Major milestone for IPPs and renewable energy in South Africa, but at what cost?

The minister indicated that after delays of about three months, the Department of Energy (DoE) had now obtained Government and Treasury approval under the Public Finance Management Act to enter into long-term, 20-year agreements with 28 preferred independent power produces (IPPs) for the supply of renewable energy (RE) into the Eskom grid.

The 28 preferred bidders for the first bid window were initially announced by Minister Peters at COP17 in Durban on 7 December 2011. Now that financial closure and government approval has been achieved, the final contracts and implementation agreements will be signed by the DoE, Eskom and the individual bidders on 5 and 6 November 2012.

The projects under this first bid window represent a capital investment by the renewable energy IPPs of R47 billion.

Eskom CEO Brian Dames indicated last week that all necessary arrangements such as grid access and power purchase agreements between the renewable energy IPPs and Eskom were finalised, and that there were no impediments to progress from Eskom’s side.

In a second window, bids for a further 1,040 MW of renewable energy projects closed on 5 March 2012, and financial closure for this second window is scheduled for 15 March 2013. A further three bid windows planned will bring the total installed capacity of renewable energy generation capacity to 3,625 MW by 2017, with an expected investment by renewable energy IPPs of some R100 billion.

Dr. Wolsey Barnard, deputy director general at the DoE responsible for implementation programmes and projects, indicated that the average bid prices for the supply of energy in the first bid window for the various renewable energy technologies were:

• Concentrating solar power (CSP): R2,69 per kWh


• Solar photo-voltaic (PV): R2,76 per kWh


• Wind: R1,14 per kWh

He further indicated that the average bid prices for the second bid window were:

• Concentrating solar power (CSP): R2,51 per kWh


• Solar photo-voltaic (PV): R1,65 per kWh


• Wind: R0,90 per kWh


• Small hydro: R1,03 per kWh

Based on the above, and the mix of renewable energy technologies planned in the national integrated resource plan for electricity, IRP 2010 – 2030, Eskom CEO Brian Dames has indicated that Eskom was being required to pay an average of about R2,00 per kWh for renewable energy from IPPs in the five-year period from 2013 to 2017.

Dames said this was significantly higher that the average price of (non-renewable) electricity from IPPs that it currently procures at R0,71 per kWh. He further indicated that the levelised cost of energy from Medupi and Kusile would come in significantly below R0,71 per kWh, and that the average cost of electricity generation from Eskom’s current fleet of power stations at present was R0,31 per kWh.

The impact of the high cost of renewable energy can be seen clearly in Eskom’s recent price application to the National Energy Regulator of South Africa (NERSA). Over the five-year MYPD3 period, the 3,625 MW of renewable energy capacity (with a capacity factor of 0,3 taking into account the intermittency of wind and solar power) yields a net extra generation capacity of 1,090 MW, which is only 2,5% of Eskom current installed capacity. Yet Eskom indicates that the requirement to procure energy from IPPs causes the price increase applied for in each of the next five years to rise by 23% – from 13% per annum for five years to 16% per annum for five years. 

Eskom critics, on the other hand, believe that the levelised cost of new electricity from the Medupi and Kusile coal-fired power stations currently under construction will be significantly higher than that indicated by Dames. They also point out that while Eskom’s electricity prices are rising dramatically, the levelised cost of electricity from renewable energy is in fact dropping, to the extent that price parity will be achieved sooner rather than later.

In another major development on 29 October 2012, Minister Peters, in concurrence with NERSA, also announced three further important ministerial determinations regarding the expansion of electricity generation capacity from IPPs in South Africa as follows:

• Additional base-load generation capacity of 7760 MW, comprising 2500 MW of energy from coal in the system between 2012 and 2024; 2652 MW of gas power in the system between 2021 and 2025; and 2609 MW of imported hydro power from regional projects in the system between 2022 and 2024.


• Additional renewable energy generation capacity of 3200 MW, comprising CSP, solar PV, biomass, biogas, landfill gas, and hydro power between 2017 and 2020.


• Additional power for the mitigation of medium term risk, comprising 800 MW from cogeneration to be on the system as soon as possible; and 474 MW from natural gas between 2019 and 2020.

Minister Peters said the above determinations would be promulgated in the government gazette in two weeks’ time, and this would be followed by a procurement programme with more details on the procurement framework and time frames for the different technologies involved.

Still outstanding, however, is a ministerial determination in respect of the 9,600 MW nuclear energy build programme planned in IRP 2010 – 2030 to come online between 2023 and 2030. Dames indicated last week that decisions by government in respect of the nuclear build programme were overdue and must be taken quickly to avoid commissioning delays and a repeat of the 2008 blackouts. 

A commitment to the nuclear build programme and decisions on its financing, as well as the level of Eskom involvement, remain uncertain for the time being. What is clear, however, is that the DoE is now moving forward with an ambitious IPP programme to mitigate the risk of a single electricity supplier (Eskom), to diversify generation technologies away from the current overdependence of coal, and to slow the rise in carbon emissions. This augers well for the nuclear programme, too. DM