Renewable Technologies Used In Other Countries

Published Date: 02 Nov 2017

It is crucial that the private sector plays a role in addressing the future electricity needs of the country. This will reduce the funding burden on Government, relieve the borrowing requirements of Eskom and introduce generation technologies that Eskom may not consider part of its core function which may play a vital role in the future electricity supply options, in particular off-grid, distributed generation, co-generation and small-scale renewable projects.

The introduction of private sector generation thus has multiple benefits. It will contribute greatly to the diversification of both the supply and nature of energy production, assist in the introduction of new skills and capital into the industry, and enable the benchmarking of performance and pricing.

4. Introduction

Grid connected renewable energy is currently the fastest growing sector in the global energy market. Installed global wind capacity at the start of 2008 is in the order of 90GW, with total world installed capacity having doubled since 2004.

The establishment of the REBID in South Africa will provide an excellent opportunity for South Africa to increase the deployment of renewable energy in the country and contribute towards the sustained growth of the sector in the country, the region and internationally. These guidelines have been developed by NERSA in response to national policy direction. The guidelines establish the institutional framework, the role of the key players and the tariff conditions.

5. Renewable technologies used in other countries

5.1 The start of feed in tariffs

There is a wide spread support for deploying low-carbon sources of energy. Renewable and distributed energy technologies entered the electricity market. Feed-in tariffs is a method that pays a price (tariff), for the electricity generated by Independent Power Producers by making use of renewable sources of energy that is sold to the grid. These methods are also called Standard Offer Contracts, Renewable Tariffs, Advanced Renewable Tariffs, Renewable Energy Payments, and more generally, feed laws. Views of feed in tariffs relating to electricity utility regulation have changed over the years e.g. how tariff rates are determined and how many feed in tariffs are on offer across the globe.

The first feed in tariffs was introduced in California in 1984, by the California Public Utility Commission as Standard Offer Contract No. 4. At the time there were several Standard Offer Contracts available.

5.2 Implementation of feed in tariffs in Germany

Germany implemented its Stromeinspeisungsgesetz (StrEG) in 1991. This is the law on feeding in electricity to the grid. The StrEG is Germany's original electricity feed law and was proposed by Germany's conservative parties, the CDU & CSU, in response to demands by members in rural southern Germany with access to small, disused hydropower plants.

The CDU & CSU backbenchers in Germany's federal parliament specifically suggested that feed-in tariffs greater than the avoided cost were justified in offsetting the environmental costs from conventional coal-fired power plants. Because of this, the tariffs were determined outside traditional measures of the financial cost of generation or the value of the electricity produced.

Because the retail rates fluctuated over time, renewable generators had difficulty finding low-cost financing. Banks preferred a stable and, more importantly, a predictable revenue stream than the StrEG provided by its emphasis on the retail rate. Additionally, the use of avoided externalities alone was insufficient to provide a tariff sufficient to pay for generation from solar photovoltaic.

The principle is the same as that followed by electricity regulators in North America and Europe for much of the 20th Century. In classic electric utility regulation, a power plant is built; the utility then seeks recovery of its expenditure plus a reasonable profit from citizens. Regulators determine the reasonableness of the costs incurred and the profit required and award tariffs or rates based on their findings. The EEG follows the same practice except that it determines reasonableness before construction even begins. Reasonable costs are determined from existing experience and the profit necessary to attract capital in sufficient amounts to reach public policy goals for renewable energy development are found and tariffs subsequently set.

Policies that use a system of feed-in tariffs characterised by technology, size, application, and resource intensity, like those in Germany's EEG, have been named Advanced Renewable Tariffs. These systems of differentiated tariffs are the most modern, hence, "Advanced" form of feed-in tariffs.

France, Spain, Switzerland, Great Britain and several other European countries have since introduced variations on the German practice.

Differentiating tariffs in this manner breaks any remaining link between the rates paid for renewable energy and the cost of conventional generation which renewable resources offset. This is most obvious in the case of solar PV. In the 2004 revision of Germany's EEG, the tariff for residential rooftop solar was raised. Public policy makes a determination that a particular resource is desired, then the tariff necessary to bring on the amount of the technology desired determined, and the rate posted and made available to all comers.

5.3 Spain feed in legislation

Spanish feed-in legislation was set by Royal decree 1578/2008 (Real Decreto 1578/2008), for photovoltaic installations, and Royal decree 661/2007 for other renewable technologies injecting electricity to the public grid. Originally under the 661/2007, photovoltaic feed-in tariffs have been developed under a separate specific law frame due to the rapid growth experienced by this technology since release of the original scheme.

Eskom’s debriefing document after their visit to Spain

Eskom’s, Single Buyer Office visited Spain in 2010 to learn more on Spain’s successful renewable energy feed in tariff. The following feedback was provided:

Spain’s support for renewable energy technologies began in 1980 with the approval of the first law on renewable energy, the "Law of Energy Conservation". Since then a variety of instruments, mainly legislative measures and financial support have been used in introducing renewable energy. The current tariff system was introduced in 1997 through the Electric Power Act.

Under this system, Spain has developed significant capacity in renewable energy power plants. The technology categories under their scope of application for Feed in Tariffs include solar, wind, hydro and biomass.

