I was wrong — South Africa’s energy procurement programme is in serious trouble

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  • Of the 25 renewable energy projects awarded in 2021 in bid window 5, only eight have started construction.
  • The rest are all ‘under water’: priced too low to be viable.

I was wrong.

Two years ago, I argued that South Africa’s public Renewable Energy Independent Power Procurement (IPP) Programme, the REI4P, run by the IPP Office (Ippo) was not in trouble; that the cheap project bids submitted in 2021 would reach financial close and projects would surely be built.

And that this would usher in a renewed era of public renewable energy procurement that would help address rolling blackouts. Turns out, I couldn’t have been further off the mark.

Of the 25 renewable energy projects awarded in 2021 in bid window 5, only eight have started construction. The rest are all “under water”: priced too low to be viable.

To make matters worse, less than a quarter of the projects submitted in a bid window 6 in 2022 could be awarded because of grid constraints, and now it looks like many of these projects are also in trouble. And only three (totalling 150MW) of the 11 projects awarded as part of the previous “emergency” risk mitigation procurement programme in 2020 have started construction.

In addition, the battery storage bid window results have still not been announced and all of the previously procured “small” IPP procurement projects, meant to stimulate local market development, have been abandoned. And there are no signs of the much-anticipated gas IPP tender years after it was first announced.

What had once been one of the most highly regarded renewable energy procurement programmes in the world has now become a cautionary tale. Some are even calling for the end of the REI4P programme and the closure of the Ippo.

Catalogue of obstacles

So what went wrong? The answer seems to be a mix of hubris, unanticipated global shocks and political interference. The 2021 renewable energy projects were bid after a period of sustained reductions in solar and wind energy costs, but then were exposed to turmoil in global markets: first the Covid pandemic, then the Suez Canal shutdown and finally China’s zero Covid policy caused massive disruptions in global supply chains.

At the same time, interest rates went up, as did inflation, and South Africa’s rand weakened considerably against global currencies. In combination, these factors raised costs, and fixed bid prices could no longer guarantee financial sustainability, let alone an acceptable return on investment.

In Bid Windows 1 to 4 (2011 – 2015), 99% of awarded projects (111 of 112) reached financial close, totaling more than 6,300MW, all of which are now delivering electricity to the grid. This was achieved under the leadership of an IPP Office head who was internationally lauded, but whose contract was not renewed by the Development Bank of Southern Africa (DBSA) which oversees the administrative functions and finances of the office.

Eskom’s refusal to sign the contracts of awarded projects in 2015 caused a funding crisis for the IPP Office (since it is funded by “development fees” paid by projects that reach financial close) and saw the loss of further key skills in the organisation.

It’s not all doom and gloom though. Regulatory changes announced in 2021 resulted in a flood of new private power investment by corporate South Africa. Driven by security of supply, cost and export market access concerns, more than 3,800MW of new projects have been registered with Nersa thus far in 2023 alone and Eskom estimates that close to 5,000MW of non-REI4P and rooftop solar have been added to the grid.

Still, South Africa desperately needs a parallel renewable energy public procurement programme that works. The volumes of new power needed to keep the lights on as Eskom’s fleet of old coal plants break down or are retired are staggering — estimated by Eskom as 50 to 60 GW of solar, wind, storage and gas power with an investment cost greater than R1-trillion —  requiring an “all-of-the-above” approach. Instead, the Department of Mineral Resources and Energy (DMRE) is not making any decisions to call bid bonds, free up grid capacity or accelerate new procurements, despite worsening rolling blackouts and Eskom’s repeated pleas for more private power.

Returning wind to our sails

To return the programme to its former glory will require, as a start, an army of financial, commercial, legal and engineering specialists akin to what was used in the first years of REI4P. They were funded by the project development fees paid to the IPP Office by successful projects.

This experience resides in South African legal firms and among financial and engineering consultants and could easily be contracted back, but procurement restrictions by the DBSA appear to be frustrating this option.

It will also require the incorporation of a more flexible, yet fair procurement approach, that responds to the changes in a much more unstable global economy.

There are numerous international examples of centrally run procurement programmes delivering positive investment and price outcomes — often complementing private bilateral deals. More than 110 countries, including leaders like Brazil, Chile, India and Morocco run regular auctions for new capacity and have thriving private-to-private power markets. South Africa used to be counted among these countries, and can again.

Finally, this experience reinforces the importance of reforming the South African power sector. We need an independent transmission, system and market operator — effectively the heart of the system — that is able to plan for and procure new power without political interference; can coordinate transmission and generation planning and investment to reduce risks and delays; and which is able to translate system needs — such as increased flexibility or storage — into investment signals.

The IPP Office should be removed from the DMRE and transferred to the new Central Purchasing Agency (previously Eskom’s Single-Buyer Office) that will be housed in the National Transmission Company (and later the Transmission and System Operator). The long-anticipated ERA amendment bill promises to do much of this, but more urgency is required.

South Africa’s renewable energy IPP procurement programme laid the groundwork for what is now a booming sector and our best hope for banishing rolling blackouts. And it still offers one of the best options to rapidly bring large volumes of new power onto the system through a centrally managed, standardised process.

But it needs rescuing — a restart. I’m willing to admit I was wrong; is government willing to do the same?

Author: Wikus Kruger

Dr Wikus Kruger is a specialist in energy auctions and is director of the Power Futures Lab at the University of Cape Town’s Graduate School of Business.

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