Post on 14-Apr-2018
REIPPP - A New Dawn for
South African Renewables?
An analysis of renewable energy prices in the
South African Renewable Energy Independent
Power Producer Procurement programme
Master Thesis by Kai Simon Eikli Yuen
M.Sc. International Energy
Thesis supervisor: Prof. Giacomo Luciani
Sciences Po, Paris School of International Affairs
June2014
The copyright of this Master's thesis remains the property of its author. No part of the content may be reproduced, published, distributed, copied or stored for public or private use without written permission of the author. All authorisation requests
should be sent to vanessa.scherrer@sciencespo.fr
REIPPP – A New Dawn for South African Renewables?
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“The biggest barriers to developing renewable energy in
Africa to date are not technological, but financial”.
President Jacob Zuma of South Africa
November 2011, Durban1.
1 The Presidency of the Republic of South Africa, 2011
REIPPP – A New Dawn for South African Renewables?
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Executive Summary
The Renewable Energy Independent Power Producer Procurement programme (REIPPP) is a
South African competitive auction for IPP renewable energy projects. In the auctions held
since its inception in 2011, bid prices for solar PV and wind have fallen by 68 % and 43 %,
respectively.Having awarded tenders for solar PV and wind projects totaling 3.5 GW thus far,
REIPPP is being hailed as a great success and possible model for other countries. On the
other hand, during the renewable energy feed-in tariff regime (REFIT) that preceded it, not a
single project materialized. This research project aims to explore how REIPPP, when South
Africa had only minimal experience with renewables, succeeded in procuring a high number
of solar PV and wind projects at affordable prices within the span of a few years.
Sources: SA Department of Energy and Minerals2013, Pegels 2012
The main goal of this master thesis is to explore the factors that have influenced REIPPP
bidding prices by tapping into the knowledge and experience of renewable energy investors,
project developers and EPC contractors with a presence in REIPPP. The scope is limited to
onshore wind and solar PV projects. While some limited research already exists on the topic,
the author conducts a literature review which finds that four key questions remain
unanswered. Firstly, it is unclear why there has been such a marked difference in investment
REIPPP – A New Dawn for South African Renewables?
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activity between REFIT and REIPPP. Secondly, it is unknown what the private sector
actorsthemselves perceive to be the primary drivers of reduced bid prices. Thirdly, the
impact of the design and implementation of REIPPP as an energy policy on bid prices are
uncertain. Lastly, there are no records of how perceived investment risk have changed
throughout the various stages of REIPPP.
The thesis finds that the lack of investment activity in REFIT was not due to insufficient feed-
in tariff premiums, but rather the lack of an efficient central procurement mechanism. The
responsibility of procuring IPP projects fell to the state utility (Eskom), which was
notinterested in PPAs for IPPs at the time. Some respondents felt this was due to a conflict
of interest, i.e. that Eskom as a monopoly was not interested in facilitating IPP activity –
others believed this was an issue of capacity. Unexpected changes in feed-in tariff premium
levelsin REFIT also translated into increased investment risk, which discouraged some of the
interviewees. It also contributed to perceived investment risk in REIPPP, albeit only in the
first round of auctions.
The main contributors to the strong drop in bid priceswere found to be gradually increasing
competitionandreduced technology costs for wind and solar PV, as well as an economic
downturn in more established renewable energy markets such as Europe.
Theintervieweesalso claimed prices were too high in the first round of auctions due to a lack
of competition, meaning that the striking aggregate bid price reduction was partly the result
of inflated prices. Competition have since driven prices down to a level where smaller
companies find it hard to operate, and there is a genuine concern among the investors that
large utilities backed by corporate finance will dominate the market in the future, much like
Enel Green Power did in the third round of auctions.
As for the design and implementation of REIPPP, interviewees are generally very satisfied
with both aspects and find that they have had a significant impact on bid prices. The
competitive nature of the auctions, and the fact that there are multiple winners in multiple
rounds of bidding, secures cost-efficient pricing that is seen by some investors as more
sustainable than inflated feed-in tariffs. Interviewees also expressed a sense of satisfaction
in the efficiency, transparency and good communication shown by government institutions
and financial partners in South Africa, and the risk of corruption was seen as minimal. A
REIPPP – A New Dawn for South African Renewables?
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steep learning curve meantthat prices came down as banks, regulators, municipalities etc.
became increasingly experienced with REIPPP. Note that while the stringent requirements
for documentation were seen as leading to excessive costs, interviewees also believed this
discouraged less serious actors from the auctions.
Investment risks were measured through a simplified quantitative survey. The 10
interviewees agree that there has been a strong drop in risks related to the power market,
the issuing of permits and the financial sector. Power market risk registers a perceived
decrease because of reduced uncertainty concerning government handling of the PPA and
REIPPP in general. As initial IPP projects have been finished and are generating and selling
electricity under the terms of the PPA for the first time, interview respondents see power
market risk as significantly reduced. Permitrisk and financial sector risk was elevated in the
first round of auctions, but has since been reduced because both government and financial
institutions have gained capacity, experience and knowledge of the renewable energy
sector. Interviewees also note a slight increase in risks related to grid connection and
transmission, as well as social acceptance, though opinions are the interviewees are divided
in their opinions on this. However, the greatest perceived risk is the future of the South
African economy and the effects an economic downturn could have on theoperations and
the credit rating of Eskom.
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Acknowledgements
I am grateful for the support and guidance of Professor Giacomo Luciani, my thesis
supervisor, during the process of writing this thesis. He was always interested and readily
available to assist me in my work, and his extensive experience with the energy sector and
methodological expertise was vital. Any mistakes or errors found in this paper are solely of
my own doing.
I am also appreciate the willingness of interview respondents George Pergamalisand
Lamberto Dai Praof Enel Green Power,TimonDubbelingand RomainSormani of Total New
Energies,JensThomassen of Denham Capital, BjørnarBaugerud of Norfund, SilomnuLongelwa
of OMIG, Helen Tregurtha of AIIM, PhylipLeferink of Vestas, Mark Pickering of Globeleq,
Marc Wright of Biotherm and Christian Lie Hansen of Scatec Solarto aid me in my research
efforts. These are all busy professionals that found the time to answer my many questions
on REIPPP and energy investment risks. Their input was crucial for this research project and
the fact that they were able to find room in their hectic schedules for my interviews is
greatly appreciated.
In addition, I would like to thank Manfred Hafner of the Sciences Po energy faculty for
sharing his knowledge and expertise with me. His comments were insightful and provided
me with guidance that helped further advance the process of writing this thesis.
Lastly, I would like to extend my warmest thanks to Mark Davis of Norfund. His ability to put
me in touch with suitable interview respondents proved invaluable. Also, the importance of
renewable energy financing and investment risk was only made clear to me while working
for him during an internship in the fall of 2013, and it was this enjoyable and educating
experience that initially piqued my interest in the field of financing renewable energy.
Without Mark’s support and tutelage, this thesis would not have been written.
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Table of Contents Abstract ...........................................................................................................Erreur ! Signet non défini.
Acknowledgements ................................................................................................................................. 5
1 Introduction.......................................................................................................................................... 8
1.1 Thesis structure ............................................................................................................................. 9
1.2 Call for research............................................................................................................................. 0
1.3 Context ........................................................................................................................................ 10
1.3.1 The South African electricity sector ..................................................................................... 10
1.3.2 Investing in renewable energy in developing countries....................................................... 13
2 Literature review ................................................................................................................................ 14
2.1 About electricity auctions internationally ............................................................................... 15
2.1.1 A comparison of Brazilian and South African experiences................................................... 16
2.2 Falling technology costs in solar PV and wind power ................................................................. 18
2.3 About REFIT ................................................................................................................................. 20
2.4 About REIPPP............................................................................................................................... 22
2.4.1 REIPPP bid evaluation criteria .............................................................................................. 24
2.5 The South African currency fluctuations..................................................................................... 26
2.6 Summary and research gaps ....................................................................................................... 27
3 Methodology ...................................................................................................................................... 29
3.1 Conceptual framework................................................................................................................ 29
3.1.1 Research questions............................................................................................................... 29
3.2 Interviews.................................................................................................................................... 30
3.2.1 Interview respondent criteria and sampling ........................................................................ 30
3.2.2 Interview topics .................................................................................................................... 31
3.2.3 Pilot interview ...................................................................................................................... 32
3.2.4 About the interview respondents ........................................................................................ 32
3.3 Quantifying perceived changes in investment risk ..................................................................... 34
3.3.1 Investment risk categories ................................................................................................... 35
3.3.2 Measuring investment risks ................................................................................................. 37
3.4 Limitations ................................................................................................................................... 38
4 Findings............................................................................................................................................... 40
4.1 What explains the difference in investment activity between REFIT and REIPPP? .................... 40
REIPPP – A New Dawn for South African Renewables?
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4.2 External factors influencing average bidding prices ................................................................... 41
4.2.1 REIPPP 1................................................................................................................................ 42
4.2.2 REIPPP 2................................................................................................................................ 43
4.2.3 REIPPP 3................................................................................................................................ 44
4.3 Has the design and implementation of REIPPP have influenced average bidding prices? ......... 45
4.4 Investment risk in REIPPP............................................................................................................ 47
4.4.1 Power market risk ................................................................................................................ 47
4.4.2 Permits risk ........................................................................................................................... 48
4.4.3 Social acceptance risk........................................................................................................... 49
4.4.4 Grid and transmission risk .................................................................................................... 51
4.4.5 Technology and resource ..................................................................................................... 52
4.4.6 Counterparty risk.................................................................................................................. 54
4.4.7 Financial sector risk .............................................................................................................. 55
4.4.8 Political risk........................................................................................................................... 56
4.4.9 Macro-economic risk............................................................................................................ 57
5 Discussion........................................................................................................................................... 59
5.1 What explains the difference in investment activity between REFIT and REIPPP? .................... 59
5.2 External factors influencing average bidding prices ................................................................... 60
5.3 Has the design and implementation of REIPPP have influenced average bidding prices? ......... 61
5.4 Risk perceptions .......................................................................................................................... 63
5.4.1 Reductions in perceived investment risk ............................................................................. 64
5.4.2 Increases in perceived investment risk ................................................................................ 65
5.4.3 Risk categories without observed changes .......................................................................... 66
5.4.4 Overall evaluation ................................................................................................................ 66
5.5 Differences from existing literature ............................................................................................ 67
6 Conclusion .......................................................................................................................................... 68
Attachment 1: Investment risk questionnaire ...................................................................................... 70
Attachment 2: Call for interviewees...................................................................................................... 72
References............................................................................................................................................. 73
REIPPP – A New Dawn for South African Renewables?
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1 Introduction
The Renewable Energy Independent Power Producer Procurement Programme is a South
African renewable energy competitive bidding mechanism commonly referred to as REIPPP.
In REIPPP, which has had three phases of auctions since its inception in 2011, renewable
energy deployment has essentially spiked while prices have dropped significantly. In the
annual reports on global renewable energy investment issued by the United Nations
Environment Programme (UNEP) and Bloomberg New Energy Finance (BNEF), South Africa
went from being described as a “disappointment” in 20112 to being called a “runaway star”
and one of the top 10 investor countries in renewable energy in 2012, with total investments
in the first round of auctionsamounting to 5.7 USD billion, up from virtually zero3. IHS has
even proclaimed South Africa to be the world’s most attractive emerging solar market in
20134.
In stark contrast, not a single renewable energy IPP project was started in South Africa
during the two-year long feed-in tariff regime that existed before REIPPP implementation. In
the course of just three REIPPP auctions over two years,the average bidding prices of
projects what have won an auction have dropped 68 percent for solar PV and 43 percent for
wind power (2011 ZAR values). Can these changes be attributed to the planning and
implementation of REIPPP and a perceived reduction in investment risk, or are the reduced
prices resulting more from external factors such as a drop in renewable energy technology
prices?
This objective of this paper is toidentify the main factors influencing REIPPP bid pricing.Prior
to the writing of this thesis, little academic literature on the opinions of investors and project
developers existed. The data for this thesis was therefore gathered from interviews with a
range of investors and project developers that have participated in REIPPP and are therefore
expected to have unique information on the topic.
2 UNEP 2012
3 UNEP 2013
4Woods 2014
REIPPP – A New Dawn for South African Renewables?
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1.1 Thesis structure
The first chapter of the thesis is this introduction, which gives an overview of the thesis. It
also explains the context of the research, with particular focus on the South African energy
sector and the increased global attention on the importance of investing in renewable
energy. The second chapter is the literature review, which studies the literature on REIPPP
currently available and ends by analyzing what gaps regarding the subject that remain
unfilled. Based on these gaps, research questions are then formulated in the third chapter,
which contains the methodology and which also explains the research design and research
methodsused in the paper, in addition to presentation of the limitations of this study.
Findings of the research are presented in chapter four, and a discussion of these findings can
be found in the fifth chapter. In the sixth and final chapter, the conclusions that can be
drawn from this thesis are presented.
1.2 Call for research
When speaking at the Investor Summit on Climate Risk
in January 2014, the Executive Secretary of the United
Nations Framework Convention on Climate Change,
Christiana Figueres, urged investors to move into green
investments5. While renewable energy investments
have generally increased the last few years, they are
still far below what is believed is needed to facilitate a
transformation to a sustainable energy sector.
Ceres, a coalition of investors, pension funds and NGOs,
believe the amount should be even higher.They believe
as illustrated in figure 1, that an annual amount of 1 USD trillion must be reached within
2030 - almost four times of all RE investments registered by BNEF in 2012.Studies on RE
financing could contribute to reaching this goal.
