Renewable Energy Feed Tariff: briefing by National Energy Regulator of South Africa (NERSA)

Meeting report

Chairperson's Introductory Remarks
The Chairperson of the Select Committee on Economic Development welcomed the Chairperson of National Energy Regulator of South Africa (NERSA) and her team. He advised the team from NERSA to feel free and discuss issues openly.

National Energy Regulator of South Africa briefing
Mr Smunda Mokena, Chief Executive Officer (CEO), NERSA, presented the brief on Renewable Energy Feed Tariff. The report was presented in six parts covering the mandate, objects of Electricity Regulation Act, Renewable Energy Policy, features of the Renewable Energy Feed Tariff (REFITs), and conclusion. In the first part Mr Mokena outlined that the mandate of NERSA was to regulate the Electricity Supply Industry (ESI) in South Africa established in terms of the National Energy Regulator Act, 2004 (Act No. 40 of 2004). The section also included an outline of the structure of the electricity suppy industy. Two of the objectives of the Electricity Regulation Act relevant for the briefing where highlighted and these were firstly to facilitate investment in the ESI and secondly to promote the use of diverse energy sources and energy efficiency. The Committee was informed that the Renewable Energy Paper of 2003 set forth a 10-year target for renewable energy aimed at achieving a10 000 gigawatt hour (GWh) (0.8 Mtoe) renewable energy contribution to final energy consumption by 2013, to be produced mainly from biomass, wind, solar and small-scale hydro. The renewable energy was to be utilized for power generation and non-electric technologies such as solar water heating and bio-fuels. This would meet approximately 4% (1667 megawatts (MW)) of the estimated electricity demand (41539 MW) by 2013.
 
Mr Mokena informed the Committee that the REFITs were a pre-approved tariff for a specific renewable energy generation technology such as wind. By nature REFITs included a premium above tariffs for conventional generation mainly to attract investors and developers. Other features of the REFITs was that they would be escalated by consumer price index annually and a full tariff review would take place every year for the first five year period of implementation and every three years thereafter. Furthermore the term of the power purchase agreement (PPA) was 20 years and independent power producers (IPPs) would apply for Clean Development Mechanism (CDM) revenues separately. Mr Mokena informed the Committee that since the NewGen regulations of 05 August 2009 required that NERSA issued rules on selection criteria for the REFIT programme, NERSA was finalising the rules after a lengthy public consultation process. These would be forwarded to the system operator or the buyer who would then kick start the process by issuing a request for qualification (RfQ) and a request for proposals (RfP). Mr Mokoena concluded the presentation by stating that all perceived regulatory risks had been mitigated, and once the rules on selection criteria for the REFIT programme had been finalised, the buyer would be in a position to invite interested parties to bid before the end of 2010.

Discussion

Mr B Mnguni (ANC, Free State) asked how the fluid from the concentrated solar power (CSP) tower produced electricity.

Mr Mokena replied that the liquid in the concentrated solar power tower was heated to produce steam which drove the turbines.

Mr Mnguni asked what the effect of increasing solar power producers would be on tariffs.

Mr Mokena replied that the IPPs benefited from supplying power to Eskom through a cost recovery mechanism as Eskom produced power at a lesser cost and was therefore able to reduce average costs.

Mr K Sinclair (COPE, Northern Cape) asked if NERSA was developing a REFIT model for wave and tide forms of energy.

The CEO replied that the REFIT programme would mainly be focusing on technologies that were tried and tested within South Africa therefore nothing had been developed on wave and tide.

Mr Sinclair asked if the buyer referred to in the presentation was Eskom or some other entity as the essence of REFITs was to get more spread in terms of electricity provision.

The CEO replied that plans were underway within Government to establish an independent systems operator but that currently the buyer was Eskom.

Mr Sinclair asked if there would be incentive for investment into renewable power production given the huge costs required and yet returns had been calculated at 12%.

Mr Ncetezo Mbulela, Executive Manger, NERSA replied that the 12% was arrived at through consultation with stake holders such as banks and potential investors. Therefore it was anticipated that there would not be any problems.

Mr A Lees (DA, KwaZulu-Natal) asked why there were no direct lines connecting independent power producers (IPP) to customers. Why were the transmission lines from IPPs going through Eskom when most of the IPPs would be producing at lower voltages?

