Independent Power Producer Procurement Programme update by Department of Energy

Energy

04 November 2013
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Meeting Summary

The Department of Energy (the Department) briefed the Committee on progress on the Renewable Energy Independent Power Producer Procurement Programme (IPPPP). The Department indicated that the minister required about 3 725 megawatts of electricity to be harnessed by way of renewable energy to meet South Africa’s needs. This would be divided between two projects; the second, for smaller projects, dealt with renewable energy. Most of the projects were still under review and may change. The Department highlighted that there were 47 bidders for Window 1, and some of the projects under that Window were already supplying power to the grid, but the majority were due for connection in 201. Most Window 2 projects were under construction, and were due to be connected to the grid in 2016-2017, The second determination included 2500 MW of coal based load and imported hydro, and 2652 MW of gas fired plant. The Department wanted further exploration on the gas possibilities, including Liquefied Natural Gas (LNG). The procurement process essentially involved three parts; Part A involved general requirements and rules that bidders needed to adhere to, Part B focused on the qualification criteria, including environmental benefits, pricing, financing, and land (and was the stage at which many bidders were disqualified) and Part C looked at the benefits of the projects on economic development. The Department emphasised that purchasing power agreements had to be signed. The bids were conducted in a rigorous and very strictly confidential environment, which included a number of actions taken to mitigate risk, as well as all evaluators being required to sign confidentiality agreements, and no evaluator was permitted to act as adviser to any bidder.   

Under Window 2, the DOE received a total of 17 bids, with an allocation of 1456 for Window 2 and 1473 for Window 3. The Department received six bids for solar photovoltaic. The maximum MW allocated for bid Window 3 was 401, while the MW taken by preferred bidders was 435 MW, and he Department decided to allow this because one bidder fell between two categories, and because no bids were received for small-hydro and biogas components. All bids were easy to compare, and reasonable. The requirements that the Department would continue to assess, quarterly, included black citizenship, skilling of  black citizens, local community jobs created, the value of local content, black top management in firms from whom procurement was done, and gender-equity. During construction phases, 7915 jobs were created. Funding had been localized. Most of the projects in Window 1 had commenced last November or December, and R20 billion had been spent, creating about 12 000 jobs, with 6 000 opportunities for youth. On Window 2, the construction began in May 2013,  with 19 projects already approved, starting between July 2013 to 2015. 981 jobs had been created on these projects to date, and R2 billion spent.

The Committee was generally impressed by the presentation, and commented that this should be widely publicised, in view of the Department’s efforts to job creation and local content. They asked, however, about disability and women employment. Members wondered why no projects were running in Mpumalanga, but it was noted later that there was a potential for sugar to be used for renewable energy there and in KwaZulu Natal, and that expense and viability were considerations for all projects.  Members also wanted clarity on the implication of price decrease on the projects. They asked the Department to further explain the criteria that they used for choosing bidders, whether the Department assisted those who had been unsuccessful and encouraged them to try again, and were encouraged by the number of youth being employed, although they also urged that where youth failed to take advantage of opportunities, they needed to be opened wider to other categories also. Members urged the Department to increase uptake in small- hydro, biomass and biogas, particularly in the urban areas, where much waste was generated.  
 

Meeting report

Chairperson’s opening remarks
The Chairperson acknowledged apologies from the Minister of Energy Mr Dikobe Ben, who was out of the country, and the Deputy minister and the Director General who were both attending urgent meetings in Tshwane. He also noted the apologies of Members.

He said that this briefing on the renewable energy Independent Power Producer Procurement Programme (IPPP) was going to give more detail on Window 3, since it was still new, and he hoped that the Committee would be told, for instance, how many bidders applied, who was successful, the value of bids, and for more breakdowns on the renewable resources such as biomass, biogas, landfill gas wind turbine and photovoltaic. The Committee wanted to ensure that there were linkages to lessons learned from Windows 1,2 and 3 and improvements in terms of local content, job creation, and the benefits to the economy of South Africa.

Department of Energy update on Independent Power Producer programmes
Mr Maduna Ngobeni, Manager, Department of Energy, begun the presentation by emphasising that it was the Minister of Energy who had set the figures for the harnessing of independent power projects, and in the 1st Window, 2400 MW had already been procured. He mentioned that out of the 3725 MW total, there was a division into two projects. The second determination dealt with renewable energy, and 3200 MW of renewable energy added to the current Renewable Procurement Programme. However, he did state that most of the projects were still under review; therefore the allocation of MW might change during the course of the review.