In 2011 a UNEP Energy Finance Initiative study in South Africa estimated that the
incremental costs of installing 1-3 GW of renewables per year until 2020-2025 would have a
5UNFCCC 2014
Figure 1: The need for RE investments
Source: CERES 2013
REIPPP – A New Dawn for South African Renewables?
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net present value of approximately 21 USD billion6. The same study concluded that this
amount of capital would be impossible to raise within South Africa and that international
sources of capital would be needed. These could be raised through “domestic institutional
de-risking and the provision of a blend of concessionary debt and risk guarantee
instruments”. As not one single renewable energy IPP project had been closed under the
REFIT regime, the authors of the study concluded that REFIT was not fit to attract foreign
investments. REIPPP has apparently been a greater success in this regard, but the study was
released before the first auction had been conducted. An investigation of how and to what
extent REIPPP has influenced financier perspectives and succeeded in attracting the capital
needed to decarbonize is therefore of importance.
It should also be noted that while REIPPP is the first large-scale independent power producer
(IPP) electricity auction in Africa, yet very little research has been done on the topic. Seeing
as how the African continent has suffered from a shortage of renewable energy deployment
despite having ample renewable energy resources, the findings from this research could
prove valuable for policy makers in Africa and elsewhere wishing to stimulate increased
renewable energy investment.
1.3 Context
1.3.1 The South African electricity sector
The South African state utility, Eskom, is a vertically integrated actor that is responsible for
the majority of generation, transmission and distribution of power in the country. Eskom
generated 96 percent of South Africa’s electricitybefore REIPPP, and it also owns and
controls the high voltage transmission grid in addition to distributing electricity directly to
approximately half of the end-users (the rest is distributed by local authorities)7.
The South African Network Infrastructure Review on Electricity was written in 2008 for the
South African National Treasury. This was an extensive evaluation of the South African
power sector, which it concluded was facing seven principal challenges8:
6Sullivan 2011
7 Eberhard 2005
8 Newbery 2008
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1. An urgent need for capacityexpansion due to delays in reforms and unclear decision-
making, to a level that would likely require increased private investment.
2. Eskom’s own investments in power generation could struggle with high cost and
inefficiencies because of soft budget constraints (meaning they can expect the
government to provide loans or allow higher prices if needed).
3. Eskom’s poor management. A series of blackouts, breakdowns and plant failures
questions their energy procurement strategies and O&M systems.
4. A lack of efficiency and cost-reflectivity in electricity pricing, as well as a lack of
transparency in subsidy programmes.
5. Transmission constraintsand interruptions, which are linked to past maintenance
problems and inadequate investment criteria.
6. Very poor municipal power distribution, which could worsen and bring about great
economic cost.
7. Outdated data for electrification planning.
8. South Africa is carbon-intensive, meaning that a carbon tax would have a significant
impact on South Africa’s energy sector.
Coal power constitutes the vast majority of South African electricity generation. A minor
portion of power generated comes from nuclear power, and the remaining 2.1 percent is
predominantly from hydro power. The dominance of coal and the lack of renewable
electricity generation is clearly illustrated in the graph below.
Figure 2: South African electricity generation capacity by source before REIPPP
Source: IRENA 2012
This heavy reliance on coal is not without environmental consequences. The electricity
sector produced 61 percent of South Africa’s CO2 emissions in 2011 and was therefore the
REIPPP – A New Dawn for South African Renewables?
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main reason why South Africa was the 11th
largest CO2 emitting country and accounted for
38 percent of all African CO2-emissions that year910
.
At the same time, the potential for wind and solar PV power generation is very high in South
Africa. The average solar radiation varies between 4.5 and 6.5 kWh/m2 (compared to 2.5
kWh/m2 in Europe and 3.6 kWh/m
2, at the most, in the US), and very high mean annual wind
speeds along the coast can translate into 200 W/m2, according to aWhite Paper on
Renewable Energy published by the South African Department of Minerals and Energy
(DoE)11
.In a comprehensive energy sector planning document called the Integrated Resource
Plan it was decided that renewables excluding hydro power should constitute 42 percent of
all new power generation capacity by 2030, delivering 9 percent of net electricity12
. The
planned additional capacity is shown in the figure below.
Figure 3: Planned energy mix in 2030
Source: The South African Department of Energy 2011
9IEA 2013
10 EIA 2011
11 The South African Department of Minerals and Energy 2003
12The South African Department of Energy 2011
REIPPP – A New Dawn for South African Renewables?
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1.3.2 Investing in renewable energy in developing countries
The concept of risk and return is central in finance and investment decisions. Investors
simply want to make a return proportional to the risk they take – more risk therefore leads
to a higher expected return on that investment13
.
Looking at Figure 4, it is important to note that the proportion of the different cost
components change depending on the given investment. According to Waissbein, the fall in
technology costs for renewables has in one sense not been able to mitigate the importance
of the high upfront costs found in renewable energy projects that are typically not found in
fossil fuel investments14
. For example, the investment cost in onshore wind projects will
typically constitute about 80 percentof the lifetime technology costs, but only 15 percentin
combined-cycle gas projects15
. Wind does have the advantage of having low operational
costs – it does not consume fuel in the way that a gas plant does – but the high upfront
investment and the long lifetime of these projects means that the impact of higher financing
costs become all the more important.
13
Justice 2009 14
Waissbein et al, 2013, 15
Ibid.
REIPPP – A New Dawn for South African Renewables?
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Figure 4: Example ofLCOE for renewables in developing countries
Source: Waissbein et al, 2013
This dynamic is especially challenging in developing countries. Whereas a wind project in a
developed country could have a commercial loan with a tenor (say 18 years) almost
matching the lifetime of the wind plant (say 20 years), commercial loans for projects in
developing countries typically have a tenor that is around half or less of the plant lifetime16
.
Having to pay back the loan on a much shorter tenor, the wind project has to increase the
price of the electricity. One also has to consider the increased investment risk seen in
developing countries and the fact that these are priced directly into the cost of equity17
.
2 Literature review
Information on the South African energy sector is easily available through public sources.
Some quantitative data from the DoE exists on REIPPP, such as the number of bids and bid
prices. Academic literature on REIPPP remains limited as it is a relatively new program that
has only existed for three years. One study briefly discusses investor risks in South Africa
(Waissbein 2013), but only for wind projects. Two short articlescompare REFIT and REIPPP
(Pegels 2012 and Eberhardt 2013). These articles state that REIPPP has been successful in
16
Ibid. 17
Ibid.
REIPPP – A New Dawn for South African Renewables?
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attracting foreign investors and project developers and that the average price bids from
these developers were decreased, but they do not go in-depth into issues such as
investment risk.One of these papers also studies developments from REIPPP 1 to REIPPP 2.
At the time that this thesis was being written, no academic studies on year-to-year
developments in REIPPPthat included the REIPPP 3 auctions were discovered.
Chapter 2.1 presents literature on international experiences with renewable energy
auctions. In 2.2, we review literature describing developments in technology costs for wind
and solar PV. Academic literature on REFIT is presented in 2.3 and on REIPPP in 2.4.
2.1 About electricity auctions internationally
Lessons learned from electricity auctions elsewhere in the world could be important in
evaluating REIPPP, and are therefore briefly discussed in this chapter. “Electricity Auctions:
An Overview of Efficient Practices” is an extensive study on electricity auctions in the world
conducted by Luiz Maurer and Luiz Barroso of the World Bank in 2011. The study shows that
electricity auctions have grown in popularity and that they are quite widespread, and that
they can be a highly efficient tool in procuring electricity generation projects if designed and
implemented correctly. Still, it should be noted that the majority of the auctions researched
in that study has included fossil fuelled power generation. Experiences with renewable
energy sources in electricity auctions are still limited, especially in developing countries
whose primary goal is to attract high amounts of new generation capacity.
Maurer notes that three common issues are experienced by investors in competitive bidding
in infrastructure projects, notably long time frames, high development costs and the risk of
intellectual property issues (especially seeing a developed project being taken over by other
companies)18
. Together, issues of this nature could imply that competitive bidding is not the
right form of energy procurement policy for a given country.
In addition to these common issues, Maurer finds that electricity auctions conducted
specifically to increase for renewable energy power generation are reliant on a few key
requirements19
. First, they must be able to attract enough bidders in order to secure a
sufficient level of competition. Second, speculators and financially insolvent players must be
18
Maurer 2011 19
Ibid.
REIPPP – A New Dawn for South African Renewables?
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discouraged from participating in the auctions in order to make sure that the auction
winners actually deliver the projects awarded. And lastly, effective compliance mechanisms
must be in place in order to ensure that projects are delivered on time and operate properly.
2.1.1 A comparison of Brazilian and South African experiences
Special attention should be paid to the Brazilian renewable energy program because of the
number of similarities between the Brazilian electricity auction for wind and REIPPP. Brazil
and South Africa countries are both developing countries and high-growth economies, they
are both using auctions to attract high amounts of new renewable energy generation
capacity and, most importantly, they have both made the transition from a feed-in tariff-
based system to an electricity auction program awarding 20-year PPAs as the main tool for
procuring renewable power20
. The development in pricing and increase in capacity for wind
power in Brazil is somewhat similar to that of wind power in REIPPP, as shown in the graph
below. This implies that the transition from feed-in tariff to competitive auctioning may have
had similar effects in the two countries.
Figure 5: Switching from feed-in tariffs to electricity auctions for wind power in Brazil and South Africa
N
ote:REFIT refers to the first REFIT tariff, which lasted the longest period of time. All figures real USD, 2011.
Sources: Maurer 2011, Pegels 2012, Barroso 2012, Bloomberg 2013
This chart does not adjust for inflation or currency fluctuations, and it does not consider the
differences in timing (Brazil started the auctions just as wind turbine prices started dropping
20
Ibid.
REIPPP – A New Dawn for South African Renewables?
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significantly in 2009). However, the observed patterns in the transition from feed-in tariff to
electricity auction can still be interesting and provide grounds for further research. Of
particular interest is the trend indicating that the drop in average bidding prices has been
slightly faster in REIPPP, but the Brazilian prices have been lower and the incremental
increase in MW generation capacity found in Brazil is much higher. Wind prices have now
stabilized in Brazil, as witnessed by the average bid price of 5.5 USc/kWh in the 2013 wind
power auction, marginally above that of the 2011 auction21
. That means that there is only a
1.1 USc/kWh difference between prices obtained through electricity auctions in Brazil and in
South Africa in 2013.
It is interesting to note that prices went up in the first auction following REFIT in South Africa
whereas they dropped 44 percent, from 15 USc/kWh to 8,4USc/kWh , after Proinfa in Brazil.
No projects were secured under REFIT, and the fact that the REFIT tariff was actually lower
than the price given by project developers in 2011 could indicate that they were too low to
attract investors. However, it would be premature to conclude that Proinfa was more
successful or better priced than REFIT. Proinfa encountered a range of difficulties since its
inception in 2002 until 2009, when wind power procurement was conducted through
electricity auctions22
.
Brazil did face some difficult in facilitating competitive market forces in their electricity
auctions. In the first auction, participation was limited because developers allegedly
preferred to sell energy to large end-users who generally received discounts on transmission
and distribution, thereby subsidizing direct electricity sales to these large users23
. That being
said, Maurer considers the auctions to have been a success as they have succeeded in
mitigating many of the risks commonly related to wind power investments and that the
auctions were therefore seen as very attractive by investors.
Note that a side-by-side comparison of the two countries does not take the numerous
differences between the countries that could impact the auctions into account, and that it is
therefore not a good basis for measuring the success of these auctions. For instance, REIPPP
places a 30 percentweighting on economic development factors, meaning that prices are not
21
Bloomberg 2013 22
Barroso 2012 23
Maurer 2011
REIPPP – A New Dawn for South African Renewables?
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directly comparable because higher kWh prices can be compensated for by increasing the
economic development scores. Tax credits can be as high as 75 percent of income tax in
Brazil, and long-term low-cost loans from the Brazilian Bank of Development are given to
projects, allowing for lower bidding prices24
. There could also be any number of differences
in implementation agreements, grid codes and PPAs etc. In addition, Brazil has not held
auctions specifically for solar PV as found in REIPPP, so there are no grounds for comparison
of procurement policies for this technology.
2.2 Falling technology costs in solar PV and wind power
The global deployment of solar PV and wind power installations has increased sharply during
the last decade. At the same time that installed capacity growth has been growing, prices
have also been dropping significantly. This trend is especially clear for solar PV, where a
long-term trend can be observed in which prices for installed generation capacity drop by 22
percent each time the cumulative installed capacity is doubled, as seen in the graph below.
Figure 6: Historical development in solar PV module costs
Source: IRENA 2013
A 2006 polysilicon shortage increased the costs for the solar PV industry for a short period,
but it seems clear that there has been a significant drop in module prices overall. The graph
24
Ibid.
REIPPP – A New Dawn for South African Renewables?
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below shows a somewhat less coherent overview of developments wind turbine prices over
time, but a significant decrease since 2009 can still be observed.
Figure 7: Historical developments in wind turbine costs
Source: IRENA 2013
The wind turbine manufacturing sector saw a rise in the costs for materials (particularly steel
and cement) and civil engineering in 2009, as well as higher profit margins for the wind
turbine manufacturers and an increase in turbine size that made turbines more expensive
per Watt25
. However, the larger turbines also came with a higher capacity factor (average
increase of approximately 8 percent from 1999 to 2011), thus generating more power and
leaving costs per kWh stable or decreased26
. We have seen the same development solar,
with more expensive 1- and 2-axis tracking systems increasing the capital expenditure for a
project, but at the same time increasing capacity factors by approximately 5-10 percent,
thereby reducing or maintaining a stable cost per kWh27
.
