ATC140314: Report of the Portfolio Committee on Energy on the Energy Stakeholder Meeting, scheduled on 07 June 2012, dated 18 February 2014

Report of the Portfolio Committee on Energy on the Energy Stakeholder Meeting, scheduled on 07 June 2012, dated 18 February 2014

Theme: Independent Power Producers Renewable Energy Procurement Bidding: Window 1

1. Opening remarks by the Chairperson, Hon SJ Njikelana

The Chairperson welcomed delegates to the third public stakeholder’s meeting on renewable energy hosted by the Portfolio Committee on Energy. The Chairperson pointed out that there is much to discuss in the energy sector, thus the committee resolved that it had to create a platform for robust debate by the various organisations in the public and private sectors and civil society involved in the renewable energy industry.

2. Presentations

2.1. Presentation by the Department of Energy (DOE)

Mr Thabang Audat , Chief Director: Electricity Supply, DOE presented an update on the Window 1 and Window 2 procurement programmes.

The procurement documents for Window 1 were released on 3 August 2011. The documents provided for the procurement of 3725 megawatts (MW) in five different bidding rounds. A total of 53 bids were received under Window 1 and 28 preferred bidders were selected in December 2011. A total of 79 bids were received under Window 2. The bids received under window 1 substantially exceeded the cap of 1275 MW.

The procurement process followed was explained. The Request for Proposal (RFP) comprised of the following; the general requirements and rules (Part A), the qualification criteria (Part B) and the economic development criteria (Part C). Separate Power Purchase Agreements (PPA’s) are applicable to the seven different types of renewable energy technologies. The Implementation Agreement is a legally binding contract between the DOE and the Independent Power Producer (IPP).

The contractual arrangements between the IPP, Eskom and government (i.e. the DOE and the National Treasury) were illustrated. The RFP’s received from IPP’s were subjected to a qualification process. Preferred bidders had to meet all six qualification criteria. If the bid was over-subscribed, the bidders were subjected to a comparative evaluation process. The comparative evaluation assessed the economic development criteria (30%) and the price criteria (70%). The bids received for Window 2 would be subjected to the additional comparative evaluation process, which had not been necessary for Window 1.

The sequence of events for bid Window 1 was summarized. The bid evaluation team included the following; international reviewers, a legal evaluation team, a technical evaluation team and a financial evaluation team. The evaluation streams covered environmental, land and commercial legalities, economic development, financial and technical aspects. Bids were received from entities producing Solar Photovoltaic (PV), Concentrated Solar Power (CSP) and Onshore Wind energy. The total allocation to preferred bidders for Window 1 was 1415.52 MW. 13,908 construction jobs and 874 operations jobs would be created through Window 1.

The majority of bids received were of a good standard but contained many omissions and inconsistencies that had to be clarified. The key shortcomings identified during the financial evaluation process were listed. 33 bidders passed the financial evaluation. The majority of bidders submitted prices at or just below the applicable technology price cap. A comparison of the bidding prices for the various technologies for Window 1 and Window 2 was provided. The price differential was 25.1% for Solar PV, 11.3% for Onshore Wind and 6.5% for CSP.

The total financial investment for bid Window 2 was R85 billion. A total of 79 CSP, Landfill Gas, Onshore Wind, Solar PV and Small Hydro projects was involved and a total of 3233 MW would be generated. 22,590 construction jobs and 1,371 operations jobs are involved. 19 preferred bidders were short-listed.

2.2. Presentation by the Sustainable Energy Society Southern Africa (SESSA)

Mr Stephen Forder , Representative, SESSA advised that the presentation prepared covered the establishment and organisation of SESSA. SESSA is a member of SAREC, which had prepared a more detailed presentation document on the bidding process.

2.3. Presentation by the South African Renewable Energy Council (SAREC)

Mr Johan van den Berg, Chairperson: Steering Committee, SAREC presented the submission.

The presentation covered the establishment of SAREC and a summary of the outcomes of the bidding process. The Council commented on the complexity, cost and secretive nature of the procurement process. The objective to increase local content was welcomed. An assessment of the visibility, stability and predictability of the procurement process was included.

SAREC commented on the development of the renewable energy industry in South Africa and included a list illustrating the country’s global ranking and potential for improvement. The Council warned against the dangers of “cavalier” bids, a pricing ‘race to the bottom’ and the need for long-term sustainability. A table summarizing the cost/output data from a study of the Kusile power station published by the University of Pretoria was included.

