The private sector is expected to play an increasingly important role in the generation of electricity in South Africa in the coming years, with independent power producers (IPPs) intended to generate 30% of the additional power capacity required by the country.
In an effort to facilitate such meaningful participation by the private sector in the generation of electricity, State-owned utility Eskom is pursuing three IPP programmes:
- The Pilot National Cogeneration Programme (PNCP),
- The Medium-Term Power Purchase Programme (MTPPP), and
- The Multisite Baseload Independent Power Producer Programme.
The PNCP and the MTPPP have been designed with the intention of securing IPP capacity in the short to medium term, while the baseload IPP programme will bring capacity on stream in the longer term.
In addition, as part of what is believed to be a separate programme, Eskom has called for expressions of interest (EoIs) from the private sector for the generation of electricity from renewable sources.
Further, an IPP project is being spear- headed by the Department of Minerals and Energy (DME), although this development has experienced numerous delays, and is likely to only come on stream several years after it was originally intended for completion.
Most of these IPP programmes are intended to secure new generation capacity within South Africa’s borders. However, potential also exists for Eskom to secure capacity from outside the country, and there are several IPP projects being under- taken in neighbouring countries, most notably Botswana, from which South Africa stands to benefit.
Despite the large number of IPP projects being pursued, it is believed South Africa may struggle to meet the target of IPPs providing 30% of new production capacity, owing to the country’s low electricity price environment, which serves as a disincentive to independent operators. In addition, uncertainty remains about the level of future tariff increases that will be approved by the regulator.
Linked to this are concerns regarding Eskom’s designation by Cabinet as the single buyer of electricity from IPPs. Even the National Energy Regulator of South Africa (Nersa) has expressed reservations about structuring the IPP sector in this way, claiming that private power generation should rather be managed and coordinated centrally, by an entity separate from Eskom, not only because of pricing issues, but because Eskom is already overstretched.
The Pilot National Cogeneration Programme
Cogeneration refers to the use of waste heat and energy from industrial processes in the generation of electricity. Currently, a number of industries contribute small amounts of power to the national grid through such means, and Eskom is seeking to expand the role of cogeneration in the country’s energy mix.
As a result, under the auspices of the PNCP, Eskom has embarked on a process to procure about 900 MW of commercial cogeneration supply, as a medium-term supply-side intervention.
The PNCP is intended to bring new capacity on stream fairly quickly, and thus, the programme allows for an early completion incentive, which will apply to those projects that are able to achieve early commissioning.
Further, the PNCP has the potential to bridge the gap from the medium to long term, through offering 25-year contracts, which will also serve as a means of support to project finance arrangements that developers may wish to secure with financiers. Under the terms of the PNCP power purchase agreement (PPA), the energy generated by qualified projects will be bought by Eskom on a self-dispatch basis. Owing to the nature of the cogeneration projects, the payment structure of the PPA provides for energy payments modified to reflect the time of use.
Eskom received more than 15 bids by the May 31, 2008, deadline for PNCP applications.
The Medium-Term Power Purchase Programme
Eskom’s MTPPP is intended to augment power supply through projects ranging in size from 5 MW to 1 000 MW, using any technology or project type, including new facilities, expansions of existing facilities, refurbishments or arrangements where third parties with available capacity may allocate capa- city to Eskom.
The programme requires that projects reach commercial operation by 2012, and prescribes that PPAs under the programme will not extend beyond 2018. As a result of the relatively short term PPAs on offer, project finance arrangements are unlikely to be feasible.
Further, while Eskom has indicated that it is keen to exploit such non-Eskom balance sheet opportunities, where possible, the utility has, however, also cautioned that it is not only Eskom’s balance sheet that is under strain and that, in fact, many of the IPP hopefuls are likely to battle to raise the necessary capital in the current environment.
Bids for the MTPPP closed at the end of 2008, and Eskom is currently evaluating those received, with some 5 000 MW on offer.
It is believed that pulp and paper producer Sappi submitted bids under the programme, which could add 30 MW to Sappi’s internal generation capacity and raise the group’s overall self-sufficiency to 340 MW. The company had evaluated other opportunities, involving up to 90 MW, but only the projects at the Ngodwana mill, in Mpumalanga, and the Tugela mill, in KwaZulu-Natal, pass commercial muster.