While it is clear that costs for wind turbines and solar modules have dropped, it is important
to keep in mind that a significant part of the costs of an energy project are in fact related to
other factors, the so-called “soft costs”. For instance, the grid connections, foundations and
25
IRENA 2013 26
Ibid. 27
Ibid.
REIPPP – A New Dawn for South African Renewables?
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planning constitute 36 percent of the cost of a typical onshore wind farm, whereas the wind
turbine stands for the remaining 64 percent28
. For solar PV, only 31 percent of the cost of an
average utility-scale solar PV system is related to EPC – the rest is shared among balance-of-
system costs, electrical and hardware costs, inverters and racking/mounting of the
modules29
. Such factors are dependent on a range of local cost aspects, such as the
availability of skilled local staff, salary levels, geographical location of the installation,
distance to the nearest grid access point etc.
2.3 About REFIT
The South African Renewable Energy Feed-in Tariff (REFIT) was introduced by the National
Energy Regulator of South Africa (NERSA) in 2009. The first tariff rates were exceedingly low
and were quickly increased substantially (wind tariffs were doubled and CSP tariffs tripled)
when it was made clear that project developers considered them insufficient to incentivize
investment30
. NERSA designed the tariffs (which would be fully indexed for inflation) so that
they would provide investors with an approximate return on equity of 17 percent after
accounting for generation costs31
. Investors and environmental organizations expressed
satisfaction with the new tariff levels32
.
Despite the seemingly attractive tariff levels, the REFIT implementation was followed by a
two year long renewable energy investment standstill. Many investors voiced their interest,
but there were no real procurement mechanisms at the time33
.In 2011, NERSA unexpectedly
released a consultation paper on tariff reviews in which tariffs were strongly reduced yet
again, in some cases by as much as 40 percent34
.
28
Ibid. 29
IRENA 2013 30
Pegels 2012 31
Eberhardt 2013 32
Pegels 2010 33
Eberhardt 2013 34
NERSA 2009, NERSA 2011
REIPPP – A New Dawn for South African Renewables?
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Table 1: Changes in tariff levels from REFIT 2009 to REFIT 2011
Technology REFIT 2009
ZAR/MWh
REFIT 2011
ZAR/MWh Change (%)
Wind 1250 938 -24.9
Solar PV (>1MW) 3940 2311 -41.3
Landfill gas 900 539 -40.1
Small hydro 940 671 -28.6
CSP through w/storage 2100 1836 -12.6
CSP trough, no storage 3140 1938 -38.8
CSP tower w/storage 2310 1399 -39.4
Biomass solid 1180 106 -10.1
Biogas 960 837 -12.9
Needless to say, project developers were not pleased with the cuts and also deplored the
lack of renewable energy investment climate stability, as the tariff cuts were announced just
before a planned 1025 MW request for project proposals35
. Regardless of its ability to
incentivize renewable energy investments, the National Treasury questioned the legality of
REFIT by claiming it could be unconstitutional. As per the South African 1996 Constitution,
state purchases of goods and services have to be done in a fair, equitable, transparent,
competitive and cost-effective manner. The National Treasury believed that fixed tariffs
were not competitive or cost-effective, and so in July 2011 Minister of Energy Dipuo Peters
announced that price competition was to be the basis of the renewable energy procurement
program (REIPPP)36
. After two years in which not a single renewable energy had been signed,
REFIT was thus removed37
.
It should be mentioned that while no projects were closed during the REFIT regime,
renewable energy developers invested significant resources on project development by
securing sites, conducting environmental impact assessments or having started resource
assessments. For instance, the South African Wind Energy Association claims that wind
developers were reported to have spent 400 ZAR million on project proposals38
.
35
Pegels 2012 36
Ibid. 37
Eberhardt 2013a 38
Naidoo 2011
REIPPP – A New Dawn for South African Renewables?
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2.4 About REIPPP
REIPPP beganin August 2011 with the release of a request for project proposals (REIPPP 1),
an offer which had a proposal deadline in November 2011. This was seen as a tight deadline
by developers39
. In REIPPP 1, a total of 3,625 MW capacity was tendered, with specific MW
allocations for each technology. There were also upper price caps of 1,150 ZAR/MWh for
wind and 2,850 ZAR/MWhfor solar PV. But with a full 1,850 MW wind capacity and 1,450
MW solar PV capacity was tendered in REIPPP 1, the first auction was undersubscribed. The
projects that were accepted only amounted to 643 MW for wind and 631.5 for solar PV. The
government spent approximately 10 USD million on the tender design and the first round of
evaluation of bids40
.
Table 2: REIPPP increase in competitiveness
Competitiveness Solar PV Wind
Bidsrece
ived
Bidsacce
pted
Success
rate
Bidca
p
ZAR/M
Wh
Change Bidcap ZAR/M
Wh
Change
REIPPP 1
2011
53 28 52.8 % 2850 2758 - 1150 1143 -
REIPPP 2
2012
79 19 24.1 % 2743 1645 40 % 1078 897 22 %
REIPPP 3
2013
93 17 18.3 % 881 68 % 656 43 %
All prices in 2011 ZAR.
Sources: Department of Energy and Minerals 2011, 2012 and 2013
The average bid prices of 1,143 ZAR/kWh for wind and 2,758 ZAR/MWh for solar PV were
just barely under the bid cap. This, combined with the high success rate and the fact that the
full amount of tendered capacity was not awarded to bidders, indicates that there may have
been lack of competition in REIPPP 1. REIPPP 2 took this into account and reduced the total
capacity tendered to 1,275 MW. As shown in the table above, more bids were also received,
possibly because developers now had had more time to prepare their bids. While half of the
bids were accepted in REIPPP 1, less than a quarter were accepted in REIPPP 2. Combined
with the significant drop in solar PV and wind project prices, this indicates that market
competition became a more important factor.
39
Eberhard 2013a 40
Eberhard 2013b
REIPPP – A New Dawn for South African Renewables?
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This trend continued in the third round, but no academic literature has been found on the
developments since REIPPP 2. Nonetheless, the results of three phases of REIPPP have been
noteworthy. As illustrated in the graph below, investments in solar PV and wind have been
increasing quickly the last few years while also seeing a strong drop in bidding prices.
Figure 8: REFIT tariffs vs average bid prices and MW capacityclosed under REIPPP, 2009-2013
Sources: SA Department of Energy and Minerals2013, Pegels 2012
To date, the first three phases of REIPPP have procured and closed projects with a net
capacity of 3,914 MW in two years (3,468 MW of which are solar PV and wind power). To
put that figure in comparison, the net capacity of all South African energy generating assets
before REIPPP was 42,856 MW (chapter 1.3.1). That means that if all REIPPP projects
secured to this date begin generating electricity, South African power generation will have
increased 8.35 percent by adding nothing but renewable capacity.
The scale, speed and price of these renewable energy additions are noteworthy. According
to Eberhard, the main reasons for the success of REIPPP have been the following41
:
• A well designed procurement policy, partly because of the use of international
advisors.
41
Eberhard 2013a
REIPPP – A New Dawn for South African Renewables?
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• Efficiency and a demonstrated ability of the government to stick to the deadlines in
the bidding process.
• Flexibility in allowing REIPPP 2 to change tendered capacities and price caps.
• Benefiting from the highly competitive nature of renewable energy sector.
• Stringent thresholds for local content, creating local employment.
• The ability to mobilize the local capital market.
• Incentivizing developers through high returns. 1 percent of REIPPP project revenues
is taxed and used to finance a renewable energy fund for future procurement
programs in South Africa.
2.4.1REIPPP bid evaluation criteria
The Request for Proposal (RFP) is the South African government’s request for energy project
bids in REIPPP. A new RFP is thus released before every new REIPPP phase, andthe
government can therefore change key criteria for bids in different phases. Note that
information on RFPs is available on the website of the South African Department of Energy.
In evaluating the bids received following an RFP, three steps are taken. First, bids found not
to be in compliance with key requirements and rules are ruled out. Second, qualified bidders
are differentiated from the rest following an evaluation of compliance based on a range of
factors, including environmental impact, land issues, potential impact on economic
development, financing, technical issues, price and capacity. Lastly, a comparative evaluation
of projects is made based on pricing and economic development score42
.
It is important to underline that REIPPP bidding does not solely focus on cost-efficiency (bid
price). As a policy that also focuses on local economic development, REIPPPP bid selection
evaluates bids with 30 percent weighting on price and 70 percent and on 30 percent on an
economic development score. The different criteria used to calculate a score for economic
development are shown in the table below.
Table 3: Weighting economic development scores in REIPPP
Economic development factors Weighting
Job creation 25%
Local content 25%
42
Eberhard 2013a
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Ownership 15%
Management control 5%
Preferential procurement 10%
Development 5%
Socio-economic development 15%
Total 100%
Source: The South African Department of Energy 2011
In REIPPP 3, the approved bid Adams Solar PV2 had an economic development score of 12.6
and a price of 864 ZAR/MWh while another project, MuliloSonnedixPrieska PV, compensated
for its relatively high price of 1100 ZAR/MWh with an economic development score of 18.
The fact that both projects were approved despite a large difference in price shows that
while price is the most important factor in the evaluation process, the score given for
economic development can still be decisive in leading to bid approval and thus leaves room
for significant pricing differences.
Several minimum thresholds have also been implemented for economic development
requirements in REIPPP. As an example, the table below shows the thresholds used for wind
projects in REIPPP in 2013.
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Table 4: Economic development tresholds for wind projects in REIPPP
Source: Eberhard 2013a
According to the South African Department of Energy, the REIPPP evaluation process is
stringently regulated and highly transparent. Evaluation of bids is conducted in “closed”
environments under strict security conditions that include physical separation of evaluation
teams and video recordings of the entire process43
. The evaluators, which are partly
comprised of external consultants, all have to sign a declaration of interest to ensure that no
conflict of interest arises. Independent review teams scrutinize both individual reports and
the overall process.
2.5 The South African currency fluctuations
According to the World Bank, good governance and a well-designed economic policy has let
South Africa experience continued economic growth (which averaged 3.2% percent from
1995 until today), infrastructure development and poverty reduction up until the 2008
43
Department of Energy 2011b
REIPPP – A New Dawn for South African Renewables?
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financial crisis44
. The main challenges of the South African economy, namely large income
gaps, poverty and unemployment, were exacerbated by the crisis.
The South African Rand (ZAR) has experienced a significant decline after 2011. The USD-ZAR
rate has fallen steadily from 0.15 in August 2011 (RFP REIPPP 1) to a bottom value of 0.09 in
January 201445
. In the same time space, EUR-ZAR rate fell from 0.11 to 0.06. This steady
decline is likely to affect project developers and investors in REIPPP who have their entire
income in ZAR. In addition, a substantial amount of their EPC costs are in USD or EUR.
2.6 Summary and research gaps
One can observe a clear rise in wind and solar PV energy deployment in REIPPP, along with a
significant drop in average bid prices in the projects that have been rewarded in the
auctions. As mentioned in the introduction, the research objective of this thesis is to identify
the main factors influencing REIPPP bid prices by exploring the perspectives of investors,
project developers and EPC providers. While the literature reviewed here provides some
answers, the following gaps have been identified.
Firstly, a few academic articlesdescribe the main drivers of reduced bidding prices exist.
However, the articles are relatively short. They primarilyattribute the reduced costs to the
competitive nature of electricity auctions, but they do not explore this indepth and they only
describe developments until REIPPP 2. The same articles also describe REFIT, though they do
not provide in-depth research with investors or project developers either. As the goal of this
thesis is to focus on investor perspectives, it seems that the experiences of investors on this
topic should be explored to see if their opinions differ from this view.
Secondly, the literature available does not consider to what extent pricing has been
influenced by the significant drop in solar PV and wind technology prices, the macro-
economic situation, the 30 percent weighting of economic development or by other factors
discussed in the literature review. The articles do describe the main differences between
REFIT and REIPPP, but they do not consider whether REFIT has shaped the perspective of
potential investors. This is also something that should be covered by this thesis.
44
The World Bank 2014 45
Currency rates found at www.xe.com.
REIPPP – A New Dawn for South African Renewables?
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Thirdly, no comparisons have been made between REIPPP and Maurer’s survey of electricity
auctions worldwide. As Maurer has listed several success criteria for electricity auctions, this
gives some room for evaluation of REIPPP in the way that it has been designed and
implemented and to the extent to which this has facilitated bidding price reductions.
Lastly, Waissbein’s study on investment risk in renewable energy in developing countries
claims that investor risk translates directly into higher prices. However, no information is
available on how investment riskshave been perceived and how they havechangedduring
REIPPP.This thesis should therefore aim to chart how changes in investor risk have been
perceived by the investors and developers involved in the process.
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3 Methodology
3.1 Conceptual framework
Considering the limited academic work available on renewable energy financing in South
Africa and the fact that the REIPPP is a fairly young energy procurement policy which has not
been subject to in-depth research, it stands to reason that it is the experiences of the project
investors and developers that have participated in the process that can provide the most
relevant the data for this thesis. Financiers want to understand the risks they face, and those
that have in fact invested in REIPPP will therefore have assessed REIPPP investment risk in
one way or the other. In order to accommodate such aresearch focus, a qualitative approach
based on the principles of grounded theory has been chosen for this study.