Mr Mokena replied that the IPPs benefited from supplying power to Eskom through a cost recovery mechanism as Eskom produced power at a lesser cost and was there able to reduce average costs.

Mr Lees asked why the tariff for CSPs was lower without storage than with storage.

Mr Mbulela replied that storage affected the load factor and life span of the plant, hence the decision to have a lower tariff for no storage.

Mr Lees asked if all were limited only to the 20 year period.

Mr Mbulela replied that the 20 year period was agreed with by stake holders who suggested that they would need this period to have ample time to reap on their returns. Those that wanted a shorter investment period would be allowed as the initial investment period that was proposed was 15 years.

Mr Lees asked how steam generation from coal fitted into the new REFIT model.

Mr Mbulela replied that there was a process underway for coal generation and a paper would soon be circulated for public comment.

Mr D Gamede (ANC, KwaZulu-Natal) asked if the IPP would result in reduced costs for the consumers.

Mr Mbulela replied that if IPPs blended the cost with Eskom the consumer was bound to benefit.

Mr Gamede asked if the REFIT model would lead to a change in life for ordinary rural South Africans.

Mr Mbulela replied that in the short term there would be jobs created as certain components of the concentrated solar power (CSP) tower would be produced locally. Furthermore the CSP would also need staff to maintain it such as cleaning the mirrors.

Mr Gamede asked when the rules for the selection criteria would be finalized.

Mr Mbulela replied that NERSA was waiting for a go ahead from the Department of Energy and from the National Treasury which had indicated that there were a few policy changes that needed to be made. As soon as the go ahead would be given NERSA should publish the criteria.

Mr Gamede asked what the position was with regard to renewable energy given that the Renewable Energy Paper of 2003 was set forth ten years back.

Mr Mbulela replied that what was being awaited was the publishing of the criteria which would then be forwarded to the system operator or the buyer who would then kick start the process by issuing a request for qualification (RfQ) and a request for proposals (RfP).

Mr Mnguni said that the essence of IPPs was to reduce costs but he observed that, since all the producers were using one grid, the cost would not be reduced.

Mr Mokoena replied that the economies of scale were reduced considerably through IPPs’ interactions with Eskom.

Mr Lees asked why small power producers were not allowed to sell their power into the grid as they had the potential of contributing to power provision.

Mr Mbulela replied that there was a risk of such producers damaging the grid as these were not regulated and could therefore carried a risk as they could be using incompatible converters. NERSA was at the moment only registering power producers with a minimum one mega watt.

Mr Gamede asked how feeding the power of IPPs to Eskom instead of customers would directly result reduced cost. Eskom was also likely to add its costs.

Mr Mokoena replied that the economies of scale were reduced considerably through IPPs interactions with Eskom.

Mr Sinclair observed that some of the targets set fourth would not be met by 2013.

Mr Mokoena replied that he was very optimistic from the processes that were being done so far that NERSA was getting there.

A Member asked if there was a policy about regulating places producers would set up wind farms.

 Mr Mokoena replied that there were no restrictions that had been put in place.

Mr Sinclair asked if there was a plan to introduce special tariffs to the agriculture sector.

Mr Mokena replied that such an issue had to be proposed through the relevant departments because NERSA acted only n accordance with what was provided in terms of legislation.

The Chairperson asked if NERSA was aware about the intentions of some mining companies which wanted to set up IPPs for supply of electricity to consumers.

Mr Mokena replied that such arrangements were normal and that more IPPs were being encouraged to use power generation facilities that were present in some mines but were currently not being used. This would boast the power generation capacity.

Mr Sinclair observed that the theory part of REFITs seemed to be alright but the practical aspect was lacking.

Mr Mokena stated that he was very hopeful that the renewable energy programme would be a success. Members of the Committee were invited to visit NERSA to see how the programmes were being undertaken.

The Chairperson of NERSA thanked the Committee for their input and pointed out that NERSA’s performance would only improve with input from stake holders.

The Chairperson thanked the Chairperson of NERSA and her team and further thanked the Members of the Committee for their input. NERSA would be visited as part of the oversight functions of the Committee.

The meeting was adjourned.