Engineering News

By: Robert Franklin

South Africa's Renewable Energy Independent Power Producer Procurement Programme (REIPPP) has been successful in contracting over 6 000 MW of additional generation capacity in four rounds since 2011.

Given the need for additional generation capacity in sub-Saharan Africa, in general, and high generation costs, if a similar approach is applied elsewhere in the region, it will be a significant step towards achieving the Sustainable Development Goals. Besides the potential to deliver value for money and speed of procurement, renewable-energy technology can also make more efficient use of the grid and reduce exposure to fuel price volatility.

Although several other countries in the region have incorporated renewables into their development plans, only a handful of projects have reached financial close. However, Uganda and Zambia, led by development institutions, recently adopted new programmes that share a number of features with the REIPPP and there are now plans to roll out similar programmes in other countries in the region.

In 2006, in South Africa, responsibility for the planning and procurement of additional electricity generation capacity was assumed by the Department of Energy (DoE), which established a renewable-energy procurement programme following a conventional feed-in tariff model, but there was limited uptake. As a result, this was replaced in 2011 by the REIPPP, the key features of which include:

• Stakeholder management. The unit proactively engaged with relevant stakeholders. It also identified the public, generally, and the local communities close to project locations as stakeholders. This was reflected in the inclusion of socioeconomic criteria.
• Scale: At the outset, the DoE committed to procuring a specific substantial amount of capacity through the programme.
• Market engagement. The unit took soundings from the international developer and investor community prior to launching the programme in order to test market appetite and capacity. This also ensured that messages to the market were clear and consistent.
• Institutional capacity. A dedicated unit was established to manage the programme on behalf of the DoE. The unit was adequately resourced, with access to a panel of advisers experienced in international best practice.
• Standardised documentation. Standardised forms of project documentation were developed; these were consistent with international best practice and incorporated a bankable allocation of risks.
• Competitive procurement. The programme was organised in successive rounds to make it possible for the level of interest to be accurately gauged and to take advantage of competitive pressure to progressively improve terms. By the fourth round, the tariffs achieved were between 46% and 71% of the first round tariffs, depending on the technology.

Several aspects of the more general environment also contributed to the success of the programme, including:

• the legal and regulatory framework, which, generally, was of a high standard, with the programme following the tried and tested public–private partnership procurement framework;
• South Africa's investment-grade credit rating, which was sufficient to obviate any need for country risk mitigation;
• ease of doing business – South Africa is ranked in the top 40% globally; and
• domestic debt capacity – the country has a large, sophisticated local currency commercial debt market that is able to provide long-term project finance.

GETFiT and Scaling Solar
GETFiT and Scaling Solar are programmes developed by German development bank KfW and the International Finance Corporation (IFC) respectively. GETFiT, which covers multiple technologies up to 20 MW, was implemented in Uganda between 2013 and 2015. Scaling Solar, which is solar-photovoltaic-specific and covers projects with a generation capacity of up 50 MW, was implemented in Zambia in 2016.

Apart from their smaller scale, these programmes replicate the key features of the REIPPP. In terms of institutional capacity, this is by way of technical assistance under which KfW or the IFC advises the procurer. They also contain additional elements, which are required because of differences in the prevailing local environment or to help control or partially derisk the development phase to ensure that the projects are sufficiently attractive to investors and developers to generate competition. The additional elements include:

• the procurer being responsible for obtaining the necessary permits/consents;
• financing and insurance facilities being made available to whoever is awarded the tender;
• a review and enhancement of the legal and regulatory framework; and
• risk mitigation instruments being made available to whoever is awarded the tender.

Further, unlike the REIPPP, the sites are designated by the procurer. Although this is unusual in terms of market practice, it helps in managing the cost of interconnection for the utility, while also addressing a major development risk. The first round of Scaling Solar attracted a large number of bids, and the tariffs achieved were as low as 6.02c/kWh. The fact that this was achieved in a first tender round, where the scale of the programme is a lower order of magnitude than the REIPPP, suggests that positive outcomes should be achievable in other jurisdictions.

It is necessary to sound a note of caution in relation to the potential for roll-out of the programmes in that there are some constraints which they cannot fully address, including:

• The legal and regulatory framework. The legal and regulatory aspects that are relevant to the risk profile in any jurisdiction are extensive and addressing any issue may necessitate changes to legislation. While the project documents may provide protection against changes in law, they do not cover issues arising under the existing legal and regulatory environment or dispense with the need for due diligence by prospective developers.
• Exchange risk. This arises for the offtaker where the tariff is wholly or partially indexed to compensate for currency movements relative to the US dollar. In the case of the REIPPP, it was possible to avoid this, mainly owing to the depth of the local currency debt market. However, at present, this is unique to South Africa.
• Utility and host government risk. In most countries, commercial lenders will require politi- cal risk mitigation of some kind to be provided. However, it should not be assumed that risk miti- gation instruments will automatically be available. The provider of coverage will be assuming utility risk and government risk, and will not always be comfortable doing so, particularly where the utility has significant solvency or liqui- dity issues. Development finance institutions and multilateral organisations may lend on an uncovered basis, but their capacity is limited and they prefer to cofinance with commercial lenders.

Despite these challenges, the two programmes appear to be the beginning of a step change that will create major new opportunities for developers, investors and contractors.

Franklin is legal director at global law firm Clyde & Co. He wrote this article with Peter Kasanda, a partner at the same firm.