In this dissertation, the principles of grounded theory are based on the book The Basics of
Qualitative Analysis by Strauss and Corbin. This framework does not test theories, but rather
sees theories emerge gradually from the analysis of empirical data. The principle advantage
of this approach is that it allows for a flexible approach in which the process of research can
change over time in a manner that helps analysts consider alternative meanings of registered
phenomena46
. Interviews will therefore be used not just to confirm/reject the context set by
the literature review, but also could also supplement the literature review by raising topics
not covered by existing literature and data.
3.1.1 Research questions
Based on the research gaps noted in the last chapter, four specific research questions can be
formed.
1. What factors can explain the difference in investment activity between REFIT and
REIPPP, and how did REFIT impact perceived investment risk in REIPPP?
2. Whathave been the main factors influencing average bidding prices in REIPPP?
3. How has the design and implementation of REIPPP as an energy procurement policy
affected average bidding prices?
46
Strauss 1998
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4. How have perceptions of investment changed from the beginning of REIPPP until
today?
All four questions are inherently qualitative and can be answered using input from in-depth
interviews. However, changes in investment risk is something that can in fact be quantified
as well, and this thesis will attempt to do so through a simplified survey of investment risk
levels perceived by investors and project developers. The methodological framework for the
interviews is presented in chapter 3.2 and for the investment risk questionnaire in chapter
3.3.
3.2 Interviews
Primary data was collected through semi-structured interviewing, a method which provides
flexibility and the ability to handle relatively large amounts of complex data47
. These
interviews were comprised of open topical questions that allowed respondents to talk at
length, but more specific questions were sometimes asked to explore respondent attitudes.
3.2.1 Interview respondent criteria and sampling
In order to avoid interviewees with limited experience with renewables or with REIPPP,
selection of interview respondents was based on the following criteria:
Criteria 1: Works for an organization that has solar PV and/or wind power as a core
competence.
The organization where the respondent works must have extensive insight into solar PV
and/or wind power industries and markets. However, the nature of their experience and
services offered can differ. Interview respondents therefore include EPC providers, project
developers, equity investors, debt providers or a combination of several of the above.
Criteria 2: Involved in all three phases of REIPPP.
The interview respondent has been involved in REIPPP I, II and III. This can mean
involvement through closed projects, unsuccessful bids or merely observing the REIPPP as a
potential market. While this is a wide definition, the key criterion is that the respondent is
able to comment on developments in REIPPP over time.
47
Sarantakos 2005
REIPPP – A New Dawn for South African Renewables?
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Note that involvement in REFIT is not required. While this would be an advantage for this
thesis, the investment activity was much lower during REFIT and would therefore limit the
choice of potential interview respondents.
Criteria 3: Has reached financial closure for at least one project in REIPPP.
This indicates that a bid has been accepted by the South African government and that the
financing of the project has been successful. It was decided not to list ownership of a
constructed and operational REIPPP project, as construction times are long and REIPPP is a
young project, meaning that this would severely limit the amount of potential interview
respondents.
One can reason that increasing the amount of criteria reduces the number of potential
interview respondents. But qualitative research does not necessarily aim to cover all
information sources – it rather aims to provide depth, rather than breadth48
. Given the
difficulties inherent in attempting to interview all the project developers and investors in
REIPPP, a sufficient yet achievable sampling size had to be chosen.
In December 2013 and January 2013, 18 potential interview respondents were contacted.
These interviewees were identified either through contacting their firms directly and being
referred to the staff responsible for operations in South Africa, or through contacts provided
by Mark Davis in the pilot interview. While using the professional network of one
“gatekeeper” in this fashion could limit the diversity of interviewee backgrounds, this also
provided easier access to interview respondents. Of the 18 that were contacted, 11 replied
positively. Two of the 11 were unable to fill in the questionnaires due to time constraints.
3.2.2 Interview topics
Topics were essentially the same as the research questions:
1. What factors can explain the difference in investment activity between REFIT and
REIPPP, and how did REFIT impact perceived investment risk in REIPPP?
2. What factors have been the primary drivers of the change in average bidding prices in
REIPPP?
3. How has the design and implementation of REIPPP as an energy procurement policy
affected average bidding prices?
48
Burns 2000
REIPPP – A New Dawn for South African Renewables?
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4. How has perceived investment risk changed from REIPPP 1 to REIPPP 3?
Question 4 was answered through a survey which can be found in attachment 1.
3.2.3 Pilot interview
An exploratory pilot interview was conducted with Mark Davis, Investment Director of
Norfund, in January 2014. This was done in order to assess whether or not the nature and
the number of the questions asked were suitable, and to identify potential practical issues,
such as sufficient time frames.
Following the pilot interview, it was decided that questions should be few in number,
general in nature and allow the interview to be guided in part by interviewee responses.
3.2.4About the interview respondents
The different companies which the interview respondents represented, as well as their main
business activities and renewable energy experience in South Africa, are explained briefly
below. While the companies and the interview respondents are identified by name below,
their comments will be anonymized past this point in the paper and their identities will be
given a random number, i.e. Respondent 1 through Respondent 10.
BjørnarBaugerud – Senior Investment Manager, Norfund
BjørnarBaugerud, is an investment manager with six years of experience in Norfund. He has
been managing the Scatec investments on behalf of Norfund and therefore has deep insight
into REIPPP and its developments over time.
Norfund is a Norwegian development finance institution that invests in the establishment
and development of profitable and sustainable enterprises in developing countries. The aim
is to contribute to economic growth and poverty reduction.Norfund is owned by the
Norwegian Government and is used as an instrument in Norwegian development policy. The
Norwegian parliament allocates annual capital grants to Norfund as part of its development
assistance budget. Norfund has invested in all three solar PV projects, all developed by
Scatec Solar, and also considered energy investments before REIPPP was established. As per
mid-2012, Norfund’s investment portfolio amounted to 1.3 USD billion.
Lamberto Dai Pra - Country Manager, Enel Green Power
Lamberto Dai Pra , Country Manager for Enel Green Power in South Africa, has been working
in the South African market since 2010.Enel Green Power is a renewable energy company
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Page 33
that develops power generating projects mostly in Europe and the Americas. Their portfolio
contains almost 750 plants which together have a capacity of almost 9 GW. Enel Green
Power is part of Enel, a large Italian power utility with a strong international presence and a
joint installed capacity of almost 98 GW.
Note that a second interview was conducted with Georgios Pergamalis, Global Head of PV
M&A at Enel Green Power.
Mark Pickering - Managing Director, Globeleq
Mark Pickering is the Managing Director of Globeleq South Africa. Globeleq is an
international developer, owners and operator of power plants across Africa and Central
America. Globeleq has commenced construction of one wind project and two solar PV
projects that were closed in REIPPP 1.
Christian Lie Hansen - Country Manager, Scatec Solar
As a Country Manager, Christian Lie Hansen has been responsible for all Scatec activities in
South Africa for 4+ years.Scatec Solar is an independent solar energy provider that both
invests in and develops solar PV projects of small and large scale, in addition to delivering
EPC services. The company thus owns a number of solar PV parks developed, built and
operated by the company itself. Their current solar project portfolio amounts to 300+ MW
generation capacity.
Scatec Solarhas had one bid approved during REIPPP 1 and two bids approved in REIPPP 2.
TheirKalkbult solar PV park was the first project of all REIPPP solar projects to become fully
operational and deliver power into the South African grid.
Marc Wright - Senior Associate, BioTherm Energy
Marc Wright is a Senior Associate at BioTherm Energy with extensive experience from
renewables in South Africa. BioTherm Energy is a Sub-Saharan African renewable energy
developer dealing in both wind and solar. They closed three projects in REIPPP 1. They have
a 2.4 GW pipeline of projects in South Africa.
SilomnuLongelwa –
Investment Professional,Old Mutual Investment Group South Africa (OMIGSA)
SilomnuLongelwa is an Investment Professional in OMIGSA’s infrastructure and development
department, where she negotiates and manages infrastructure investments. OMIGSA is one
REIPPP – A New Dawn for South African Renewables?
Page 34
of the largest financial services providers in Southern Africa. They offer a variety of financial
products and services, such as investment, life assurance, asset management, banking,
healthcare and general insurance. Their client base comprises of individuals, businesses,
corporates and institutions.OMIGSA is one of the largest investors in solar PV projects in the
country with 9 REIPPP projects in its portfolio.
Helen Tregurtha -
Transaction Manager, African Infrastructure Investment Managers (AIIM)
Helen Tregurtha is a Transaction Manager at AIIM. AIIM is an infrastructure investment firm
with a 1.15 USD billion portfolio. This includes two solar PV projects closed in REIPPP 1.
RomainSormani - Area Manager, Total New Energies
Romain Sorani has 8+ years of experience at Total, where he is currently working as an area
manager with responsibility for South African projects.Total is a world-leading French energy
company that is perhaps more known for its work in oil and gas upstream sectors than for its
work on solar power generation. However, Total is also involved with solar PV and other
renewables through Total New Energies. Total New Energies secured one solar PV project in
REIPPP 3, but have also been submitting bids in earlier rounds.
Jens Thomassen - Director, Denham Capital
Jens Thomassen is the Director of the Power and Renewables department at Denham
Capital, which is a private equity investor with 7.9 USD billion invested through its three
departments: oil and gas, power and renewables and metals and minerals. Mr. Thomassen is
responsible for the analysis, structuring, valuation and execution of investments in his
department. He is also a member of the Biotherm Board of Directors.
PhylipLeferink - Country Director, Vestas
PhylipLeferink has been working at Vestas as country manager in South Africa since 2008.
Vestas is a leading wind power provider that was founded in 1979 and that, by their own
estimates, has supplied 19 percent of the world’s wind turbines. They have been working on
several EPC projects in REIPPP, but have been essentially been active in South Africa since
2001.
3.3Quantifying perceived changes in investment risk
Waissbein’s framework for changes in investment risk categories, found in the UNDP
publication “Derisiking Renewable Energy Investment” from 2013, is used in this thesis to
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quantify investment risk changes from the RFP for REIPPP 1 until today (after REIPPP 3). This
method is explained in this chapter.
3.3.1 Investment risk categories
Based on an extensive portfolio of renewable energy projects and on several studies,
Waissbein has presented the eight kinds of stakeholders whose behavior, be it through
action or inaction, can contribute to investor risk in renewable energy. These are then tied to
specific risk categories, which form the basis for the questionnaire which was given to
interviewees in relation to this thesis. The 8 risk categories included in Waissbein’s
framework are summarized below49
.
Power market risk:
Risk arising from limitations and uncertainties in the power market. This risk can be related
to the market outlook (lack of certainty regarding governmental energy strategy), the
competitive landscape, the price outlook for renewable energy, limitations in the PPA
design, tendering procedures or market distortions such as high fossil fuel subsidies.
Permits risk:
Risk arising from the public sector’s inability to efficiently and transparently administer
relevant licensing and permits such as power generation licenses, environmental impact
assessments, land titles etc. Examples of issues include corruption, complexity, labor-
intensity and time-frames for obtaining relevant licenses and permits.
Social acceptance risk:
Risk arising from the lack of awareness of and resistance to renewable energy. Examples of
issues include resistance to energy projects from local communities (NIMBYism), political
movements or other special interest groups.
Resource and technology risk:
Risks related to the energy resource and technology. Resource risk can be related to
inaccuracy in the energy resource assessment and supply, such as inaccurate wind
measurements, or difficulties in accessing these resources, be it because of the difficulties in
49
Waissbein 2013
REIPPP – A New Dawn for South African Renewables?
Page 36
securing land with sufficient supply of the energy resource in question or because of a lack
of access due to limitations in civic infrastructure.Technology risk is related to the planning,
design, construction, operations and maintenance of the plant, in particular difficulties
infinding qualified technical staff or skilled and experienced third parties offering the
services or hardware necessary for the energy supply chain to function.
Grid and transmission risk:
Risks related to limitations in grid management and transmission infrastructure in a
particular area or country. Grid codes can include responsibilities for power generators that
reduce commercial viability, and grid management can bring about investment risk if the
grid operator has limited experience or a poor operational track-record with intermittent
energy sources. Transmission infrastructure can increase risk if the grid is old or poorly
maintained, if there is a lack of transmission from the power generation project to load
centers or uncertainties related to the planning and building of new transmission
infrastructure.
Counterparty risk:
Risk related to the ability of the electricity purchaser (usually the utility) to pay for electricity.
Risk is most often measured based on the utility’s credit rating, corporate governance or
operational track record and outlook. It can also be related to the existence or future risk of
unfavorable policies regarding the utility’s cost-recovery arrangements. The impact of this
risk is typically related to the IPPs reliance on the utility’s timely payments for power
purchased.
Financial sector risk:
Risk arising from the availability of local or international capital for renewable energy.This
risk can be in the form concrete capital scarcity coming from an under-developed finance
sector locally or a policy bias limiting investments in renewable energy. It can also manifest
itself through a limited level of experience, skill and familiarity with renewable energy
(knowledge of renewable industrial trends, energy project assessments, project finance etc).
Political risk:
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Country-specific issues such as good governance and social stability. Examples of risks are
upheavals such as terrorism or civil disturbances, political instability, poor institutions and
governance, impediments or uncertainty due to government policy (such as currency
restrictions or corporate taxes).
Macro-economic risk:
Risk related to the macro-economic environment and the impact it has on renewable energy
investments. For instance, currency volatility or changes in inflation and interest rates can
impact the commercial viability of the energy project. Also, in the event that PPA payments
are guaranteed by the host government, the guarantee is tied to the government’s credit
rating and other indicators of its ability to make these payments.
3.3.2 Measuring investment risks
Waissbein’s methodology for quantifying the impact of the risk categories explained in the
last chapter is based on input from interviews. The statistical treatment for measuring
investment risks can be quite sophisticated, but a simplified approach, which Waissbein
claims is suitable when there are few interviewees50
, is used in this thesis.