Objectives

The objective of the trip was to have a small delegation from South Africa visit Spain to meet with Government departments, regulators, grid operators and developers to discuss the implementation of, and lessons learned from Spain’s successful renewable energy feed in tariff programme.

Spain’s significant experience under a REFIT system and the similarities between the available South African renewable energy technologies and that of Spain were explored during this trip. The experience added valuable insight into the successful implementation of a similar system in South Africa.

Market Structure and Context

The key differentiating factors between the Spanish and South African market structures can be summarised as follows:

South Africa is better integrated into the Southern African Power Pool whereas Spain only has one interconnection point (to France) via the Pyrenees mountains

The Spanish therefore have to build their own reserve capacity

There are also differences in installed capacity and demand

REFIT Process

The energy planning decision is taken by the Spanish Parliament but the proposal is made by the Ministry of Energy Tourism and Mines in consultation with the Regulator

The Spanish government (i.e. the Ministry of Energy, Tourism and Mines) administers the Renewable energy procurement process. In Spain it is a tender process, run on the "first come, first serve" basis. There is a pre-registration element to the process whereby Spanish bidders have to become pre-qualified.

Once a developer is pre-qualified, it has to achieve scheduled commercial operation date (COD) within the specified timeframe (typically 1 year), failing which it is de-registered and cannot participate in the programme. A Bid bond is required as guarantee. If developer walks away then the guarantee becomes effective.

If the tender calls for a certain number of MW’s, once a certain percentage or quota of those MW’s is reached then the FIT rate is reduced. Thus the "first bidders in" get a higher tariff. Each developer’s project needs to be far advanced by the time they apply to be part of the call for proposals (therefore Spanish developers typically are prepared to take on construction risks).

After construction has been completed, a 3-4 months procedure follows for the qualification of the operational conditions before the plant is registered in the "Regimen Especial de Produccion de Electricidad (REPE)" and it can then receive the Feed-in-Tariff.

Curtailment is a shared risk between developer and off-taker:

in the case of scheduled outages, the risk is borne by the buyer and in the case of unscheduled outages it is borne by the developer.

Spain does review the Feed-In Tariffs – on an "Efficiency gains" basis - this is dependent on the type and maturity of the technology concerned. An indication of the regularity of this review is provided below:

Wind: every 12- 18 months

CSP: every 24 months

PV every 3 months

For South Africa, it has been suggested that at some stage, the financials of the projects be called for in order to assess the viability of reviewing the tariffs.

Financial

Spanish banks require the sponsor to warrant the risk of the project and the Spanish government does not provide any guarantees.

Technical

The resource risk is borne by banks/lenders.

Incentives are provided for ancillary services of cogeneration, wind and mall hydro.

The Spanish Regulator undertakes economical and technical inspections of renewable energy plants on an annual basis, post COD.

Grid Connection Issues

Spanish Transmission and Distribution is regulated but open to third party access, any player who wants to produce and sell in Spain may do so as long as they pay an "access tariff".

Renewable energy sources have priority access to the Grid over conventional energy sources. Therefore a developer needs to obtain an "access permit" for connection to the grid from Red Electrica de España (REE) (in the case where the plant will be connected to the Transmission Grid (220KV or above) or from the relevant Distribution System Operator (i.e. below 220KV).

Similar to South Africa, in Spain the dedicated (grid connection) costs are borne by the developer, whereas strengthening/ so called "deep connection costs" are borne by the network operator. A grid planning and resource map is made available to the bidders by the network owner and it includes a "grading" of the area relative to the resource.

Conclusion

In so far as the market structures of Spain and South Africa are very different, the lessons learnt from the Spanish Renewable Energy Feed in Tariff and Process is very relevant to the current South African REFIT challenges being faced. It is very important that we incorporate these lessons into our own REFIT implementation.

Specifically for Transmission and Distribution there are valuable lessons to be learned in to grid integration and system operations. However, there has to be an acceptance of high electricity tariffs and the associated impact on competitiveness or the other alternative in lieu of these, government subsidies. A number of lessons can be learned from the Spanish Transmission and Distribution network owners.

Future feed in tariff predictions

According to a study done by James Prest (from the Australian National University), the future of feed in tariffs is in question Worldwide. Feed in tariffs have contributed to the strong average growth in investment in renewable electricity generation capacity and mainly in Solar Photovoltaic and wind. The original purpose of feed in tariff laws was to create a climate of fewer investments where the returns from electricity from renewable energy sources generating equipment were guaranteed. "

Important Research questions include: How have solar provisions of Feed in tariff laws been amended? How frequently have Solar Photovoltaic incentive provisions been closed to new entrants? Why have solar incentive laws been so heavily amended? How should we encourage and incentives renewable energy sources technologies that are further from market competitiveness with fossil fuels?

If a feed in tariff is set too high, then there will be a very strong market response and electricity consumers will support this instead of high levels of investment in generation capacity. This will lead to generation profits with more than acceptable return on investment and the feed in tariff costs that must be retrieved from consumers will be enormous. Instead, if the feed in tariff is set too low there will be less interest and market growth will deter and climate and renewable energy sources targets will not be achieved. Should investment in renewable generation not be made sufficiently profitable, investors will invest in other energy businesses such as gas or coal-fired generation.