There were 47 bidders for Window 1, and some of the projects under Window 1 were already supplying power to the grid whilst the majority were due for connection in 2014. Most Window 2 projects were under construction and were due for connection into the grid in 2016-2017. The second determination included 2500 MW of coal based load and imported hydro, and 2652 MW of gas fired plant. He also emphasised that the Department of Energy (DOE or the Department) had to consider the medium term risk mitigation, as 800 MW was from cogeneration while the 475 MW was from gas or coal-based load power plants. The gas side needed to be explored further and a study was done by the Department to ensure a better understanding of gas as a resource to be used in South Africa, which might lead the Department to consider exploration of the Liquefied Natural Gas (LNG).

The procurement process background included a request for proposals, which had three parts, A, B and C. In general, Part A involved general requirements and rules that the bidders needed to adhere to, Part B involved qualification criteria and Part C looked to the benefits of the projects on economic development, especially the local communities where these projects would be taking place. He emphasised that most of the bidders tended to fall away at the Part B requirements, before even reaching the comparative evaluation.

Mr Ngobeni also mentioned that there were also power purchasing agreements, signed between Eskom and a seller. The implementation agreements basically entailed all the agreements of the Department or the government, and these included the obligation upon the independent power producers (IPPs) to deliver on certain economic development criteria. Under Part B, the Department considered matters such as environmental benefits, availability of land, economic development, price and finance. He also indicated that the Department would look at pricing and financing on less competitive technologies like wind, solar photovoltaic and biogas. The Department also conducted the evaluations in a closed evaluation environment, and this was done under strict security conditions. The persons who conducted the evaluations could not in any way be involved with or have any interest with the bidders, so the evaluators were not allowed to be advisors to the bidders. The overall process was reviewed by independent governance review teams.

The preferred bidders’ summary clearly showed that the Department received six bids for solar photovoltaic. The maximum MW allocated for bid Window 3 was 401, while the MW taken by preferred bidders was 435 MW, an impressive number that needed to be commended. In addition, he also indicated that the Department had exceeded the allocation slightly, because one bidder had fallen “in between” two categories, and the Department also had not received any bids for the small-hydro and biogas components.

Under Window 2, the DOE received a total of 17 bids, with an allocation of 1456 for Window 2 and 1473 for Window 3.

Mr Ngobeni said that the prices of the bidders were important in showing a comparative price between Window 1 and Window 2 for solar photovoltaic. On average, Window 1 bids were around R2 758 per MWh, with Window 2 at around R1 645 per MWh, and Window 3 at around R881 per MWh. The wind production also experienced a sharp decline in terms of the cost per MWh, as the prices were R1 143 for Window 1, and R897 for Window 2 and R656 for Window 3. Overall, all the prices from the bidders were generally good and reasonable, and the prices were easy to compare, as they could be adjusted to inflation.

Mr Ngobeni stressed that the projects also indicated the potential for creating job opportunities in and around South African provinces, especially in the regions where the projects were taking place, and the creation of jobs was one of the main priorities of the Department. The total number of jobs that were created during the construction period was 7915, while there was a general increase in job creation in the operation period, up to 18 228.

He indicated that indeed there was potential for the exploitation of biomass in both the KwaZulu determination, which would require 3725 megawatts of electricity in Natal, and Mpumalanga, considering the abundance of sugar in those regions. The Department indicated that the funding of the projects was by and large using local currency, and this was particularly important considering the risks of foreign currency funding.

In summary there was analysis of the MW requirements for different windows. In Window 3 there were about 1456 MW. It was clear that from the Window 1 applications, and the 2 808MW capacity that still remained, that the remainder needed to be procured in the subsequent windows, especially in the spread of the Window 3.

Ms Angelique Killian, Director, Department of Energy, summarised that under Window 1, most of the projects had started in November/December last year with construction already, and a total of 20 billion was already spent on Window 1 projects, with creation of about 12 000 jobs, with 6 000 jobs created for the youth. There were seven factors and obligations which the Department measured on a quarterly basis. Five of these fell into the construction phases. The obligations included black citizenship, upskilling black citizens, creation of jobs in local communities, the value of local content, black top management in the companies from whom procurement was done, and gender-equity.

Ms Killian noted that under Window 2, the construction only began in May 2013, and there were 19 projects that were approved, of which five had just commenced, five had started in July and two would be commencing in the first half of 2014, with another two set to start in the second half of 2014. One project would start only in 2015. Those projects that had already begun had spent R2 billion on construction, created 981 jobs, of which 381 jobs were for the youth.

Discussion
The Chairperson commended the presentation by the Department of Energy, especially its achievement to drive the country towards a path of clean energy that would save the planet from pollution.