Interviewees are asked to score each risk category for both the probability of a risk
impacting the project and the financial impact this risk would have. The probability and
impact scores are multiplied to obtain a total score for each risk category. This is done for
two different investment scenarios (before and after), and this data is then processed.
After having calculated the scores of all eight risk factors, the researcher can add together all
scores and see the net change in investment risk and to the impact of the change in each risk
category. An example of this would be as follows:
Figure 9: Example of measurement of developments in all risk categories
Risk 1 Risk 2 Risk 3 Risk 4 Risk 5 Risk 6 Risk 7 Risk 8 Total
Before 15 12 5 20 25 10 10 3 100
After 8 10 5 22 18 8 5 2 78
Net change 7 2 0 -2 7 2 5 1 22
It should be noted that in this thesis, the interviewees have a wide range of backgrounds.
50
Waissbein 2013
REIPPP – A New Dawn for South African Renewables?
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While they all have significant experience from renewable energy projects in REIPPP, risk
perceptions can differ depending on if the interview respondent is in the EPC, investment or
project development sector. In addition, experience with developing countries, electricity
auctions, economic development factors and other issues means that the subjective
perceptions of risk can differ greatly.
It should also be noted that Waissbein’s framework is a smaller part of a method for
quantifying the decrease of cost of capital by reducing investment risk. The full methodology
provides more detailed information, but also requires specific figures for cost of equity/debt,
which was seen as too commercially sensitive and cumbersome to be gathered through this
thesis. This also falls outside of the scope of this thesis.
3.4Limitations
As a master’s degree candidate with limited resources available, the writer of this thesis was
unable to explore the subject of the thesis in the depth and detail that it deserves. A number
of constraints were thus encountered.
One key constraint was the fact that access to REIPPP bidding documents, which contain
bidding instructions and general information on the REIPPP bidding process, is only given
toregistered project developers. As the bidding documentation is not made public,
information about REIPPPP therefore had to be pieced together from news reports,
presentations from the Department of Energy, press releases etc. This was a somewhat
time-demanding process that led to delays in my research, and interviews were thus started
rather late. With less time spent on this process, it would probably have been possible to
conduct additional interviews or explore other areas more in-depth.
A second key constraint was the difficulty encountered in arranging interviews with debt
providers. The vast majority of debt financing for REIPPP projects come from 3 South African
banks, which failed to respond to the call for research or simply declined to be interviewed
due to time constraints.
The researcher was unable to travel to South Africa and conduct many of the interviews in
person. This meant phone or Skype was used to conduct the interviews, which did lead to
some technological issues, such as poor connections.
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Another issue was the unwillingness of some interview respondents to have the interview
recorded and their preference for anonymity. Without recordings, the researcher instead
took notes of the interviews by hand or on a computer. This also meant that the researcher
was unable to provide full transcripts of the interviews, limiting the validity of this paper. On
the other hand, fulfilling this requirement was necessary in order to facilitate the interviews
- insisting on recordings and full disclosure of interviewee identity would have limited the
amount of interviews possible in a significant fashion. In addition, anonymity and the lack of
transcripts made the interviewees feel more comfortable with sharing information that
would otherwise be seen as commercially sensitive.
In addition, the research design of the thesis has its weaknesses. Interviews focusing solely
on investors and project developers could overlook actors and stakeholders that have
important insight and attitudes different from those of the investors and project developers.
In addition, focus groups in addition to interviews could have stimulated different
participation and may have provided more data that would have been relevant to this
research. However, given the time constraints and wide geographical distances between the
interviewees, this option was seen as unrealistic.
Another possible issue with the interview respondents is that of vested interests. As the
actors all profit from renewable energy investments, their answers could reflect this.
Lastly, the investment risk survey and the quantification of investment risk developments
across categories is highly simplified and likely not representative of the actual investment
risk climate in South Africa. Interviewees can perceive scores of 1 to 5 differently, giving a
possible misrepresentation of actual investment risk. It should therefore be noted that the
goal of the survey is to discover changes in perceived investment risk, not to quantify
investment risk and translate this into cost of equity in the fashion that Waissbein does. The
survey can therefore only be said to give show perceived changes in investment risk levels.
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4Findings
This chapter presents the findings from the interviews, divided into the four research
questions. Note that the information in this chapter reflects concrete statements given by
interview respondents rather than the analysis and evaluation of these statements.
4.1What explains the difference in investment activity between REFIT and
REIPPP?
All respondents agreed that that the initial REFIT tariff levels were high enough to incentivize
project development. However, while many well-developed projects were presented to the
government, there was no real central procurement mechanism that worked as REIPPP did
later. The responsibility of procuring IPP projects was therefore seen to have fallen to
Eskom. Having tried to approach Eskom directly in order to promote renewable energy
projects, three of the respondents blamed Eskom for the lack of projects. They claimed
Eskom as a monopolywas simply not interested in facilitatingPPAs for IPPs during REFIT.
Without PPAs being signed, there was no real basis for renewable energy projects.
The IRP released in 2010 did help reduce investment risk significantly as it contained
numerous detailed long-term goals, including MW allocations for different renewable energy
technologies, indicating that REFIT was part of a holistic and coherent energy policy backed
by steady political commitment.While it was still not seen as possible to realize PPAs at the
time, three of the project developers interviewed felt the IRP laid the ground for an
attractive future market and therefore started building their project pipeline at this
time.Seeing the long-term market potential, these developers took a strategic position
during REFIT and decided to develop projects at some of the most attractive sites available
despite the fact that it was difficult to get a PPA from Eskom. These developers later felt like
they had a very advantageous position when entering REIPPP 1.
Several project developers also struggled in attracting investors after the tariff levels were
changed abruptly in 2011. Two of the investors interviewed stated that they were
categorically not willing to invest in REFIT projects. They also declared that uncertainty
observed in REFIT influenced their view on REIPPP 1, which followed closely after the tariff
modifications. The uncertainty experienced at this time translated directly into increased
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investment risk. On the other hand, respondent 7 claimed that a key issue for feed-in tariff
stability was the ongoing complex developments in technology costs for wind and solar. This
respondent also claimed many investors doubted that the tariffs were actually going to be
paid – that is to say that the tariffs, which were almost twice that of the European standards
at the time, were so high that they were in fact seen as unrealistic and therefore increased
the perceived investment risk.
Several respondents declared that had a procurement mechanism been in place, REFIT
would be better than REIPPP from the point of view of an investor. The cost of formulating a
bid is significant, and the competition squeezes margins for investors, developers and EPC
providers alike. Tariffs were also far higher under REFIT, and the respondents would
naturally be far more comfortable with such income levels.
Note that three respondents were unfamiliar with REFIT and preferred not to comment on
the subject.
4.2The main factors affecting bidding prices
All respondents mentioned the same two main drivers of reduced bidding prices:
1. Competition: Investors, project developers and EPC providers reduced their margins
in order to be able to offer increasingly low-priced auction bids.
2. Falling technology costs: Cheaper solar PV modules and wind turbines, as well as
increased capacity factors leading to higher electricity generation.
With the exception ofjust one respondent, all respondents believed the impact of
competition to be superior to that of reduced technology costs in reducing bid prices in
REIPPP. When asked to be more detailed in their estimates, the respondents offered varied
responses. One respondent claimed that only 5 percentof the average bidding price
decrease in wind projects was due to technology cost reductions. Another respondent
believed falling solar PV module costs and increasing capacity factors had contributed to as
much as a 30-40 percent of the decrease. Note that most respondents did not wish to
disclose concrete figures, so these estimates are not representative for developments in
REIPPP.
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Some respondents declared that they were not just pulled into REIPPP because of the
attractiveness of its markets; they were also pushed into it by the economic downturn
occurring elsewhere in the world following the 2008 financial crisis. As the home market
weakened, the need to fill up the project pipeline increased. As said by one investor, “the
situation in the renewable energy market at the time was simply a choice of finding new
markets or finding a new job”.This factor was not discussed in the literature review of this
study, but the majority of respondents supported the claim that the downturn of key
European and US markets had given investors and developers added incentive to search for
new markets and to place more aggressive bids in REIPPP.
These factors were present throughout the first three phases of REIPPP. In the following
chapters, the specific trends observed in each phase of REIPPP are presented.
4.2.1 REIPPP 1
Based on the feedback of the respondents, it seems clear that bidding prices were inflated in
REIPPP 1.Firstly, the short time between the RFP and the deadline for bid submission meant
that many interested developers were not able to participate in REIPPP 1. Many were also
surprised by requirements concerning local content, local capital and the 30 percent
weighting of economic development factors, which combined with the three-month
deadline meant they had difficulties integrating this into their bids. This meant that many
developers that were interested in bidding were unable to do so, thereby reducing the
competition. Second, the deadline for bid submission in REIPPP 1 was November 4th
2011,
whereas the RFP was announced on August 4th
that same year. That gave developers a three
month time frame to formulate their bids, which was seen as a very short time to prepare,
especially since some respondents were surprised by economic development factors
presented in the RFP. This further limited the competition in REIPPP 1.Third, the amount of
MW capacity tendered (1,266 MW) was seen as too high to stimulate competition at such an
early stage when so few developers were able to submit bids. And lastly, as developers and
investors were very aware of the lack of competition in the market, the respondents
generally did not feel there was an incentive to bid significantly below the price cap.
In short, the respondents agreed that the REIPPP 1 was fundamentally lacking in
competition. In the words of one respondent, the price cap was essentially just like a feed-in
tariff because bidders knewthat was price the government was willing to pay. Many
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respondents felt that development costs were significant, and some developers had
purchased developed projects from other developers at inflated costs in order to be able to
bid before the deadline. However, most respondents believed competition to be so weak
that the bid prices would have been the same even without these costs.
While the majority of the respondents claimed development costs were higher in REIPPP 1,
they also noted that development costs spent on bids that did not win tenders essentially
became sunk costs. This gave some incentive to lower bidding prices in later rounds, but not
as early as in REIPPP 1.
Only respondent 8 believed prices had to be as high as they were in REIPPP 1. This
respondent claimed that as it entailed the very first large-scale solar and wind project
procurement process in Africa, everyone from EPC providers to Eskom to project developers
and investors had to go through a learning process before being comfortable with lowering
their hurdle rates.
Reported IRRs from REIPPP 1 were in very a wide range: 17 percent to 25 percent. Note that
not all respondents chose to provide IRR rates.
4.2.2 REIPPP 2
REIPPP 2 marked the beginning of a more competitive marketplace for renewables in South
Africa. The MW capacity tendered was capped at a much lower amount than in REIPPP 1,
and developers had more time to develop their bids. In addition, while the consensus among
the respondents was that REIPPP 1 had given lucrative power prices,these prices had also
attracted much attention amongst investors and developers and ultimately increased
bidding participation in REIPPP 2. In sum, REIPPP 2 attracted 79 bids of which only 19 were
accepted (16 of these were wind or solar PV). This was far more competitive than REIPPP 1,
where half of the bids were accepted. All respondents claimed that this competition was the
main driver behind decreasing bid prices in REIPPP 2.
One respondent believed bid prices could have been pushed further down, but claimed local
lenders and investors did not yet fully understand the IPP and renewable energy business
well enough to pressure the margins of developers and EPC contractors at this stage. Still,
the majority of the respondents pointed to the fact that the REIPPP 2 average prices were 40
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percent below the price cap for solar PV and 17 percent below the price cap for wind power,
indicating stronger competition than in REIPPP 1.
Experience and competition also affected the rest of the value chain. EPC providers,
consultants and others in the renewable energy sector gained more experience from South
Africa and started trimming their margins. The drop in the cost of solar PV modules, and to a
lesser extent the cost of wind turbines, has also contributed strongly to the reduced bidding
prices.
While interviewees observed uncertainty in phase 1, they claimed this disappeared after the
industry had seen that the first auction had been executed quite smoothly. Most
respondents claimed they felt more comfortable with the government’s capability to
operate efficiently and transparently.This reduced the perceived investment risk
significantly, which also led to a reduction in the cost of financing. Most respondents felt
that the prices were consistent with the risk levels perceived in REIPPP 2.
IRRs in nominal local currency terms in REIPPP 2 were reported to be in the range of 12-15
percent. Note that not all respondents disclosed their IRR rates.
4.2.3 REIPPP 3
All respondents felt REIPPP 3 was highly competitive. Just 18 percent of project proposals
were awarded a tender in REIPPP 3, compared to 24 percent in REIPPP 2. Respondents
agreed that the trends of increasing competition, lower technology costs, cheaperfinancing
and reduced investment risk continued to contribute to a strong decreasein bid prices in
REIPPP 3. Margins were becoming increasingly small, and bid prices on the projects offered
to the government were very low, to the extent that some called it “unsustainable”.
The decrease in perceived risk and the now well-proven efficiency and commercial viability
of REIPPP attracted bigger players who were able to get cheaper financing. Many of the
respondents expressed that they were surprised to see Enel Green Power, a large Italian
utility, dominate REIPPP 3 and winning a very large share of the capacity tendered (four solar
PV projects and two wind projects). Many respondentsargued that this change constituted a
lasting “demographical change” in the renewable energy market in South Africa.
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The impact of this change was decisive because of the ability of larger actors to access
corporate financing. Corporate financing gives lower investment hurdle rates, a fact which
allows these actors to squeeze their margins further and be more competitive in the REIPPP
bidding process. Many respondents argued that they would not be able to compete with
such players in the future unless they were able to take greater advantage of the economic
development factors. One respondent estimated that Enel Green Power’s IRR was just barely
better than South African bonds and said that other firms would not be able to compete
with someone that would settle for such low returns. Two respondents argued that a
possible future niche for smaller project developers would be to develop projects and simply
sell them to these larger playersinstead of using them to propose bids in REIPPP.