Another project submitted under the MTPPP is for the development of a multi- billion-rand coal-fired power station, with a capacity of 300 MW, with the potential to be expanded to 900 MW. The project, which could be developed on the Vele coal deposits, near Musina, in Limpopo province, was submitted by a consortium of South African and Chinese energy investors, and the group is reportedly moving ahead with an extensive environmental-impact assessment (EIA) for the project. The project is expected to be one of the only, if not the only, greenfield coal-fired power generation proposals submitted under the MTPPP, given the lead times associated with such developments. That is also why the bid under the MTPPP is only for a single 300-MW unit. The EIA process, however, will cover a far larger 900-MW three-unit prospect, with the other two units possibly being added incrementally under the separate multisite baseload IPP programme, also being pursued by Eskom. For 2009, most of the consortium’s attention will focus on securing a record of decision from the Department of Environmental Affairs and Tourism, which is a necessary condition for participation under the MTPPP.
Multisite Baseload Independent Power Producer Programme
In addition to the PNCP and the MTPPP, there is a need to fill a long-term supply gap with baseload and dispatchable power in the 2012 to 2017 period. As a result, as the designated single buyer of power from IPP projects, Eskom is pursuing a multisite baseload IPP programme. In terms of the programme, Eskom is seeking to secure between 2 100 MW and 4 500 MW of power from private developers, with a minimum plant capacity of 200 MW (down from an initial minimum plant capacity of 400 MW).
The utility called for EoIs in April 2008, and received responses from 76 companies. It then issued a request for qualification in August 2008, in terms of which 23 local and international deve- lopers prequalified. The company is now pursuing requests for proposals, with final bids closing in May 2009. Financial close is expected to be concluded in the first quarter of 2010.
Most of the bids feature conventional coal technology, although also under conside- ration are bids for a liquefied natural gas plant, a liquefied petroleum gas plant, a hydro- power plant and a solar power plant. Most of the proposed plants will produce between 500 MW and 1 000 MW, with one proposed plant intended to produce 1 500 MW. Many of the sites for the proposed plants are situated in the Lephalale area of Limpopo, while there are also a few proposed sites in the Eastern Cape, the Free State and Mpumalanga.
The prequalified developers include a number of consortiums, including ACWA Power Projects/Holgoun Energy, Huaneng Power International/G3 Power, Essar Power/Bhander Power, GMR Infrastructure/GMR Energy, Group Five Infrastructure Developments/Strang Rennies, International Power, Keangnaem Enterprises/Korea South East Power/Mega Africa Holdings and Union Fenosa SA/Shanduka Group.
The developers also include Mulilo Energy/China Railway Construction Corporation/Coal of Africa, Umbono Capital Partners/Lanco Infratech, Aviva Corporation/GDF Suez, Sekoko Resources/Mulilo Energy/China Railway Construction Corporation and Sumbandila Consortium, consisting of GDF Suez/Korea East-West Power/Korea Electric Power Corporation/Terracotta Resources.
Further, AES Energy Developments, Aldwych International, Endesa, International Power, MAPNA Group, Mitui & Co, Shenzhen Energy Group, Statkraft Norfund Power, Sumitomo Corporation, YTL Power International and Independent Power Southern Africa have also prequalified.
Eskom will be the sole offtaker of power from the approved pro- jects, in terms of PPAs extending for up to 40 years from the date of commercial opera- tion. The PPAs will be struc- tured on an availability basis, with Eskom paying capacity charges based on the availabi- lity of the plant. Successful IPPs will be required to enter into an equivalent term with a fuel supplier to procure and secure fuel supply.
Renewable Energy IPPs
In late 2008, the single buyer office, situated within Eskom, under the oversight of the DME, called for EoIs for the deve- lopment of renewable-energy projects.
By the October 2008 deadline, more than 100 project proposals had been received, involving as much as 5 000 MW of potential generation capacity, from local and international companies. It is believed that some 45% of the applications relate to wind energy, 34% to biomass projects, and 8% to small-scale hydro schemes. Projects have been proposed in all nine of South Africa’s provinces.
A prebidding conference will be held to clarify the future processes, ahead of the issuing of a formal request for pre- qualifications.
Government is ultimately pursuing a renewable-energy target of 10 000 GWh by 2013, and has also outlined a Renewable Energy Framework, which indicates that grid- connected projects will contri- bute 6 000 GWh and nonelectric technologies the balance.
It is expected that Nersa’s recent finalisation of a renew- able energy feed-in tariff (Refit) will stimulate new investment in renewable energy projects.
Essentially, Refit is a pre- mium tariff, or incentive structure, that covers the cost of renew- able-energy generation, plus a “reasonable profit”. To date, feed-in tariffs have been adopted in over 36 countries, including Spain, Germany and several states in the US, as well as in a number of developing countries, such as Turkey, Thailand, Sri Lanka, Nicaragua, Indonesia, Ecuador, China, Brazil, Argentina and Kenya.