The Chairperson said that the Department should indicate that, according to recent reports, the progress it had made on the Renewable Energy Procurement Programme had placed South Africa into the top 10 countries globally. Already, in the G20 group, the country had moved from position number 20 to number 9 within a year. He also thought that the Department should have mentioned the improvement in the financing of the bidders, especially the price decreases. The fact that there was over-subscription of MWs was also worth mentioning, even in Window 3, as the power for which bids were accepted was already far beyond the power that the Department had been aiming for.

The Chairperson also wanted to commend the fact that so far, all the projects were taking place on time, which was critically important, especially when looking at the cost implications of any delays and inconveniences. He was also pleased that there were visible improvements on the local capacity, as he mentioned that he was especially sensitive to the issue of local empowerment, and there needed to be a localisation of the technology, as the country could not rely on imported technology. He also suggested that practitioners needed to bid for biomass, particularly considering the generation of waste by the municipalities, as this presented a further opportunity for job creation. In addition, he emphasised that the creation of jobs needed to improve the skills development especially for young people, as this was important for future employment.

The Chairperson noted his concern that there were no running projects in the province of Mpumalanga, especially given the potential for the exploitation of biomass through waste generation.

Mr S Radebe (ANC) commended the Department for an interesting presentation, and said that it shed light on how far South Africa was advancing under each of the windows. He thought that it would have been useful if other MPs and stakeholders had been present at the meeting, as there had been some concerns expressed from them about what was being done to enlarge and build skills on renewable resources. In addition, he also would like this information presented by the Department to be made available to the general public so as to inform people about the sterling job that has been achieved by the Department, especially the utilisation of renewable resources.

Mr Radebe sought more clarity in terms of Window 2, especially on the project that was planned to be opened by 2015, and asked how large this project was, whether construction had started, or when it was due to start. He was also interested in the status of the companies that would be part of the projects, and the values and skills these companies instilled, in particular whether they were ensuring that there would be sustainable knowledge and skills built in young people. He wondered how many females were involved, or whether the projects were dominated by males, as this was important in view of the gender equity that the government promoted.

Mr Radebe wanted to know what happened if companies failed the Plan B bidding process, in relation to qualification criteria, and if they were given a second chance, assisted, or just left on their own. He wanted to know whether companies operated by previously disadvantaged individuals had applied, and whether they were encouraged to participate in the future.

Mr Radebe, like the Chairperson, was disappointed that there were no projects running or planned in Mpumalanga, considering the availability of sun and the exploration of solar photovoltaic power.

Mr Radebe also wanted clarity on how the Department ensured that there were no leakages of information or that people adhered to the confidentiality procedure of the Department.

Ms Killian responded that all the companies were bidding were required to produce both their socio-economic plan and also their enterprise development plan, and there had to be monitoring over the next 20 years. Part of the economic development plan had to do with uplifting the community, with skills development and so forth. The Department was to sit down with the provincial and local development authorities, to identify the needs of the community and the possible ways that they might benefit in the projects.

She noted that it took around 12 to 18 months for a site to be completed, but those that were commencing in 2015 were really starting in the stipulated year as this would be the first time of breaking the ground and the bidders would be required to proceed in line with the contracts. She noted that there was already an on-going testing of the IPPs to be connected to the grid. Rustmo in Rustenburg had already been connected to the Eskom grid for about 33 weeks now, producing about 7MW, although she emphasised that the project had not received any money because of dates that needed to be adhered to in terms of the contracts.

Speaking to the questions about skills development, she indicated that most of the IPPs had gone to the colleges that were closest to them in the area and there was collaboration with some of the colleges. The Industrial Development Corporation (IDC) was responsible for the skills development plan, and it was in contact with IPPs to see if it could assist in sending people to academic training, or offering practical training on site for the people. In relation to gender, she responded that there were few projects where women were involved, but what was of even greater concern was the current lack of black- owned vendors.

She also responded on the question of confidentiality, and emphasised that security was very strict and she also had information that she could not access or pass to other people.

Mr Ngobeni responded that the Department was mindful of the fact that there was a potential for sun and wind generation in provinces where there were no projects currently running, but emphasised that the Department targeted projects that would show value for money, that were competitive and could bring better revenue. He believed that provinces like Mpumalanga and KwaZulu Natal could benefit more from the exploration of biomass, as they were both endowed with a lot of sugar. He also indicated that, probably early next year, the Department would be going out with a procurement programme that specifically dealt with programmes such as biomass so as to create job opportunities in those areas. In addition, he warned about the danger of enforcing a technology that would not be suitable for a particular region.