Several respondents noted that Enel Green Power also submitted project proposals that
were based on project finance. None of these projects were awarded a tender, indicating
that the advantage of having corporate finance helped “tip the scales”, in the words of one
interviewee.
While the projects who have been awarded a tender in REIPPP 3 have been announced by
the South African government, they will not reach financial close until June 2014.
Information on IRR rates in REIPPP 3 is therefore highly sensitive, and the investors and
developers behind these projects therefore declined to comment on IRRs. However, several
respondents that had failed to secure projects in this round of bidding estimated that their
more successful competitors had IRRs below 10 percent.They believed suchreturn rates to
be so low that some REIPPP 3 projects would have to be refinanced in the near future.
4.3 The impact of the design and implementation of REIPPP as a policy
All respondents agree that the design of a competitive auction with multiple winners in
multiple rounds of bidding combined with transparency, efficiency and good communication
has been crucial in enabling market competition and decreasing prices.Designing REIPPP as
an electricity auction facilitated a competitive environment that was seenby all respondents
as the dominant driver of falling bid prices.
Several respondents also claimed design of REIPPP 1 actually hindered competition by not
giving developers enough time to prepare, not limiting the MW allocation and including a
price cap. But while respondents who had been awarded tenders in REIPPP 1 were pleased
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to be making what they described as exceptionally high returns, many also felt this was the
main reason REIPPP was able to attract so many more developers, and hence increase the
competition, in latter rounds. Several respondents expressed that they were very surprised
to see competition at this level and that they never expected big European actors, especially
utilities, to enter the market.
All respondents considered the actual implementation of REIPPP by the government to have
been efficient.Respondents noted that some delays did occur, especially in the beginning,
but these have not been critical.
Bidders are given useful feedback on their bid proposals, also for those that are rejected. A
high level of transparency and low perceived chance of corruption also contributes to
reducing the risk perceived by the respondents. One respondent claimed having multiple bid
winners also reduces the incentive to engage in corruption, and that hiring world-class
lawyers, engineers, financiers etc. as consultants for the bid evaluation further reduced this
risk. No respondents saw corruption as an issue in REIPPP – in fact, many respondents felt it
was almost impossible to engage in corruption due to the transparency of the programme.
All respondents, except for one, expressed frustration with the complexity and the amount
of paperwork encountered in the development and submission of project bids. In addition to
concrete expenditures involved, which one respondent claimed amounted to 300,000 to
400,000 USD per project, the process was also seen as highly time-demanding. Many
respondents with substantial international experience claimed REIPPP was among the most
complex IPP procurement mechanisms that they had seen. While some respondents
believed the process had been simplified and that both developers and the government had
gained useful experience that sped up the process, they stated that a further simplification
could reduce costs and therefore also the bidding prices.
One respondent disagreed with this assessment. According to this respondent, paperwork is
to be expected with power projects and also helps filter out bad projects or unprofessional
actors.In REIPPP 1, almost all compliant bids were awarded a tender, whereas only 18 out of
the 50-60 compliant bids were rewarded a tender in REIPPP 3. Based on this development,
the respondent believed the development costs involved in formulating a bid proposal were
acceptable.
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All respondents agreed that local content requirements and a 30 percent weighting of
economic development factors increased costs to some extent, with one respondent
claiming it had increased EPC costs by as much as 50 percent. At the same time, some
respondents claimed they would not have been able to compete in REIPPP with just pricing
as an evaluation criteria. Some respondents expressed confusion about how the scores were
weighted, and one respondent commented that the evaluation of economic development
criteria was the only aspect of REIPPP that was lacking in transparency.
4.4 Investment risk in REIPPP
9 of 11 interviewees completed a survey on investment risk which compared their risk
perceptions upon entering REIPPP 1 with those they had after REIPPP 3.In addition to scoring
a selection of risk categories, respondents were also asked to comment in-depth on the
various risk factors. This section presents this data, divided into the nine risk categories.
4.4.1 Power market risk
As shown in the table below, we can see a general consensus is that power market risk has
declined during REIPPP.
Table 5: Power market risk scores
Respondent 8 was the only one that felt that the power market risk had increased. This was
based on the respondent’s perception of Eskom as a monopolist with significant amounts of
influence and possible conflicts of interest in Eskom’s dealings with IPPs. Many other
respondents agreed with this and also voiced concerns over Eskom beginning to develop
their own solar projects outside of REIPPP, but respondent 8 considered these issues to be
severe.
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All respondents agreed that the PPA, which in essence constitutes a single-buyer market for
electricity for a project, reduced risks greatly. There was a low degree of uncertainty related
to the PPAs and whether or not they would be complied with or even changed by the
government. Two respondents expressed concern that if the government would change or
stop complying with the PPA, their legal options would be quite limited. Some uncertainty
was also tied to NERSA and Eskom and their efficiency in facilitating market access (excluding
the issue of grid access, which is discussed in 4.4.4).
Respondent 4 perceived the high level of competition as a market risk because it had begun
to restrict market access for players who were unable to compete on bidding prices. This
compensated for the increased trust in the PPA, leaving the respondent’s overall risk
perception stable.
4.4.2 Permits risk
The table below shows that respondents generally perceived a significant reduction in
permits risk.
Table6: Permits risk scores
A key concern for respondents in 2011 was the governmental institutions lack of experience
with both IPPs and renewables. Much of the perceived decrease in risk was related to the
increased efficiency of the government in processing permit requests. Some developers also
stated that requirements were not well defined in REIPPP 1, leading to significant delays, but
that this issue was resolved in REIPPP 2 and 3.
Interestingly, the perceived impact of permits risk remains the same for all respondents – it
is the probability which is seen to have decreased. This impact was mainly tied to potential
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delays leading to developers missing the opportunity to submit bid proposals, as these are
fixed to specific dates. A delay in the processing of a permit could therefore lead to
significant losses, especially if being denied a permit after a project has been won an
auction.
Respondent 4, the only one that did not perceive a decrease but rather kept the score
stable, had never encountered any issues related to securing permits. Note that this
respondent gave this risk category a low weighted score of 4, the lowest of all respondents.
It should be noted that investors felt less familiar with the actual process of applying for
permits than project developers and EPC providers. However, few had heard of any serious
issues arising from permits risks.
4.4.3 Social acceptance risk
We observe a slight overall increase in social acceptance risk, though opinions are divided.
Four respondents felt that social acceptance risk had increased whereas another four
believed it had remained stable.One respondent saw a risk decrease.
Table 7: Social acceptance risk scores
The four respondents that registered an increase in social acceptance risk essentially
believed this was due to increased awareness of their projects and the amount of money
involved in them, as well as the groups opposing their projects gaining experience in how to
organize their resistance. Respondent 6, who saw the highest increase in risk, based this on
social acceptance issues that had been experienced by other companies. This respondent
noted that two approaches in particular – ignoring stakeholders or promising too much to
these same stakeholders – tended to increase tensions, and the respondent believed there
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was a risk the resistance encountered in these projects could spread to solar PV or wind
industries as a whole instead of being limited to specific companies and projects.
Three respondents specifically mentioned their strategy of minimizing this risk by managing
expectations in local communities by being open, transparent and honest about what they
were doing and what would happen on the ground. All respondents except one believed
their projects were viewed positively in local communities because of the income generated
by their projects. This was not just because of a requirement of donating 1 percent of total
revenues to local communities, but also the creation of jobs, even though some of these
were only available during construction. Respondent 8 believed social acceptance risk to be
commercial in nature and argued that such issues could be resolved rather easily with
limited impact.
Most respondents’ involvement in REIPPP was in projects in sparsely populated rural areas
where local communities were not affected. Respondent 4 believed that there was still a
sizeable amount of attractive sites that could be developed that were in rural areas, and so
there was no reason to take on social acceptance risk by building in more densely populated
areas.
Most respondents cited special interest groups with commercial interests, such as land
owners or tourism companies, as the main source of social acceptance risk. The sole
exception was respondent 6, who perceived the strongest increase in social acceptance risk.
This was based on experiences with demonstrations and social disturbances encountered in
impoverished areas with high rates of unemployment.
It should be noted that the respondents who saw the highest risks and the greatest increases
in risk in general felt the same way as all the other respondents; that REIPPP was well
received in the country as a whole and that this attitude was also reflected in local
communities near their projects. Many specifically mentioned discontent with Eskom and
issues such as blackouts or load shedding. Local communities were seen to be aware of the
need for increased power generation.
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4.4.4 Grid and transmission risk
Perceived risks in grid and transmission risk increased overall, but responses among the
interview respondents varied greatly, as seen the table below.
Table 8: Grid and transmission risk scores
Respondents were largely content with the grid code, though one respondent claimed that it
was being changed too often, increasing the risk of installing a power plant configured for
one grid code and then have to modify that plant in order to be in compliance with the new
one. While the majority believed the transmission infrastructure to be in need of upgrading,
there was no mention of this as a source of risk.
Instead, the key risk considered was the matter of grid access.This was mainly because of
poor handling by Eskom, which could result in significant delays and increased costs. Several
respondents complained that Eskom has the privilege of providing non-binding grid access
cost estimates and timelines for connection upon which the developers base financial
calculations and thus bid prices. Respondents worried about Eskom increasing costs or
having delays after bid approval for a project, meaning that extra costs incur after the
project has been finalized. One respondent estimated that half of REIPPP projects had
experienced changes in these estimates, which in some cases had had very strong impacts.
In one project mentioned by another respondent, costs for grid access had multiplied almost
fivefold and delays led to grid access being granted after twice the time originally allotted.
The experiences of the individual respondents seemingly had a large impact on their
perception – the three respondents that perceived a large increase in risk and gave a
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weighted score of 20 for their perception of grid risk today had all had incurred significant
costs because of grid access issues.
One respondent said contingencies included in the financing of their projects could usually
absorb cost overruns, but said that there was still was a significant risk of such costs
exceeding contingencies, and that this risk was hard to mitigate. The respondent was mostly
worried about exceedingly long delays providing grid access as projects that are not able to
finish construction or being generating power on agreed dates are penalized by the
government. Four respondents voiced concerns over the limited processing capacity in
Eskom, but felt the probability of such long delays was relatively small.
Another issue is that Eskom was perceived by two respondents to take advantage of their
position and inflate grid access costs. Other respondents believed that while costs were not
being inflated by Eskom, they believed Eskom was liable to grant grid access to projects that
provided the cheapest power. The result is a competition with other developers for grid
access points located near good renewable energy resource sites. In addition, as the “low-
hanging fruits” have now been picked by Eskom, there is a chance that future grid access
points will be more expensive or otherwise problematic for project developers.
4.4.5 Technology and resource
Respondents rated resource and technology risks as medium risks that overall changed little.
Table 9: Resource and technology risk scores
Respondents all agreed that resource assessment risks were minimal. South Africa provides
world-class solar project sites, described by one respondent as being among the top 1
percent in the world. Wind resource assessments were considered to be a little more
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complicated, but the risk was minimal if project developers would take the right precautions.
One respondent was aware of a project in which the wind resource had been overestimated
by 15 percent, but the minimum requirement for wind measurement posed by the
government was according to this respondent just to have one single mast on the proposed
project site for one year. As such, the respondent believed this was largely due to
inadequate groundwork done by developers. In addition, lenders and investors tend to
conduct their own wind measurements at sites, which can reduce this risk. One respondent
also cited climate change as a possible risk, but at this stage no-one had taken this into
account in their risk assessments.
Respondents believed a shortage of skilled staff to be a limited risk, and only a real issue to
the extent that it was raising costs. Three respondents explained that they tried to hire more
staff than needed as a contingency. Competition for labor was expected to increase further
in the future, especially for local skilled labor. Unskilled labor was considered readily
available by all respondents.
Some respondents mentioned the solar PV value chain as a possible issue because there had
been a risk of a decreased capacity in the sub-supplier sector as large companies have been
liquidated (such as Suntech) or withdrawn from the solar industry (Siemens). In addition,
there were some difficulties in foreign EPC providers lacking experience from doing business
in South Africa.For instance, some EPC providers lacking experience in South Africa had
ignored the risk of the “strike season”, in which workers go on strike not to improve their
own working conditions but in sympathy for workers elsewhere. On the other hand, most
respondents found local suppliers of civic infrastructure to be available, reliable and
competitive with international suppliers.
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4.4.6 Counterparty risk
Counterparty risk was seen to have been stable or to have changed slightly by five
respondents, whereas two believed risk had increased and two believed it had decreased.
Table10: Counterparty risk scores
All respondents agreed that Eskom is a large and relatively stable off-taker with adequate
balance sheets which are subject to credit rating by big agencies. Three respondents voiced
concerns about the number of high-cost power stations on their balance sheets, but did not
feel that this constituted a risk at the time being. The two respondents that believed
counterparty risk increased based this on the lowering of Eskom’s credit rating. One
respondent also mentioned possible conflicts of interest as Eskom was developing its own
solar PV projects.
However, as the PPA payments from Eskom are backed by the South African government,
respondents ultimately saw the South African credit rating as the main risk indicator.
Respondents did state that they saw a certain level of risk in South Africa – the credit rating
had been falling – but still felt the risk was acceptable. For the respondents used to working
in developing countries, the South African country risk was one of the lowest in their
portfolios.