The presentation was concluded with remarks on job creation, the achievement of the socio-economic objectives, the experience gained from the first two rounds of the procurement process and the need for a coordinated effort to meet the challenges. SAREC offered to host a workshop for stakeholders to find the best way forward.

2.4. Presentation by the Black Business Council (BBC)

Mr Kashif Wicomb, Representative, BBC presented the submission.

The presentation focused on four areas of concern and included specific observations and recommendations. These areas are; the ability of local black business to participate in the renewable energy sector, the financial aspects, job creation and the technical aspects.

The major concerns involved

• The absence of a broad-based black economic empowerment (BBBEE) policy;
• The lack of access to capital by BEE developers,
• The costly and complex procurement process
• The limited economic impact;
• The limited number of jobs being created and the unskilled, temporary nature of most of the jobs;
• The limited skills and knowledge base available in South Africa and
• The limited extent of local content in the industry.

The presentation was concluded with suggestions for some micro solutions that could be considered by government.

2.5. Presentation by the Southern African Alternative Energy Association (SAAEA)

Mr David Lipschitz , Representative, SAAEA presented the submission

The presentation focused on Solar PV. The illustration of the lifespan of various global energy resources highlighted the limitless availability of renewable energy resources, in particular energy derived from the sun. It was also pointed out to the committee that coal reserves used in the production of electricity would be exhausted by 2054.

The presentation examined the need for electricity and the challenges faced. Graphs illustrated;

• The significant increase in Solar PV production since 2007,
• The relative cost of producing and buying electricity and
• The impact of increases of 10% and 6% in the cost of electricity, on the City of Cape Town.

SAAEA considered the nature of the financing required for large-scale and small-scale power stations and the potential for small, micro and medium-sized enterprises (SMME’s) and homeowners to produce electricity. The ultimate cost to South Africa if the old methods to generate electricity are continued with is a staggering R2.3 trillion over 20 years. The relative speed of delivery of tenders, the feed in tariff (FIT) and the net metering processes was compared. Finance options for the net metering alternative were examined. It was pointed out to the committee that it is a myth that energy had to be supplied by big technology and big business.

2.6. Presentation by the South African National Energy Development Institute (SANEDI)

Mr Kevin Nassiep , Chief Executive Officer, SANEDI presented the submission

The presentation dealt with the impact of imported renewable energy technology and the opportunities for localization. The reasoning behind promoting local content and the local content requirements in Windows 1 and 2 were outlined. The total investment in the first two rounds of bidding was R75 billion, of which 31% (R23 billion) would be for local content. Imported content extended across the entire project value chain.

The percentage of total and the amount of MW produced by the various technologies were analyzed. Wind generated is 47%, Solar PV is 43%, Solar CSP is 8% and mini hydro projects produced less than 1%. The greatest opportunities for local content and job creation are in the waste-to-energy industry.

There are currently only two solar energy component manufacturers in South Africa. Suggestions on initiatives to increase local content are made. The wind technology and PV component value chains are illustrated to demonstrate the opportunities for manufacturing the components in South Africa. A summary of the local content requirements for comparative programmes in China, Brazil, India and Canada was included. South Africa only requires 35% local content, which is a low percentage compared to other countries.

SANEDI commented on the

• Socio-economic development
• The skills development and
• Skills transfer aspects of the programme.

The potential for job creation in the short-, medium- and long-term was illustrated.

Observations made on the Window 1 and Window 2 procurement processes included;

• The focus on price minimization;
• The failure to achieve critical mass because of the diverse technologies;
• The lack of coordinated government effort to promote manufacturing activities;
• The focus on short-term benefits and the lack of a mechanism to coordinate and
• Implementing socio-economic and enterprise development.