There has been a stong growth in the solar photovoltaic sector Worldwide. The strong growth rate created strong political pressure to amend feed in tariff laws and to reduce retail electricity prices.

Amendment of feed in tariff laws was seen as part of a broader topic of design options for feed in tariff laws. Ragwitz et al (2011) suggested increasing both the effectiveness and efficiency of support through improved design of laws for renewable energy source. By using a result based judging of performance of law and policy for renewable energy sources and by measuring the additional generation capacity installed. The most accurate and optimal approach is by measuring absolute growth as a ratio of the additional generation potential in that country, taking into account national differences in the quality of the solar or wind resources available. Even though some commentators are correct in stating that in many instances mechanisms for feed in tariff cost control have become more delicate since the first repetition of feed in tariff laws, there are exceptions.

Analysis of feed in tariff laws, of greater utility legislation and policy makers is to seek to classify and describe features of best practices in feed in tariff design.

Scheme caps are a limit on total installed capacity set within feed in tariff law, above which the feeds in tariff drive will not be paid. This is to be distinguished from the indirect approach of constraining a feed in tariff scheme with an implied cap which entails an extremely drastic reduction in the rate of incentives offered per kWh generated, so much so that the subsequent incentive is so unattractive that little investment occurs. There are a number of jurisdictions with feed in tariff laws that allow variations to exist. These include:

Which technologies are supported

The level of feed in tariff support for each technology

The duration of support

The extent and details of capacity capping

Types of scheme caps:

To cap the total cumulative installed capacity in MW over time

To cap capacity annually but without cumulative capacity cap

To impose tighter limits on individual installations’ project size

To place expenditure based limit on payments under the feed in tariff by specifying a total monetary amount, after which feed in tariff payments will end

To limit the cumulative installed capacity of particular technologies, thereby altering the portfolio of renewable energy source technologies deployed by more tightly capping and costlier options

Including a clause that triggers an administrative or expert review of feed in tariff scheme by particular dare or once installed capacity reaches a certain level

Proposals to modify feed in tariffs by introducing an auctioning components

Requirements that projects must be pre-approved by government before a feed in tariff payment can be made

Time limits on the duration of the entire scheme.

Other methods for restraining scheme costs do exist. Clauses for tariff degression provide that the rates of feed in tariffs payable are to be reduced over time. Tariffs are reduced on an advertised scale so that industry and investment certainty is maintained. The reductions provide important incentives including:

For product innovation and improvement

To provide an incentive for investors to install capacity this year rather than waiting until the next when capital cost of installation will be lower

Feed in tariff payments are the only way to maintain profitability in the building of new installations. Tariff degression is a more subtle adjustment method for containing overall scheme costs. The German experience to date has shown that industry growth can be maintained in a measured and gradual approach to degression if applied.

The future of feed in tariffs hangs in the balance. Some governments and voices of the people have already closed feed in tariffs schemes to new entrants or have imposed temporary ban.

If moderate rate reductions can be implemented for technologies such as solar photovoltaic which have historically exhibited a strong downward price due to learning curve effects and innovation, then it may be possible to avoid the need of capacity capping. Other drawbacks include limiting the achievement of economies of scale in national or regional markets for solar photovoltaic, and introduction of investor uncertainty, the risk that a project may be constructed before the developers learn that the cap has already been reached and that their project is ruled out for feed in tariff. This increased uncertainty will increase the cost of finance as lenders will seek to impose a risk premium on loans.

To meet the aims of sustainable growth with cost containment in the renewable energy source sector, it is preferable to apply a system of flexible, gradual and advertised reduction of rates over time. The ideal is to apply German style tariff degression using gateways based in installed capacity in previous quarters.

The future cost of feed in tariff law must also be weighed against other positive externalities associated with changing the energy mix. These include:

Peak solar electricity production during some of the demand peaks

Reduced transmission losses

Funded needs for network improving

Employment opportunities

Increased tax revenue from reduction in cost solar and other renewable energy installation over time

Growth of domestic industry calling

Avoided health and environment damage from coal fired generation

Savings from avoided imports of electricity and or fossil fuels

Protection from future electricity price increases associated with the trend of fossil fuel generation to rise in price

Previous Research on feed in tariffs

In theory, feed in tariff prices, are determined by the cost of producing the electricity, plus a reasonable profit to justify the expenditure. The cost-based prices therefore enable diversity of projects such as wind, solar, etc. to be developed, and for investors to obtain a reasonable return on renewable energy investments. This principle was first explained in Germany's 2000 RES Act:

The compensation rates have been determined by means of scientific studies, subject to the provision that the rates identified should make it possible for an installation to be operated cost-effectively, based on the use of state-of-the-art technology and depending on the renewable energy sources naturally available in a given geographical environment.

Costs of the equipment have to be considered and the availability of the natural resources. Feed in tariff rates differ among various sources of power generation, installation place, and projects of different sizes and, technology employed and by country.

Feed in tariffs are adopted in different countries, government may set rates that are not completely cost-based depending on other objectives, as to job creation in different countries. By attracting outside investment to build up new electrical capacity or to encourage existing property owners to install solar and to reduce the risk from overbuilding ground based installations.