Respondents that saw a reduced counterparty risk emphasized the political support
garnered by the continued success of REIPPP as an energy procurement policy (explained in
4.4.8), and felt that the PPA payments would be prioritized should the South African
economy begin to struggle. There was also a consensus risk was being reduced as the bid
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prices guaranteed in the PPA were far lower in REIPPP 2 and 3, and so these would be
prioritized if South Africa at any point will be forced to discontinue PPA payments. This
helped offset the risk seen in Eskom as an off-taker.
4.4.7 Financial sector risk
There was a clear consensus that financial risks had decreased or remained stable, as shown
in the following table.
Table 11: Financial sector risk scores
All respondents agreed that the increasing knowledge of renewables and project finance in
the South African financial sector was the main reason financial risk had decreased. Access
to equity and debt was generally not seen as problematic. Some had been worried about
black empowerment fund requirements, but these had received backing from the
Development Bank of South Africa and were therefore still with capital in the market,
although with somewhat increased minimum rate of returns. There were also descriptions of
more creative financing structures being used to maximize the availability of black
empowerment funds. None of the respondents saw this as a problem in itself, but two
respondents claimed it could be indicative of capital shortages in the near future.
Respondent 9 did experience some difficulties in finding the suitable financiers with
sufficient experience and insight into renewables, but stated that capital was generally
available.
Respondent 10 claimed that transaction capacity was a key issue in REIPPP 1, and to a lesser
extent in REIPPP 2. This was due to a high number of proposed investments coming in at the
same time in an industry in which the financial sector had very limited experience in.
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4.4.8 Political risk
Few changes were registered in political risk, though the scores varied significantly from one
respondent to the other.
Table12: Political risk scores
Two respondents expressed concern regarding the stability of energy policy. With an
election upcoming in 2014, these were worried that a new government could lead to a
change that could impact REIPPP. While it was not seen as a likely scenario, respondent 3
had experienced that governments had cancelled PPAs elsewhere in the world.
However, the majority of respondents believed political support of REIPPP would continue to
be very strong in the future. In their opinion, energy security remains important in South
Africa because of the heavy reliance on energy-intensive industries. They also stated that
load shedding and blackouts have contributed to REIPPP support among the public. With
employment rates remaining high, these respondents also believed REIPPP to be important
because of its focus on job creation and economic development factors. They also noted
that REIPPP projects have far shorter construction lead times than Eskom projects, and that
REIPPP 3 prices are in fact comparable with Eskom coal and nuclear costs. There was
therefore little risk of losing political backing. Respondent 5, who rated political risk the
lowest, felt there were far too many beneficiaries in REIPPP for the politicians to dare
changing it.
Strikes and public unrest remained a concern for many respondents, especially following the
massacre at Marikana mines in 2013. Respondent 4 believed strikes in South Africa were
often triggered by minor details, which indicated a lack of communication and poor handling
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by the firms involved. This respondent therefore felt due diligence was important in
selecting local suppliers and service providers.
4.4.9 Macro-economic risk
No clear pattern is discernible in the scores given by respondents for macro-economic risk.
Scores vary greatly, as do the perception of risks have increased, decreased or remained
stable.
Table13: Macro-economic risk
While the respondents have scored the macro-economic risk very differently, they largely
discussed the same risk factors during their interviews. The primary risk driver mentioned by
all respondents was the 25 percentdevaluation of the South African rand opposite the US
dollar, and to a lesser extent opposite the Euro. This has had a large impact and continues to
be considered a significant risk.
However, the respondents also agreed that the PPA provides significant currency risk
protection as the ZAR value on the day of the bid submission will be used on the day the
Department of Energy announces the bid winners. Several respondents pointed to REIPPP 1,
in which the ZAR/USD rate dropped from 0.15 to 0.13 in that space of time.With a continued
strong drop in the ZAR, this PPA clause has reduced losses significantly in the two
consecutive auctions. Most of the responders stated that they hedged the currency risk as
well, which increased project cost but helped mitigate this risk.
There was some worry among someof the respondents that the South African credit rating
could drop further, making it difficult for the government to continue guaranteeing PPA
payments. An over-reliance on commodities, continued high unemployment rates,
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continued currency fluctuations and possible difficulties in the mining sector were
mentioned as risk factors for the South African economy.
Respondent 4 was, except for the drop in the ZAR, not concerned about the South Africa
economy. Instead, this respondent worried that macro-economic changes elsewhere,
specifically a quicker economic recovery in European and North American markets, would
draw foreign capital back to their home markets and limit capital for projects in South Africa.
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5Discussion
This chapter briefly discusses the findings gathered through the research conducted. It is
divided into sections corresponding to the four research questions.
5.1 What explains the difference in investment activity between REFIT and
REIPPP?
The findings from this thesis give grounds to conclude that the main reason why investment
activity suddenly spiked with the inception of REIPPP was the arrival of a viable IPP
procurement mechanism as well as the importance of a coherent, long-term energy policy.
While the lack of a real procurement mechanism has been described by most respondents as
the main reason for the lack of renewable energy investments, some respondents felt this
was not the case. Eskom did have the opportunity to facilitate IPP projects, but three
respondents claimed that Eskom essentially had little to gain from REFIT and was caught up
with various cumbersome state procurement rules limiting their ability to engage with IPPs.
One can only speculate as to the reason for why Eskom was not interested at the time, as
one respondent did by expressing his belief that REFIT did not incentivize Eskom to offer
PPAs because the tariff levels were so high that they would have been able to do the
projects on their own at a lower or equal price. While the findings in this thesis cannot
support this claim, it is an interesting possibility because the mainfocus of the researcher
when conducting interviews for this thesis was whether or not the tariffs were high enough
to stimulate private investment, not whether or not they were low enough to stimulate
Eskom’s interest in facilitating the investment.
Note that another possible contributing factor to Eskom not offering PPAs could be a lack of
capacity. As noted in 1.3.1, the company has had a history of poor management and limited
capacity. However,this discussion is beyond the scope of this thesis.
Findings from this thesis also underline the importance of having stable policies. Many
respondents felt IRP laid the framework for a coherent energy policy, and even though no
projects were initiated under REFIT, the IRP gave investors faith in future developments.
Many respondents have therefore stated that they started developing projects even though
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PPAs were not seen as achievable. However,the sudden modification of REFIT tariff levels in
2011 made other respondents perceive policy uncertainty and thus increased risk. It is
somewhat odd the tariffs were changed just before REIPPP was announced. Based on the
input of the respondents, it is possible that a few more bid proposals could have been
submitted in REIPPP 1 had the REFIT changes not shaken their belief in market, though one
cannot conclude that this is the case based on the findings of this thesis.
5.2 External factors influencing average bidding prices
The most important external factors influencing bidding prices were found to have been
stronger competition, falling technology prices and a downfall in more established
renewables markets – in that order. Interestingly, a majority of respondents interpreted the
topic in such a way that inflated pricing in REIPPP 1 due to a lack of competition was also
named as an important driver of price reductions.
Based on the input of the interview respondents, it can be claimed that competition has
been the most important driver of bidding price reductions in REIPPP by far. While much of
this is due to the competitive nature of electricity auctions and the way it has been designed
and implemented as an energy procurement policy (discussed in the chapter 5.3), interview
respondents all mentioned that an external factor had a large impact. Specifically,
respondents all claimed the entrance of large utilities with access to cheaper financing may
have changed the competitive landscape of REIPPP permanently. Enel Green Power
submitted several project proposals in REIPPP 3 that were project financed, but that these
were not awarded contracts. The fact that only the corporate financed projects from Enel
Green Power were awarded contracts in REIPPP 3 indicates that corporate finance can be
seen as a crucial competitive advantage. The extent to which corporate finance continues to
be utilized in future REIPPP auctions can therefore have an important impact on this market.
The fall of solar PV module and wind turbine prices and its influence on bid pricing is rather
self-explanatory – all respondents stated that this had had a strong impact, and that it has
contributed to falling prices. However, as described in chapter 2.2, while this decrease in
costs began before REIPPP started, this did not lead to lower bid prices in REIPPP 1. The
impact of technology cost reductions is therefore more likely to have bolstered profit
margins for developers in the first round of auctions, but in REIPPP 2 and 3 they have
contributed to the drop in bidding prices. The two respondents that provided estimates of
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the impact of this effect said reduced technology costs constituted 5 and 40 percent of the
actual reduction in bid prices. Quotes from two respondents cannot be considered to be
representative, but it seems fair to claim that the impact of falling technology costs has been
significant.
Many investors claim they werepartly pushed into the South African market because of
economic downturns or weakening of renewable energy marketsin their home markets or
elsewhere in the world. If international markets pick up again, this could then possibly
reverse some of the reductions in REIPPP bidding prices. One respondent believed this was
particularly true for the large utilities, but interview respondents from such large companies
stated that REIPPP had shown itself to be attractive for them in the long run. Regardless,
based on the findings of this research, it is not possible to estimate exactly to what extent
this factor contributes to reduced prices.
Note that the decrease in bidding prices has been strong despite a 25 percent drop in the
ZAR opposite the USD. Some risk reduction is provided by the PPA, which was seen by
respondents to offer important protection. However, respondents generally also stated that
the costs of hedging this risk were significant, so while risks are partly mitigated these costs
directly contribute to higher bidding prices.
It is difficult to say anything about future developments in regards to competition. While the
number of bids and the success rate of bidders shows a clear increase thus far, many
respondents believed that prices were now so low that they were not sustainable in the long
run, and the low success rates in REIPPP 2 and 3 are seen as demotivating by many who
would consider investing, therebyreducing competition.
5.3 Has the design and implementation of REIPPP have influenced average
bidding prices?
The findings in this thesis showed that interview respondents strongly believed that REIPPP
had enabled market competition, which in turn became the biggest driver in reducing prices.
All respondents also voiced their satisfaction with the transparency and openness in REIPPP.
At the same time, a number of problematic issues were also raised. By comparing the inputs
against Maurer’s research on electricity auctions described in chapter 2.1, we can discuss as
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to what extent REIPPP can become more efficient in facilitating competition and thus
influence bidding prices.
Maurer believes that problems related to high development costs, long time frames and
intellectual property issues are common for infrastructure auctions in general. The research
conducted in this thesis finds a strong consensus that development costs are high in REIPPP
– it was noted as an issue by all but one respondent (respondent 4). However, as noted by
this respondent, the number of compliant bids is in fact increasing, which could imply that
more and more developers find that the chance of winning an auction outweighs that of the
development costs. In addition, most of the respondents also noted that the possibility of
submitting a bid for a second time in a consecutive round of auctions means that the
development cost incurred partly becomes a sunk cost. As bidders realize that the
development cost is lost, they are more willing to reduce the bidding price, a dynamic which
could in fact increase the competition. This is not to say that REIPPP would not benefit from
simplifying bidding procedures or reduce development costs in another manner - the
majority of interview respondents still claim high costs incurred contribute directly into
higher bid prices. Nevertheless, based on the input of the interview respondents one can
claim that the extent to which development prices increase bidding prices is limited by the
design of REIPPP.
Maurer also discusses issues commonly experienced by renewable energy auctions that limit
their ability to facilitate competition. These were attracting sufficient bidders, preventing
speculators and unprofessional players from participating and have effective compliance
mechanisms in order to ensure that projects are delivered on time and operate properly.
This thesis has found that all interview respondents believed REIPPP 1 had insufficient
competition, partly due to a lack of bidders, and that this resulted in inflated bidding prices.
They further stated that this was because of a few key factors, namely the short time frames,
stringent requirements for documentation in bid proposals and the choice of including a
price cap. As described by respondent 1: “With so few bidders, compliance became the only
requirement and all of the bids came in at the price cap. We might as well have kept the
feed-in tariff”.
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On the other hand, respondents generally believed that the development costs and strict
requirements for paperwork filtered out unprofessional actors. No mention of
unprofessional actors was recorded. REIPPP can therefore be said to have succeeded in
preventing unwanted actors from participating in the process.
It is too early to say if the compliance mechanisms are working efficiently in REIPPP. While
REIPPP 1 and 2 projects all reached financial close, only a handful of REIPPP 1 projects have
been constructed and become fully operational at the time that this thesis is being written.
Regardless, it should be noted that the effects of one particular compliance mechanism has
been found problematic by several interview respondents. As projects are penalized for not
finishing construction or beginning operations on time, this makes them vulnerable to third
party decisions. The example mentioned most frequently by respondents was the reliance
on Eskom to facilitate grid access in a cost-effective and timely manner, as it can delay
projects past deadlines and thus result in severe penalties. Note that the findings do not
specifically indicate that this problem lies in the compliance mechanism itself – all the
respondents who raised concerns about this stated that the problem was with Eskom and
what they perceived as inefficiencies or even possible conflicts of interest.
Findings on wind projects in REIPPP can also be compared to Maurer’s evaluation on the
Brazilian wind power auctions and the issues that arose there (described in chapter 2.1.1).
However, based on the input of interview respondents, REIPPP has not encountered any of
the issues that the Brazilian power auction has been struggling with.
In conclusion, we can make the claim that REIPPP has been designed and implemented in a
fashion that evokes trust from investors and developers and that it strongly contributes to
the reduction of bidding prices. A few outstanding issues are still troublesome according to
interview respondents, but it seems clear that REIPPP as an energy procurement policy has
been successful in attracting investors and facilitating competition.
5.4 Risk perceptions
The findings in this thesis gives basis to claim that investment risk as perceived by investors
has been decreased in certain risk categories. The chart below shows the average scores
provided by interview respondents in response to the questionnaire. Divided across all 9 risk
categories, the average risk reduction is 1.3 points. Naturally, presenting average values can
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ignore important individual observations made by respondents, so one must consider to
what extent the average values are backed by uniform opinions amongst the respondents.