South Africa’s Refit regime, announced in March 2009, covers wind, minihydro, landfill-gas and concentrating-solar power investments. For wind, a tariff of R1,25/kWh has been sanctioned, which is a significant improvement on the 65c/kWh initially proposed. Small-scale hydro will receive 94c/kWh, landfill gas 90c/kWh and concentrating solar with a storage capacity of more than six hours will receive R2,10/kWh.
Over the next six months, the regulator will also consider which other renewable tech- nologies will be included under Refit, including photo- voltaic solutions, which have hitherto been somewhat controversially excluded. Further, the Refit will be reviewed every year over the next five years, and every three years thereafter. The resulting tariffs will apply only to new projects.
While the Refit tariffs are significantly higher than the current Eskom tariff of about 22 c/kWh, Nersa contends that Refit will only add between 6% and 10% to the average tariff once the 2013 target is installed and operational.
Eskom’s MTPPP will be used as basis for a standard Refit PPA, and the Refit guidelines allow for PPAs to run for a term of 20 years.
The DME is spearheading an IPP project whereby two new peaking generation power plants will be built, owned and operated by a private sector participant.
Construction on the project was originally intended to have started in late 2007, but owing to numerous delays, construction is now only likely to start at some point in 2009, with the commercial operation date of the facilities now being set for mid-2011.
Currently, the DME is engaged in nego- tiations with a consortium led by Suez Energy, and talks are expected to be con- cluded in the first half of 2009. These talks follow a breakdown in negotiations between the DME and AES Khanya Consortium, which was originally appointed as the preferred bidder for the project. The sticking points in the negotiations with AES are believed to have been price, commercial terms and the dates for generation.
Ultimately, the project is expected to include the construction of two open-cycle gas turbine plants with a combined capacity of over 1 000 MW. The sites previously selected for the facilities were in KwaZulu-Natal and the Eastern Cape. The project’s original value was R5-billion, but a new price tag will only be determined once the current negotiations are concluded.
In addition to the IPP projects being pursued within South Africa’s borders, it is also likely that a portion of the new capacity to be developed by the private sector will come from cross-border IPPs.
The most advanced of those under consi- deration is the Mmamabula project, in Botswana, where Toronto- and Botswana-listed CIC Energy intends developing an integrated coal mine and energy project. The power station component of the project will be developed in two phases, with the first phase expected to have a capacity of 1 320 MW. The second phase is likely to raise the facility’s capacity to 2 400 MW. In total, it is believed that the coal resource is sufficient to sustain a 6 000-MW faci- lity over a 40-year period, without steri- lising export coal opportunities.
The power station will use dry-cooled technology to conserve water, and fluegas desulphurisation to remove sulphur from emissions.
The project is currently on schedule to start operating by early 2013, which will require coal production to start in 2011. Construction could start in 2009.
Power from the Mmamabula project is expected to be sold to Eskom, as well as the Botswana Power Corporation (BPC), although PPAs regarding the project have not yet been concluded.
The $3-billion project will be pursued on a project-financing basis, with a debt/equity split of 80:20. CIC Energy contends there remains a strong funding appetite for the project, particularly from development finance institutions and export credit agen- cies, despite the global credit crunch. Specifically, CIC Energy believes that the visibility that will be offered by the power purchase and offtake agreements being pursued with Eskom and BPC will provide potential debt funders with the security required, despite the leverage nature of the investment. Financial close is expected around the middle of 2009, and the expected term of the negotiated PPAs is likely to be about 30 years.
The Shanghai Electric group has been selected as the preferred engineering, procurement and construction contractor for the project. The Chinese group will manufacture and construct the power plant, while Parsons Brinckerhoff has been appointed as the owner’s engineer for the project.
CIC Energy has requested that the Botswana government allow it to use Chinese skills during the construction phase, so as to ensure that the timeframes are met. In return for this flexibility, CIC will commit to a localisation initiative during the operational phase of the plant, which will probably be extended to future phases.
A mine plan has already been completed, and a mining licence submission has been made for a mining operation with a 4,5- million-ton-a-year capacity.
Another cross-border IPP that is seemingly on the cards is a project by Australia- and Botswana-listed energy coal company Aviva, which has submitted a bid for the supply of 1 000 MW of power to the South African electricity grid.
Aviva expects a partner to join the com- pany in the power proposal, which will involve the construction of a coal-fired power station at Aviva’s 1,3-billion-ton Mmamantswe coal resource, situated north of Gaborone, in Botswana, close to the South African border.
Envisaged is a power station with two 500-MW units that will be air cooled owing to a water shortage in Botswana.