Developers of medium and large sized projects monitor news about feed in rates continuously. Most developers will choose to build new projects in countries with the highest Feed in tariffs as this will allow them to achieve the highest rates of returns by doing so. The extra cost for the feed in tariffs is shared among all energy users, thereby spreading the costs. In Germany in the average household pays about €1.01 per month for the Feed In Tariff program.

A number of analyses have shown that these price increases can be offset by the price-dampening effect that large amounts of lower cost renewable energy sources can have on spot market prices. This has led to electricity price reductions in Spain, Denmark, and Germany.

The German government estimates the actual cost is near zero, because the benefits of reducing carbon emissions and other air pollutants as well as reducing the cost of expensive fossil-fired generation and medical costs, offsets the cost of the renewable energy.

Anyone who installs Renewable Energy can profit, spreading out the value among citizens and not just owners of large-scale power stations. They are more equitable than Renewable Portfolio Standards (RPSs) because homeowners, farmers, small and large businesses and cooperatives can all participate. To date more than 400,000 German households have installed solar PV. Feed-in tariffs are designed to provide sufficient financial incentives without capital grants, rebates, or tax subsidies. Feed in tariff policies are easy to implement: there is no monitoring, no penalties and no caps.

Studies have shown that money spent locally re-circulates 300-600% more than money sent out-of-country for oil or gas, etc. This secondary affect also helps the economy grow. Good feed in tariffs for renewable technologies increase the drive for innovation, and encourage investment in technologies such as wind, photovoltaic solar energy, or Concentrating Solar Power (CSP) that all have huge potential.

In order to meet the demand, new companies have emerged, existing companies have expanded, and opportunities abound. This is one of the fastest growing industries in the world right now and most analysts say it is only getting started.

Feed in tariffs awakened competition and innovation in the renewables energy field e.g. within 20 years the cost of electricity produced from wind turbines is now less than the cost of electricity produced from lignite, especially if the environmental costs are factored in. The number one benefit of feed in tariffs for developers and investors is that they can predict the projected cash flows that will be produced by each new Solar Energy Project and the financial risks associated with a an investment are dramatically reduced.

As more countries adopt Feed In Tariff policies, the demand for renewable energy systems has risen dramatically and the installation costs are coming down fast. This financing model has now been taken up widely around the world.

Feed in Tariffs has proven to be one of the most effective policy instruments in overcoming the cost barriers to introducing renewable energy and making it economically viable. The guarantees that FITs provide – including access to the grid, a set price per Kilowatt Hour (kWh) that will cover the costs associated with electricity production, for which they will receive that rate has turned several European countries into world leaders in the renewables sector. This is the case for Denmark on wind energy and for Germany on solar energy.

Feed in tariffs have been proven to generate the fastest, lowest-cost deployment of renewable energy and with this as a priority for climate protection and security of energy supply. Feed in tariffs are the best vehicle for delivering these benefits, plus the highly desirable added benefits of new job creation and as a significant contributor to economic growth and prosperity.

As of April 2010, feed in tariff policies have been enacted in 63 jurisdictions around the world, including in Australia, Austria, Belgium, Brazil, Canada, China, Cyprus, the Czech Republic, Denmark, Estonia, France, Germany, Greece, Hungary, Iran, Republic of Ireland, Israel, Italy, the Republic of Korea, Lithuania, Luxembourg, the Netherlands, Portugal, Singapore, South Africa, Spain, Sweden, Switzerland, and in some (nowadays, a dozen) states in the United States, and is gaining momentum in other ones as China, India and Mongolia.

5.6 The reason for carbon policies failing

Carbon policies are taxes; these taxes have negative influence on fossil fuel and utility industries, who object to being singled out for providing essential services that everyone demands. These taxes would eventually rise over time, opening the door to over exaggerated claims about how much they will cost consumers.

Taxes fail to offer alternative energy supply. Only promises that the revenues raised would be spent on renewables like wind and solar, which currently make up less than 2 percent of energy supply

Carbon emissions are a global issue; this has been the primary failing of decade after decade of international climate summits that produced no tangible progress. Carbon trading schemes have benefited the banks who underwrite their trade more than they have produced meaningful cuts in emissions. And when the market price of carbon falls, as it has in Europe, they become ineffective.

The natural constituencies who support climate policy are outnumbered by their fossil fuel opponents. The oil and gas, coal, and utility lobby outspent the wind, solar, and geothermal lobby by 50 to 1 in 2011, and if all forms of funding are taken into account, the fossil fuel, utility, automobile, trucking, road-building, and airline complex probably outspends the sustainable industries complex by 100 to 1. In the fight for energy transition, proponents of clean energy will never be able to win against their opponents this way.

6. South African Context

6.1 National Energy Regulator previous attempt to implement Feed in Tariffs

The REFIT attempted to support the Government’s 10,000 GWh 2013 Renewable Energy Target and deliver sustained long term growth in order to promote competitiveness for renewable energy with conventional energies in the medium and long term.

Renewable energy is recognised internationally as a major contributor in protecting our climate, nature, and the environment as well as providing a wide range of environmental, economic and social benefits that will contribute towards long term global sustainability.

Under the National Energy Regulator Act, 2004 (No. 40 of 2004), the National Energy Regulator of South Africa has the mandate to determine the prices at and conditions under which electricity may be supplied by license.