Figure 10: Changes in average perceived risk scores
As noted in 4.4, there is a strong agreement amongst the interview respondents that the
perceived risks related to the power market, permits and the financial sector have all been
reduced significantly, and this is clearly reflected in the figure above. Grid and transmission
risk as well as social acceptance risk, on the other hand, see a slight increase in average
values. Nevertheless, the interview respondents are divided and so these risks must be
explored further in order to draw a conclusion. For the remaining four risks (macro-
economic, political, counterparty and resource and technology), the research does not give
grounds to say that perceived investment risk has changed overall, but respondents are clear
in arguing that some components of these risk categories have increased while others have
decreased, thus explaining the lack of change in average score despite ongoing
developments.
5.4.1 Reductions in perceived investment risk
It is important to note the three risk categories with the largest average changes (power
market, permits and financial sector) not only because these scores are high, but also
because the scores have a small degree of variation. All the respondents perceived that
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these risks had decreased (except for just one respondent in the power market risk
category).
Power market risk registers a perceived decrease because of reduced uncertainty concerning
government handling of the PPA and REIPPP in general. As initial projects have been finished
and are generating and selling electricity under the terms of the PPA, interview respondents
see power market risk as reduced.
Regarding permits risk and financial sector risk, the reason risk was elevated going into
REIPPP 1 was due to the lack of capacity, experience and knowledge of the renewable
energy sector. A significant decrease has been noted for both risk categories, and all the
respondents note the same reasons – that the public institutions issuing permits and the
financial institutions offering debt orequity had become more experienced with REIPPP and
renewable energy in general. The institutions were also caught by surprise in REIPPP 1 and
were not prepared to handle the significant workload that REIPPP entails. As both IPPs and
renewable energy were fairly new sectors in South Africa, especially on a scale comparable
to REIPPP, investors perceived a higher risk. In other words, the main reason these risks have
decreased is simply due to the fact that relevant institutions and the companies
themselveshave gone through a steep learning curve.
5.4.2 Increases in perceived investment risk
We can register an increase in the perceived average values of both social acceptance risk
and grid and transmission risk, but the respondents are divided in their opinion. It is clear
that the experience of respondents has had a defining influence on how they perceive these
risks. The main conclusion that can be drawn from this is that the risks have increased, but
that the risk is highlydependent on the site of the project and the proximity to areas of
interest to third parties and impoverished areas. Grid and transmission risk has an additional
dimension – proximity to grid access points is important, but risks increase when other
projects in the same area compete for grid access. It also seems clear that grid access is seen
as a much greater problem for the respondents that have been affected by it, and their
comments indicate that the role of Eskom as a monopolist in energy generation,
transmission and distribution is not without conflicts of interest when South Africa
introduces IPPs through REIPPP.
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While it is outside of the scope of this thesis to evaluate Eskom, it should be noted that
another possible reason Eskom has failed to deliver grid access in time to several of the
respondents is capacity rather than willingness. Issues related to the capacity,
organizationand management of Eskom were described in chapter 1.3.1. Based on the
findings of this study we can therefore not conclude that Eskom’s role as a monopolist
constitutes a risk factor, but the opinions voiced by respondents gives grounds to explore
the subject in future research projects.
5.4.3 Risk categories without observed changes
In the last four categories, changes are small and scores given by the interview respondents
are fairly similar. No significant change can be seen in political risk or resource and
technology risk. The only conclusion that can be drawn is that interview respondents do not
see significant changes, though they do worry that risk can increase in the future. However,
it is interesting to note that the perceptions of macro-economic risk and counterparty risk
remain stable despite obvious increasing risk in certain metrics.
Macro-economic risk is seen as the second highest risk, barely behind grid and transmission
risk. Respondents do not see a change in perceived risk, despite the 25 percent drop in the
ZAR and a worsening of the economic situation. There can be many reasons for this, but one
possible explanation is the belief that REIPPP PPA payments would be prioritized if the
macro-economy should worsen. Respondents continued to underline that REIPPP prices
have been dropping while the macro-economy has worsened –this has helped offset this risk
in their opinion.
Counterparty risk is similar to macro-economic risk in the sense that changes in risk
perception are small whilst the credit worthiness of both Eskom (off-taker) and the South
African government continues to fall. And again, respondents specifically mentioned their
belief that PPA payments would be prioritized if Eskom or the government should have to
prioritize. As with macro-economic risk, the strong drop in REIPPP bidding prices was seen as
a great advantage in this regard.We can therefore conclude that the majority of the
respondents believed that the drop in prices reduces their exposure to counterparty risk.
5.4.4 Overall evaluation
We can register a decline in overall perceived investment risk of 1.3 points, unevenly spread
across different risk categories. While 1.3 points on a scale of 25 seems small, it should be
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noted that the average score across all categories was 10.4 before REIPPP 1. That means that
a decrease to 9.1 is a reduction of 12.4 percent, which is significant. But while this decrease
is substantial and directly contributes to lower bidding prices according to respondents, it
clearly cannot be said to constitute the 68 percent decrease in solar PV bid prices and 43
percent decrease in wind bid prices seen since the beginning in REIPPP. Also, as mentioned
in the chapter on methodology, quantified subjective risk perceptions must be seen with
some degree of skepticism.
5.5 Differences from existing literature
The findings in this thesis by and large support past academic works and strengthen their
conclusions. However, while past work focuses on the lack of a procurement mechanism and
possible legal issues as the reason for why no projects were procured during REFIT, this
thesis finds that Eskom responsiveness and interest in IPPs also played a role.
Furthermore, while market competition has been the key driver in the reduction of costs in
earlier work as in this thesis, the interview respondents have also underlined the importance
of falling technology costs and the downturn in international renewable energy markets. A
new development that has taken place after the publication of past work is the arrival of
utilities backed by corporate finance. This thesis finds that the importance of this
development has been very important in reducing bid prices in REIPPP 3.
While the design and implementation of REIPPP has also been mentioned as a success factor
in past research, REIPPP developments have been compared to international experiences
with electricity auctions in this thesis. The findings are largely the same –REIPPP has been
successful in attracting investors, who see it as efficient and trustworthy. It is also noted that
insufficient competition was an issue in REIPPP 1 and that development costs are seen as
high by investors, and this shows that REIPPP had the potential to press prices further down.
Lastly, we have found that perceived investment risk has decreased significantly, though
some risks decreased far more than others. While Waissbein has made a similar survey for
wind power investors in South Africa, little information on the scores given by his interview
respondents is available. There was an overlap in the qualitative feedback in Waissbein’s
study and this thesis, and parts of Waissbein’s findings are supported by this study.
However, this study took place at a later time, allowing for the latest developments of
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REIPPP to be included, and it also included solar PV. Lastly, whereas Waissbein focused on
perceived risks at a given time, this thesis also measured the change in perceived risks over
time. The findings of this thesis show that power market risk, permits risk and financial
sector risk have decreased significantly, and that grid and transmission risk and social
acceptance risk has increased for certain projects.
6Conclusion
The objective of this thesis was to identify the main factors influencing REIPPP bid prices. We
conclude that the strongest driver of the rapid reductions in renewable energy prices in
South Africa has been the implementation and design of an electricity auction that has been
successful in facilitating competition. This was made possible as South Africa published
acoherent long-term energy policy with concrete goals and ambitions for renewable energy
deployment, which was followed up by a viable IPP procurement mechanism through
REIPPP. When REIPPP replaced REFIT,it opened the South African markets to international
finance and renewable energy expertise. Falling technology costs and reduced investment
risks have contributed to decreasing bid prices in REIPPP, but the most substantial
contribution remains the competitive forces facilitated by an electricity auctionwhich
investors, project developers and EPC providers interviewed in this thesis see as efficient and
trustworthy.
Thanks to the cost reductions achieved in REIPPP, solar PV and wind have become
commercially viable power generation options in South Africa. It is remarkable that this
transition has taken place in less than three years and that IPP projects have already started
to come online, especially when considering South Africa’s past troubles with IPPs and
complete lack of experience with renewable energy. While South Africa is not the only
country to successfully implement electricity auctions, the developments in REIPPP further
strengthen the case that electricity auctions, when correctly implemented, have the
potential to unlock large sums of investment capital for renewable energy and facilitate
strong competition.
In the context of global warming and a lack of capital going into renewable energy, REIPPP’s
success is important. It has shown that developing countries with practically no experience
with renewables can procure large amounts of renewable energy generation capacity at low
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prices if they succeed in facilitating competition. As the keys to facilitating competition partly
lie in the quality of state institutions, this is not something that can be copied by any
country. However, REIPPP does provide valuable lessons for other countries wishing to
conduct electricity auctions.
Three discoveries that supplement or differ from that of previous research conducted on
REIPPPwere made in this thesis. Firstly, the recent appearance of corporate-backed utilities
has had a significant impact on bid pricing and may have fundamentally changed the
competitive landscape in REIPPP. Second, this thesis finds a perceived reduction in
investment risk, though this is mainly in power market risk, permits risk and financial sector
risk, as well as in grid and transmission risk and social acceptance risk for certain actors. It
also finds that the increasingly lower bid pricing has reduced the perceived counterparty and
macro-economic risk, as investors see more cost-reflective power prices as sustainable in the
long term, but that this effect has been negated by the falling credit ratings of Eskom and
South Africa andconcerns of a slow-down in the South African economy. Third, falling
technology costs and the downturn in international markets have also contributed
significantly to reducing bid prices.
Further research will be needed to confirm these developments, as REIPPP is still a very
young project in which only a few power generating projects have actually been successfully
constructed and actually generate power today. It is also unclear what the long-term impact
of utilities backed by corporate finance will have on this market, as this is a new
development. Regardless, the developments of REIPPP to date give reason to believe that
South Africa has unlocked the potential of its renewable energy sector and shown what
competitive market forces are capable of in securing affordable green energy.
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Attachment 1: Investment risk questionnaire Please score the following investment risk categories by impact and probability on a scale of 1 to 5,
with 1 being very low and 5 being very high. This should be done for the risk level perceived before
bidding for REIPPP 1 in 2011 and for your perception of investment risks today. You may comment on
your scoring under “description/comment” if you wish to do so.
Risk category Description/comment REIPPP I Today
Prob Imp Prob Imp
Power market
risk
Limitations and uncertainties in the energy market and
market regulations.
Examples of barriers: PPA limitations, market outlook, market
distortions such as fossil fuel subsidies.
Permits risk
The public sector’s ability to efficiently and transparently
administer licenses and permits needed for energy projects
Examples: Delays, complexity, time-consumption.
Social
acceptance risk
Resistance to energy projects from local communities,
political movements, special interest groups, NIMBYism.
Resource and
technology risk
Risks related to the energy resource and technology.
Examples include inaccuracy in resource assessment and
supply, finding qualified technical staff (also locally),
uncertainties related to planning, construction and
operations such as sub-optimal plant design.
Grid and
transmission risk
Risks observed in grid management, grid access, transmission
infrastructure, grid code.
Counterparty
risk
Eskom’s credit rating, ability of government to back PPA
payments.
Financial sector
risk
Risk related to the availability of capital for renewable energy
projects. Includes the level of experience with renewable
energy (project assessments, project finance etc.) and the
availability of “black empowerment capital”.
Political risk
Country-specific issues such as good governance and social
stability.
Examples of barriers: Upheavals such as terrorism or civil
disturbances, political instability, poor institutions and
governance, impediments or uncertainty due to government
policy (such as currency restrictions or corporate taxes).
Macro-economic
risk
Risk related to the macro-economic environment.
Examples: Currency volatility, inflation, interest rates.
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Attachment 2: Call for interviewees
Call for Research Interviewees You are hereby asked to contribute to a Sciences Po research project. This document briefly explains the process and the purpose of the research. Research Summary : The research paper in question is a master thesis on the South African Renewable Energy Independent Power Producer Procurement Programme (REIPPPP). REIPPPP is widely being hailed as a success in developing renewable energy projects, but academic literature analyzing its outcomes is currently highly limited. Tapping into the experiences of project developers, investors and EPC providers, the thesis aims to provide first-hand information on how investment risks have changed during REIPPPP and how this and other factors have impacted the average bid prices. The current hypothesis is that while factors such as the frequently quoted overcapacity in the PV module market have decreased costs, the design and implementation of REIPPPP has also led to a significant drop in the prices of solar PV projects. By focusing on investor perspectives, the research project aims to assess REIPPP policy design and implementation and discuss how this has impacted investment risk. Such lessons learned could be valuable for political decision makers wishing to increase power generation capacity or decarbonize their energy mix. Interviews : Data will be gathered through semi-structured interviews with approximately 10 interviewees that will last about 45 minutesand be conducted via Skype or phone. Interviewees will be asked to loosely discuss a list of topics including developments from REIPPP 1 to REIPPP 3, perceived changes in investment risk and differences between REFIT to REIPPP and fill in a short questionnaire on the probability and impact of various investment risks. Interviews take place at the convenience of the interviewee, but preferably before 30/01-2014. About the master’s candidate : Kai Simon Eikli Yuen is a Norwegian-Chinese candidate for a Master of Science in International Energy at Sciences Po, Paris School of International Affairs. He has previously worked for Orkla, the United Nations and the Norwegian Refugee Council, and he has also had a 6 month internship in the renewable energy department of investment facility Norfund. The thesis supervisor is Professor Giacomo Luciani. Your cooperation in this research project would be greatly appreciated, but note that participation is unpaid. Questions and comments can be sent by e-mail (kai.simon.yuen@gmail.com) or by phone (+47 92855482).
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