3. Discussions

• Members agreed that the challenges of a complex and expensive bidding process, the lack of BBBEE policies, job creation, skills transfer and the lack of initiatives to take advantage of the opportunities to increase local content had to be addressed as a matter of urgency. The focus must be on the establishment of a local manufacturing industry as soon as possible to avoid foreign interests from dominating the sector in future.
• Members from civil society raised concern as to why the Department of Energy decided not to release the tender documents to the public, and reasoning why the process was contrary to normal practice. The DoE denied that there was any secrecy about the procurement process. Windows 1 and 2 were reserved for large, commercial operators. The total value of the programme is approximately R120 billion. The DOE decided to recoup the cost of producing the documents from the bidders, who did not consider the fee of R15, 000 to be excessive. Subsequent phases of the programme would be aimed at small scale producers and householders and the cost of the tender documents would be adjusted accordingly. A different process would be followed as there would be significantly more bidders involved than was the case during the first two rounds of bidding. The information would be made available on a dedicated website, which would have controlled levels of access.
• Members pointed out that even though several foreign bidders were successful in their bidding, the issue of skills transfer will become paramount. It is essential that a skilled labour force resulted from the billions being spent on the renewable energy programme.
• The DoE stated that the implementation agreement included the commitments and obligations of the Independent Power Producers (IPP). If the IPP failed to meet their commitments, government had the legal right to cancel the agreement and the IPP would forfeit its investment. Likewise, the IPP could take government and Eskom to Court if the other parties failed to honor their obligations.
• According to a representative of civil society 2.1% of project costs are earmarked for socio-economic development. However, there are no clear guidelines on how this money would be spent. Communities were approached by developers but there is uncertainty over how the socio-economic development programme would be implemented.
• The DoE acknowledged that they were disappointed by the low level of participation by local companies. The RFP included minimum BEE requirements for bidders. The Department was disappointed that there were no South African bidders during the first two rounds but anticipated that there would be more local participants during subsequent phases. Renewable energy is a new industry in South Africa and it is acknowledged that there had been more development in other countries. Several foreign companies had opened offices in South Africa with the intention of taking advantage of the opportunities in this country.
• Mr Audat said that extensive detail on the number and type of jobs that would be created had to be provided by bidders. The IRP gazetted in May 2011 formed the basis for the renewable energy programme. In developing the programme, the Department had to make certain assumptions. A key assumption was the number of ‘green’ jobs that would be created. In reality, the number of jobs is far less than the assumption. The Department had to reconsider how to derive the maximum possible advantage to the country from the renewable energy programme.
• The National Energy Regulator of South Africa (NERSA) had approved the inclusion of a charge for renewable energy development in the Eskom tariff.
• The EDD and the DOE are working together on the job creation aspect of the programme.
• The Industrial Development Corporation (IDC) is the leading financier of the renewable energy programme in South Africa. The IDC approved funding for projects totaling R10.5 billion since November 2011, of which R7.5 billion was for approved bidders.
• The IDC is very involved with community development. Specific funding instruments had been developed for communities and a social support department has been established to work closely with communities. The IDC conducted a needs analysis of the area, shared information and worked closely with the communities during the procurement process. R1.5 billion of the approved funding is to ensure that the community obtained a share in the renewable energy projects in their area. Most of the projects funded by the IDC allowed for at least 10% shareholding by the local community.
• The IDC takes localization very seriously and acknowledged that it is difficult to achieve the 35% local content requirement.
• According to the IDC, CSP must not be disregarded. CSP has the greatest potential for creating jobs and has the potential to supply the bulk of the base load. Much is being done to develop new CSP technologies and it is easy to achieve a 60 percent local content target.
• The Department is encouraged to consider the amount spent on research and development, not only in renewable energy technology but also on the development of new products. Some research is being done at Universities but there is a critical research gap requiring funding
• At a recent workshop arranged by the Department of Trade and Industry, a Chinese delegate advised that China had no localization targets for the first few years of its renewable energy programme. It must be acknowledged that it takes time to establish a new industry

4. Recommendations

• The Department of Energy to urgently consider challenges of the complex and expensive bidding process, BBBEE policies, job creation, skills transfer and work with other departments to address such challenges;
• The Department of Energy to try and reverse the lack of initiatives to take advantage of the opportunities to increase local content had to be addressed as a matter of urgency; The Department of Energy to ensure focus must be on the establishment of a local manufacturing renewable energy industry particularly achieve a 60 percent local content target;
• The Department of Energy to closely monitor skills transfer which is also paramount;
• The Department of Energy to ensure the 2.1 percent of project costs that are earmarked for socio-economic development are strictly adhered to – such must include clear guidelines on how this money should be spent;
• The Department of Energy should motivate South African bidders such that there are more local participants during subsequent phases beyond windows 1 and 2;
• The Department of Energy to work more intensively with Department of Economic Development and the Department of Trade and Industry on the job creation aspect of the programme;
• The Department of Energy to mobilize provincial Development Financiers to enhance their contribution on the renewable energy programme
• The Department of Energy to ensure that spending on research and development, not only in renewable energy technology but also on the development of new products be enhanced including working with SANEDI, universities and the renewable energy industry to minimize the critical research gap that requires funding.