These Guidelines are governed by the National Energy Regulator Act, 2004 (No. 40 of 2004), Electricity Regulation Act, 2006 (No. 4 of 2006) and all subsequent relevant Acts of Amendment. These Guidelines are to be applied in conjunction with Generation License application procedures.

Objective of the REFIT

The specific objectives and key principles of the REFIT are to:

Create an enabling environment for renewable electricity power generation in South Africa;

Establish a guaranteed price for electricity generated from renewables for a fixed period of time that provides a stable income stream and an adequate return on investment;

Create a dynamic mechanism that reflects market, economic and political developments;

Provide access to the grid and an obligation to purchase power generated;

Establish an equal playing field with conventional electricity generation;

Create a critical mass of renewable energy investment and support the establishment of a self-sustaining market.

The initial phase of the REFIT is aimed at kick starting and stimulating the renewable energy sector and has therefore been designed to be simple and streamlined. Future phases may add more technologies, bands within technologies, and incentives for projects in different geographical areas.

Purchase Obligation

Eskom Single Buyer Office shall be appointed as the Renewable Energy Purchasing Agency. The appointment of Eskom as REPA is in line with the Electricity Regulation Act 2006 whereby NERSA has the right to make any license subject to conditions. These conditions include the types of energy sources from which electricity may be generated, bought or sold. This appointment is also in line with the ‘Statement on Cabinet Meeting of 05 September 2007’ whereby Eskom is designated as the single buyer of power from Independent Power Producers (IPPs) in South Africa.

The aim of supporting the wider green electricity market and ensuring flexibility in the market, renewable energy IPPs are permitted to sell power direct to buyers wishing to purchase renewable energy outside of the REFIT mechanism, subject to fulfillment of necessary license conditions.

The financial subsidy required offsetting the difference in the cost of energy purchased under REFIT and the Avoided Cost will be borne by all Eskom electricity customers through existing ‘pass-through’ arrangements for costs of independent power production.

Renewable Energy Power Generator Qualification Criteria

Renewable energy shall mean naturally occurring non-depletable sources of energy, such as solar, wind, biomass, hydro, tidal, wave, ocean current, and geothermal.A Qualifying Renewable Energy Power Generator shall be defined as new investments in electricity generation using the following technologies:

Landfill gas power plant;

Small hydro power plant (less than 10MW);

Wind power plant;

Concentrating Solar Power (CSP) plant.

All Renewable Energy Generators under REFIT require a Generation License issued by NERSA under the Electricity Regulation Act 2006.

Application Process

Applications to qualify as a Renewable Energy Generator shall be made to the Regulator in conjunction with the application for a license to generate electricity in terms of Section 11 of the Electricity Regulation Act, No. 4 of 2006. Applicants are required to state the specific REFIT technology and tariff category. The agreed tariff will be set according to the base year in which the Generation License for the RE Generator is issued by the Regulator. Approval of qualification for the REFIT shall be defined in the Generation License. This will specify the technology, the tariff approved, duration of the REFIT and other specific licensing conditions.

Tariffs

REFIT will apply to each technology category such as solar, wind, biomass, hydro, tidal, wave, ocean current, and geothermal. Licensees awarded these tariffs will have them adjusted for inflation using the CPI or another suitable inflation index once per annum. The Regulator will monitor uptake, taking into account the impacts of each REFIT in an annual tariff review. This will take place as part of the annual monitoring and review. A full tariff review will take place every year for the first five year period of implementation and every three years thereafter. The resulting tariffs will only be applicable to new projects. Following the completion and end of the duration of the contracted REFIT tariff, the Generator shall be required to negotiate tariffs under market conditions applying at the time.

Rights and Obligations of Qualified Renewable Energy Power Generators

RE Generators shall be guaranteed access to Distribution and Transmission networks. The connection can be to either Transmission or Distribution voltage networks, as appropriate. The cost of connecting to the grid at the appropriate voltage level, i.e. the shallow connection, shall be borne by the RE Generator in accordance with the Distribution/Transmission Tariff Code. Such costs may be financed by the Distributor/Transmitter in accordance with Section 12 of the Distribution /Transmission Tariff Code.

All RE Generators have the responsibility to ensure power production is from credible renewable energy sources. Failure to provide credible evidence on renewable energy power generation or evidence to prove that power was not produced from non-renewable sources could lead to the termination of the Generation License.

Rights and Obligations of the Regulator

The Regulator is responsible for the administration of the REFIT.

The Regulator shall act as the overall authority for verification of the electricity production from renewable energy sources. Inspection shall be carried out by REPA.

The Regulator shall maintain a database of qualifying renewable energy producers.

To prevent over subscription of REFIT, the Regulator shall be permitted to bring in capacity limits on specific technologies in the future.

The Avoided Cost amount for each year shall be established by the NERSA and published to enable REPA to calculate the total cost of the REFIT.

