Public tender programmes and direct sale of renewable energies and natural gas in South Africa

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In a nutshell:

Since the start of the public tender programme for renewable energy projects in 2011 contracts for over 6,300 MW have been awarded in four tender rounds. Further tenders are to be launched for another 6,300 MW. Additionally, a public tender programme is being prepared for the import of and energy production from natural gas.

Public tender programme for renewable energy projects

In 2011, South Africa launched the ”Renewable Energy Independent Power Production Procurement Programme” (REIPPPP), a public tender programme for renewable energy projects. With REIPPPP South Africa decided against the implementation of a feed-in tariff. REIPPPP comprises mainly renewable energy projects with a capacity of 5 MW and above. But the tender programme involves also smaller projects with a capacity between 1 and 5 MW.

 

Besides the diversification of the energy mix – South Africa's energy industry is based on coal power (85 percent) – REIPPPP aims at introducing independent power producers (IPP) into the market. The power industry in South Africa is dominated by the state-owned company Eskom.

 

Within the framework of REIPPPP, the price to be paid by Eskom for the power generated by independent power producers is determined by way of competitive bids. Successful bidders are awarded contracts with Eskom for 20 years.

 

Until today, four tender rounds have been held under which contracts were awarded for more than 6,300 MW. About 2,500 MW have already been installed and connected to the grid. REIPPPP is seen as a big success both locally and internationally. Further tenders are to be launched for another 6,300 MW.

 

In 2016, REIPPPPP suffered its first big setback, though. Eskom refused to sign power purchase agreements with the winners of the fourth tender round. Given the substantial financial expenditure that bidders have to incur in order to submit their bids, Eskom's behaviour throws an overall bad light on the tender programme. A positive note is, however, that the Energy Ministry and South African President put pressure on Eskom. In February, Eskom announced that the power purchase agreements will be signed in the near future. Even if it is not certain at the moment whether REIPPPP enters the fifth round in its original form, the majority of market players is confident that the tender programme will be continued. In addition, further public tender programmes may be launched by South African municipalities in the future. Some municipalities in South Africa want to start to purchase their power not from Eskom alone, but also directly from independent power producers. Such a wish has been expressed by, among others, the City of Cape Town. However, this project is still in its planning phase.

 

Direct sale

Due to the uncertainties surrounding the tender programme, the companies in South Africa are more and more interested in direct sale and contracting models. There is no legal framework regulating direct marketing in South Africa. But BMW succeeded to implement the first wheeling project in South Africa. This was possible through signing a power purchase agreement with a biogas plant operator and energy wheeling agreements with Eskom and the responsible municipality.

In South Africa, contracting models may be attractive for companies especially due to the rapidly increasing power prices. Since 2004, electricity costs have increased by 300 percent. Therefore, a power purchase agreement providing for a fixed tariff for 10 to 20 years may be a favourable alternative. 

 

Public tender programme for natural gas

Besides renewable energies, South Africa aims to intensify the use of natural gas for power generation. The Energy Ministry decided to increase the power generation capacity by 3,716 MW (natural gas) which should be purchased within a public tender programme.

 

South Africa has no confirmed large resources of natural gas. It is suspected that huge resources of shale gas lie in the region around the Karoo desert, but nothing is confirmed yet. Therefore, the focus is for the moment on the import of liquefied natural gas (LNG) from Mozambique.

 

The LNG-to-Power IPP Procurement Programme envisages the purchase of  3,000 MW by way of public tender. This programme comprises the development of infrastructure for the import and regasification of LNG and the development, construction and operation of combined cycle power plants in two South African ports (Coega and Richards Bay). The announcement of the Request for Qualification is expected shortly.

 

Another tender has been announced for the construction of a natural gas power plant (600 MW). During a public tender procedure, strategic partners should be identified for state-owned enterprises yet to be nominated. The strategic private partners will play a key role in the development, financing, operation and maintenance of the power plant. In 2016, a relevant request for interest was published.

 

Conclusion

The energy sector in South Africa continues to develop and offers huge potential for independent power producers, power plant constructors and engineers. Collaboration with a South African partner and participation in a public tender programme offer German enterprises an opportunity to successfully enter into the South-African market.

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