Mr Ngobeni also stressed that the Department was very strict about the manner in which it handled the confidentiality of evaluators; for instance, they were provided with their own computers that had to remain in the office, that they were not permitted to bring into or taking anything out of the office and everyone entering and departing the evaluation venue was searched, and in addition the evaluators were obliged to sign the confidentiality forms. However, the Department was also aware that information could be retained in evaluators’ minds, and that there was also a risk that it could be disclosed to the middle man.

The criteria that the Department used for choosing the bidders, included the fact that the bidders needed to have 40% South Africans and level 4 of BEE status. Any company that did not qualify was advised of the reasons and was also offered advice on the areas where significant improvements were required, in order to make them more successful in the bidding process for the next window period.

Ms N Mathibela (ANC) commended the Department of Energy, especially on job creation by its different projects around the country, and especially emphasised that, despite what was in the media about lack of employment opportunities, this Department was doing a sterling job to prove the critics wrong. She was also impressed by the fact that there was involvement of women, especially young women, but asked whether, on the projects already running, there were any people with disability. She also wanted to know more about whether goods used were locally manufactured.

Ms Killian responded that the IPPC did not measure the number of disabled people on sites, partly because these were construction sites that posed a huge challenge to those who were physically challenged. However, she indicated that she was aware of one blind lady cooking food for the people working on sites.  

Mr Ngobeni responded that the Department did not necessarily make it a requirement that the companies should manufacture goods locally themselves, but did have a requirement for purchase of locally-manufactured items as this would boost local manufacturing. Furthermore, the Department was aware of the manufacturing plants where locally producing items were being made, for the renewable sector. Most of these programmes made substantial contributions to their local community. In the calculation of socio-economic contributions, it was assessed that Windows 1, 2 and 3 probably allowed for R9.5 billion to go to the local communities in areas which these projects took place. He stressed the need for the Department to facilitate the spending in a way that would benefit the community members, and said that there was also a plan to diversify the amount of money spent on other social development issues.

Ms B Tinto (ANC) asked if the Department considered any assistance to the previously disadvantaged companies to assist them in becoming successful in the process of bidding. Furthermore, she also wanted to ascertain the criteria that were used by the Department for choosing successful bidders. She felt that although most of these projects were targeting the empowerment of young people, she was concerned that when young people were not utilising the given opportunities, it would be prudent then, perhaps, to consider giving older women also the chance to participate.

Mr Ngobeni responded that the Department had insisted that each developer must have 40% South Africans and they must also have level 4 of BEE status, so failure to meet these requirements automatically led to disqualification. This was a way to ensure skills development in South Africa, especially for the previously disadvantaged groups, and to boost the capacity of South Africans in future to stand on their own and build businesses independently, without having to rely on international companies. The one small project, to produce between 1 to 7 MW, was introduced specifically with the intention of giving locally disadvantaged companies an opportunity to participate – this was still work in progress.

Prof S Mayathula (ANC) appreciated the evaluation protocol by the Department, which seemed to avoid delays and lead to water-tight processes. He asked for clarity on the absence of bidders for both the small-hydro (<40 MW) and also biogas projects.

Mr Ngobeni responded that a small-hydro project needed to be robust and be able to stand for long time, and there was a need to consider the financial benefits of the projects, and also the benefits of the project on local, provincial and nation-wide levels. Both small-hydro and biogas were complicated projects and required a higher level of technology and a sizeable amount of land. Furthermore, he also indicated that projects with more financial rewards were more easily funded.

The Chairperson questioned why there were still low bidders for the landfill gas projects, considering the environmental benefits and the large amount of waste that was generated, especially in urban areas. He wanted clarity on the reason for a 40% local content for both biomass and landfill gas, and why it was not 20% or 60%, as other renewable technologies that started at 7%. He also questioned the implications of price decrease in general, whether it was good or bad for the country.

Mr Ngobeni responded that the reason for the low bidders for landfill gas was the fact that the landfill sites were still owned by municipalities, and that this required a lot of time, which could be costly. The reason for local content being set at 40% was because there was a threshold, which differed from one technology to another; hence a competition was considered as the main driver for how much technology the companies had. Greater competition encouraged more bidder applications, and thus less competition for biomass resulted in a lower number of companies interested in the bidding process. Alluding to the Chairperson’s earlier comments, he also added that the price decrease was good news for the Department, but of even greater importance for all South Africans, as it meant the Department was buying more MW for lower prices, which meant lower electricity tariffs for South Africans.

The Chairperson emphasised the importance for the localisation shareholders, and the socio- economic benefits of the projects, and the need for local communities to benefit.

The meeting was adjourned.
 

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