Rights and Obligations on the Renewable Energy Purchasing Agency (REPA)

REPA shall be obliged to enter into a PPA with RE Generators and make payment for renewable energy generated and supplied to the Distribution System and Transmission System under the REFIT. Any wheeling charges incurred in purchasing power under the REFIT shall be at the cost of REPA. REPA shall be obliged to record the total annual cost of power purchased under REFIT including Wheeling Charges, calculate the difference with the cost of the same quantity of power produced at Avoided Cost, and to pass on this cost to consumers using existing ‘pass through’ arrangements. The REPA has the right and the obligation to inspect RE Generators to verify production of renewable energy. For RE Generators with an installed capacity greater than 10MW, this shall be carried out annually by REPA. Below 10MW, this shall be carried out by random sampling.

The benefits of adopting a feed-in tariff (FIT) are summarised below:

With a FIT in place, the risk premium required by investors can be minimised by the high level of price security in the system. Tariffs provided are high enough to cover investment costs and provide a reasonable rate of return. FIT have a strong track record, having proven to be successful internationally.

The use of FITs improves access to finance for developers, which in turn promotes the development of an indigenous renewable energy industry. The development of a robust industry in turn encourages job creation and opens up opportunities for black economic empowerment and the integration of historically disadvantaged people during industry initiation and expansion.

The long term certainty provided stimulates investment in relevant technology, training and building capacity. A FIT mechanism is characterised by low (to medium) administration and transaction costs. The costs to society of the mechanism are also low in the short, medium and long term, and result in a number of ancillary benefits.

In the long term, establishment of a renewables industry sector drives down the cost of renewable energy power generation due to learning effects and the development of institutional expertise. This renders renewables more competitive with conventional technologies whilst driving down costs for consumers.

The price security of a FIT encourages the promotion of a wide portfolio of technologies and provides opportunities for new operators to make a sizeable contribution to the generation mix.

Purpose

Under its mandate to determine the prices and conditions under which electricity prices may be supplied by a licensee through the National Energy Regulator Act, 2004 (No. 40 of 2004) and Electricity Regulation Act, 2006 (No. 4 of 2006), and in line with the White Paper on Renewable Energy 2003, NERSA has developed these guidelines to establish and implement a Renewable Energy Feed in Tariff (REFIT).

Objective

The overall objectives of the REFIT are to achieve national renewable energy generation targets by establishing an equal playing field with conventional electricity generation. This fiscal and financial support mechanism will allow renewable energy to compete with fossil fuel-based technologies. It is generally accepted that coal-based generated electricity does not fully account for the future escalated cost of conventional electricity generation, for adverse social and environmental impacts, as well as reduced transmission and distribution costs associated with renewable energy sources as a result of embedded generation.

Purchase Obligation

Without a fully fledged market being in place in South Africa for the buying and selling of renewable energy, there needs to be a mechanism and an obligation on an appropriate institution to purchase the electricity generated. A single buyer approach is proposed as the most appropriate model in line with the aim to keep the process simple and avoid complexity in its initial phases and also due to the emerging status of the renewables market and private sector participation in the electricity sector in the country. A single buyer model is also tried and tested in many other countries implementing a feed-in tariff.

Tariffs

The tariffs under the REFIT Guidelines have been established through the Levelised Cost of Electricity calculated for discount rate 12%. The FIT were adjusted using the latest publicly available international cost and performance data for renewable energy sources and the screening curves (levelised cost) model of the National Integrated Resource Plan 3 (NIRP3)

6.2 New Generation Regulations & Integrated Resource Plan (IRP)

6.2.1 New Generation Regulations

The New Generation Regulations apply to all types of generation technology including renewable generation and cogeneration technology, but excluding nuclear power generation technology; and also apply to base load, mid-merit and peak generation; and take effect from the date of promulgation, unless otherwise indicated in the text.

Objectives of the regulations

The objectives of these regulations are as follows:

the regulation of entry by a buyer and an IPP into a power purchase agreement;

the facilitation of fair treatment and the non-discrimination between IPP

generators and the buyer;

the facilitation of the full recovery by the buyer of all costs incurred by it under or in connection with the power purchase agreement and an appropriate return based on the risks assumed by the buyer there under and, for this purpose to ensure the transparency and cost reflectivity in the determination of electricity tariffs;

the establishment of rules and guidelines that are applicable in the undertaking of an IPP bid programme and the procurement of an IPP for purposes of new generation capacity;

the provision of a framework for the reimbursement by the regulator, of costs incurred by the buyer and the system operator in the power purchase agreement;

the regulation of the framework of approving the IPP bid programme, the procurement process, the REFIT programme, and the relevant agreements to be concluded.

Planning for new generation capacity

The process of developing the integrated resource plan shall include the following:

adoption of the planning assumptions;

determination of the electricity load forecast;

modelling and scenario planning based on the planning assumptions;

determination of a base plan derived from a least cost generation investment requirement;

risk adjustment of the base plan, which shall be based on

the most probable scenarios; and

government policy objectives for a diverse generation mix, including

renewable and alternative energies, demand side management and

energy efficiency; and

approval and gazetting of the integrated resource plan.

The energy planner, in consultation with the regulator, shall approve the policy input in so far as the risk adjustment contemplated. The system operator shall provide the regulator with any information that the regulator might request in relation to the integrated resource plan.

The Minister shall approve the integrated resource plan and publish it in the

government gazette for implementation.

The regulator:

must consider applications for licences in accordance with the determination

may, impose a licence condition on the buyer to buy all the new generation capacity procured by the system operator in accordance with the approved integrated resource plan;

shall issue rules relating to the keeping of relevant information and the rendering of returns by licensees pursuant to integrated resource planning.

Procurement mobilisation

Having regard to the need for new generation capacity in the integrated resource plan, the system operator shall undertake a feasibility study to determine whether procurement of the generation capacity should be undertaken by Eskom as part of its services as the national electricity producer, another utility provider or an IPP.

The following shall form part of the considerations and outcomes for the

feasibility study contemplated:

the affordability of the proposed generation capacity;

the proposed allocation of financial, technical and operational risk between the buyer and the IPP;

the demonstration of the anticipated value for money to be achieved by the IPP

the capacity of the buyer to enter into project agreements with the IPP.

The concurrence by the Minister of Finance with the approval of the outcome of the feasibility study to procure the generation capacity through IPPs, shall be confirmed before a determination by the Minister. Having considered the outcome of the feasibility study and the approval from the Minister of Finance, the Minister shall make a determination in accordance with section 34 of the Act.

Procurement process under the IPP bid programme

The procurement process for the IPP bid programme shall comply with applicable legal requirements including preference for the advancement of previously disadvantaged individuals.

The system operator, in consultation with the buyer, shall be responsible for the activities related to procurement under the IPP bid programme.

The procurement process shall have the following stages:

Request for prequalification (RFQ);

Request for proposals (RFP); and

Negotiation with the preferred bidder.

Concluding the power purchase agreement

The power purchase agreement must meet the requirements of the treasury regulations in respect of -

affordability of the project;

value for money;

substantial technical, operational and financial risk transfer;

effective implementation, management, enforcement and monitoring of the IPP; and

satisfactory due diligence including a legal due diligence in respect of the buyer's representative and the proposed IPP in relation to matters of their respective competence and capacity to enter into the project agreements.

The buyer, having participated in the process under regulation 5, must purchase all the generation capacity negotiated and concluded by the'system operator under the IPP Bid Programme.

Procurement of renewable energy and cogeneration under the REFIT Programme

Notwithstanding the provisions of regulations 5, the Minister may determine that the REFIT programme must be used to meet the required new generation capacity.

To meet the requirements of regulation 7(1), the regulator shall:

develop the rules related to the criteria for the selection of a renewable energy IPP or cogeneration IPP that qualifies for a licence.

be responsible for the determination and publication of a tariff in respect of the REFIT programme.

The criteria prescribed by the regulator shall take into account the:

compliance with the integrated resource plan and the preferred technologies;

acceptance by the IPP of a standardised power purchase agreement;

preference for a plant location that contributes to grid stabilisation and

mitigates against transmission losses;

preference for a plant technology and location that contributes to local economic development;

compliance with legislation in respect of the advancement of historically disadvantaged individuals;

preference for projects with viable network integration requirements;

preference for projects with advanced environmental approvals;

preference for projects demonstrating the ability to raise finance;

preference for small distributed generators over centralized generators; and

preference for generators that can be commissioned in the shortest time.

The system operator shall be responsible for selecting the preferred IPP under the REFIT Programme. The criteria prescribed by the regulator under regulation 7(2)(a) shall be applied by the system operator in the selection of the preferred IPP.

In line with the determination by the Minister under section 34 of the Act, the buyer must purchase all the generation capacity procured in terms of regulation

Cost recovery

The regulator shall prepare and pass rules, not inconsistent with these regulations, for purposes of cost recovery by the system operator and the buyer, which shall clearly and transparently set forth:

The factors that should be considered in assessing:

the afford ability of the proposed IPP;

the allocation of financial, technical and operational risk between the

buyer and the IPP; and

the anticipated value for money to be achieved by the IPP.

The process to be followed by the buyer in seeking the approval of costs

incurred under the power purchase agreement;

The process to be followed in assessing the principle of efficient risk transfer in the power purchase agreement and the mitigation mechanism in relation to the off taker; and

All such matters as are necessary to give effect to these regulations.

Guidelines

The Minister may issue guidelines relating to the IPP bid programme and the REFIT programme. All parties to the IPP bid programme and the REFIT programme shall be required to comply with such guidelines.

6.2.2 Integrated Resource Plan

The Integrated Resource Plan (IRP 2010) is a long-term electricity capacity plan which defines the need for new generation capacity for the country. The IRM outlines the concepts and development behind the integrated resource plan for the electricity industry in South Africa as well as the strategic objectives of the IRP, including the policy and technical parameters that drive the planning process.

A number of scenarios have been developed to inform debate on specific issues relating to future generation capacity, dealing with climate change, regional integration and the benefits of demand side initiatives, especially regarding energy efficiency. The final proposed IRP 2010 is derived from the debate arising from these scenarios.

While long-term planning is essential, it is fraught with uncertainty. This is particularly true today given the pace of global change on political, economic, social, technological and environmental fronts

The biggest challenge for all long term plans is to find a sensible balance which takes into account the divergent views and expectations put forward by the different parties involved.

These views fall broadly into two categories: desired/wished for outcomes, and required inputs or outputs which are subject to various constraints. Such "could be" and "must be" parameters are the interdependent variables of planning.

Scenario planning is an effective tool to find this balance. A scenario is not a plan but rather a glimpse of a future where a particular outcome or input is amplified in a modelling process in order to observe the effect this has on the other interdependent variables. The balanced scenario is created by an assessment of all scenarios to establish a balance between desired future outcomes and the realities of known constraints. The balanced scenario is the basis for the ultimate government approved risk/policy adjusted plan.

The primary objective of the Integrated Resource Plan (IRP 2010) is to determine the long-term electricity demand and detail how this demand should be met in terms of generating capacity, type, timing and cost. However, the IRP 2010 also serves as input to other planning functions, inter alia economic development, funding, environmental and social policy formulation. The accuracy of the IRP is improved by regular reviews and updates as and when things change or new information becomes available. For this reason, all long-term plans should be considered as indicative rather than "cast in concrete" plans.

The proposed policy-adjusted IRP 2010 aims to achieve a balance between an affordable electricity price to support a globally competitive economy, a more sustainable and efficient economy, the creation of local jobs, the demand on scarce resources such as water and the need to meet nationally appropriate emission targets in line with global commitments. It supports the development of the Southern and Central African region by stimulating the development of hydro and other power projects in Africa. This serves as a catalyst for further economic development due to increased energy security.

The IRP 2010 supports a gross domestic product (GDP) growth trajectory averaging 4,5% over the next 20 years. It requires 41346 MW of new capacity (excluding capacity required to replace decommissioned plant) in order to meet the projected demand and provide adequate reserves. It assumes at least 3420 MW of demand side management (DSM) programmes, as well as a gradual reduction in electricity intensity due to increased efficiency and a diversification to secondary and tertiary sectors in the economy. It still assumes a significant primary sector, however, built on the extraction and beneficiation of the natural resources with which the country is blessed.

The scenario evaluation process confirmed that the "Revised Balanced Scenario" represents a fair and acceptable balance considering the divergence in stakeholder expectations and key constraints and risks, including:

Affordability

Reducing carbon emissions

New technology uncertainties such as costs, operability, lead time to build etc.

Water usage

Job creation

Security of supply

The least-cost Base Case would provide for alternative options other than coal such as the construction of imported hydro, liquefied natural gas (LNG)-fuelled combined cycle gas turbines (CCGTs) and some fluidised bed combustion (FBC) coal to meet the demand following Kusile’s completion. However these options are constrained by the availability of fuel or the capacity to build. This results in the bulk of the demand (for base-load power) over the planning horizon being met by coal-fired power stations, with open cycle gas turbines (OCGT) providing peaking energy. This outcome is not surprising given the relatively low direct cost of coal-fired power stations and the relatively high domestic reserves of coal to meet future demand, and given that the externalities relating to coal are not included in the Base Case.

While the Base Case Scenario indicates the least-cost alternative, these costs do not include the inherent externalities involved in coal-fired electricity production, in particular greenhouse gas (GHG) emissions and the impact on the environment as well as the security of supply imperative in diversifying the national energy base.

Scenarios were developed around the targets for GHG emissions, as well as policy objectives relating to regional development and increasing demand-side interventions. These scenarios, alongside the Base Case, were assessed in terms of cost, emissions, water consumption, localisation potential and regional development objectives, as well as discounting for additional risk to the system.

The balanced scenarios (the original Balanced Scenario and the Revised Balanced Scenario) were developed from workshops with government departments considering the results of the assessment of these criteria and balancing the objectives to converge on the proposed IRP 2010.

The proposed IRP 2010 is presented in the table below as the plan that best meets the stakeholder criteria and the policy requirements of government.

In summary the plan includes:

The continuation of Eskom’s committed build programme (including the return to service of Grootvlei and Komati power stations, and the construction of Medupi (4332 MW), Kusile (4338 MW) and Ingula (1332 MW) power stations).

The construction of the Sere power station (100 MW wind farm).

Phase 1 of the Renewable Energy power purchase programme linked to the National Energy Regulator of South Africa (NERSA) Renewable Energy Feed-In Tariff (REFIT1) programme amounting to 1025 MW (made up from wind, concentrated solar power (CSP), landfill and small hydro options).

Phase 1 of the Medium Term Power Purchase programme of 390 MW (made up from cogeneration and own build options).

The Open Cycle Gas Turbine (OCGT) Independent Power Producer (IPP) programme of the Department of Energy (DoE) of 1020 MW.

A nuclear fleet strategy, commencing in 2023, contributing at least 9,6 GW by 2030. The nuclear costs included in the IRP are generic values as for the other technologies and are not intended to tie the IRP to a specific technology.

A wind programme in addition to the REFIT1 wind capacity, commencing in 2014, of a minimum 3,8 GW.

A solar programme in addition to the REFIT1 solar capacity, commencing in 2016, of a minimum 400 MW. This does not include solar water heating, which is included in the DSM programme (to the extent of 1617 MW).

A renewable programme from 2020, incorporating all renewable options, inclusive of wind, concentrating solar power (CSP), solar photo-voltaic, landfill, and hydro, amongst others) of an additional 7,2 GW.

Imported hydro options from the region totalling 3349 MW from 2020 to 2023.

CCGT capacity, fuelled with imported LNG, totalling 1896 MW from 2019 to 2021.

Own generation or co-generation options of 1253 MW as identified in the Medium Term Risk Assessment study.