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Ramaphosa signals procurement bonanza as South Africa struggles with Covid


Issue 433 - 25 Feb 2021 - By Dan Marks

President Cyril Ramaphosa used his state of the nation address to set out measures the government is taking to combat the economic fallout of the Covid-19 pandemic, with energy close to the top of the list of priorities. New procurement may finally get under way soon, writes Dan Marks

In his state of the nation address on 11 February, President Cyril Ramaphosa spelled out the challenges South Africa faces. At least 45,000 people have died of Covid-19 and the resistance of the 501Y.v2. variant has disrupted the vaccination programme. Unemployment has reached 30.8%, with 1.7m fewer people in work in Q3 2020 than at the same time in 2019 and the economy 6% smaller.

The government has put a R500bn ($34bn) Social and Economic Relief Package into action, which includes direct cash transfers, wage support, tax relief for businesses and loan guarantees, along with the Economic Reconstruction and Recovery Plan which Ramaphosa launched in October. This plan has four pillars: investment in infrastructure, increased local production of goods, an employment stimulus, and development of the electricity sector.

Ramaphosa said the long-awaited fifth round of the renewable energy IPP procurement programme (REIPPP) would begin “in the coming weeks” for 2.6GW of wind and solar. This will be followed by a second window in August. He said Eskom was expediting technical and commercial assessments to allow the new variable capacity to be absorbed by the grid. The utility expects a supply shortfall of 4-6GW within five years if no further capacity is added.

Government programmes to meet COP21 commitments will be guided by the Presidential Coordinating Commission on Climate Change, which will meet for the first time this month and develop a plan for a ‘just transition’, ensuring as few communities as possible lose out in the transition to a low-carbon economy, and that opportunities are shared.

Preferred bidders from the 2GW risk mitigation IPP procurement programme are expected to be announced in March or early April, after first clarifications were received by bidders in mid-February. The innovative but complex tender, launched to bring new capacity to the grid as quickly as possible, was technology-agnostic, instead setting out grid requirements and allowing bidders to come up with solutions.

Unlike the REIPPP, the risk mitigation programme includes a best and final offer process to further reduce prices. This could slow the selection of preferred bidders because of the need for additional negotiations, particularly in a tender involving hybrid plants where it is more difficult to assess if the cost of equipment and software reflects good value for money.

“I believe the bidders recognised the fierce competition in the programme so I don’t think there is going to be a premium on costs,” Wärtsilä Energy business development manager for Southern Africa Wayne Glossop told African Energy. “There might be a small cost for expediting construction but, in our view, it will be negligible overall.”

Many in the industry expect the outcome, which had been planned for February, to have significant implications for the sector. It will be the first time in Africa that thermal, renewable and storage technologies have been put head-to-head or in combination to meet a specific grid requirement and some see it as a potential model for future procurement. The outcome could also be significant for gas procurement, with several of the shortlisted bidders looking to import gas that could form the basis of future programmes.

“The outcome of the programme may have implications for the LNG-to-power programme as well,” Glossop said. “Does it need to be LNG? What about taking a gas-agnostic approach, following the risk mitigation programme’s technology-agnostic approach? It could be LNG, LPG, biogas, hydrogen or anything else.”

Unblocking C&I

In a significant policy departure, Ramaphosa said schedule 2 of the Electricity Regulation Act would be amended within three months to increase the threshold at which embedded commercial and industrial power plants would require a generation licence. There has been speculation this could be as high as 50MW, but Ramaphosa said consultations would be carried out with stakeholders.

At present, the National Energy Regulator of South Africa (Nersa) is able to process licences for embedded projects with capacity of 1MW-10MW, following a letter from energy minister Gwede Mantashe in late October (smaller plants are only required to register with the regulator). Prior to Mantashe’s letter, generation licences for plants larger than 1MW had failed to make progress, frustrating large industrial consumers trying to protect their businesses from blackouts and the rising cost of power. Ramaphosa said up to 5GW of embedded capacity could be unlocked by the measure.

Not long after the address, Sasol announced it was aiming to install 900MW of renewable energy at its facilities in Secunda and Sasolburg by 2030. Sasol requested information from the market on procuring 600MW of solar power last year and released a request for proposals (RfP) in November for two 10MW solar PV plants. Sasol chief executive Fleetwood Grobler told Engineering News the company had received an “overwhelming response” to the RfPs and raising the licence exemption to 50MW would help Sasol’s plans.

Sasol aims to procure the power from IPPs, although it might invest directly in renewable plants which could power its planned green hydrogen facilities. The company is developing a proof-of-concept pilot for green hydrogen which will make use of existing equipment. Sasol is already a hydrogen producer using coal for input into jet fuels and may blend hydrogen from renewable energy and fossil fuels to reduce the overall emissions profile.

The additional renewable procurement and a significant switch to embedded generation create new challenges. “The question we have is if the threshold for embedded generation is increased to 50MW, and they go ahead with the REIPPP fifth window, Eskom is going to be sitting with a lot of challenges around flexibility on its system,” Glossop said. “There might be 5GW of pent-up demand but the vast majority of that will be embedded solar, because that’s what makes most commercial sense. Is that solving the power crisis? To some extent, but it’s creating another challenge as well.”

The stars align?

Government energy policy has in the past been hampered by the conflicting goals of factions within the ruling African National Congress, Eskom, industry lobbies and the private sector. But with the election of Ramaphosa in 2018 and new leadership at Eskom under chief executive André de Ruyter – pushed closer together by the escalation of the electricity crisis – key decision makers look more aligned than they have for over a decade.

Eskom’s refusal to sign power purchase agreements (PPAs) and implementation agreements with IPPs selected in the fourth window of the REIPPP in 2015 meant plants are only now beginning operation, despite years of load-shedding. Underlining Eskom’s shifting position, De Ruyter called in November for the government to speed up procurement from IPPs, while cautioning that coal IPPs may not be built.

Earlier this month, he called on the government to lift the licence threshold for distributed power to 50MW. The utility has committed in principle to becoming a net zero emitter by 2050 and said it will not consider repowering its ageing coal power plants using coal.

Eskom has also made significant progress with structural reform. Generation, transmission and distribution have now been functionally unbundled and have their own boards and managing directors. The transmission company is on track to be legally separated into a subsidiary company later this year, in line with the government roadmap. De Ruyter is expected to provide an update on the process on 3 March.

The apparent alignment between the government and Eskom is encouraging for an industry fatigued by years of delay and political intrigue. “There have always been divergent views – government, various private sector stakeholders, state-owned enterprises – they’ve all been pulling in different directions for many years, which is partly why we’re in this predicament,” Glossop said.

“If you look at more recent statements from Eskom and the president, you get the feeling that the main private and public parties are finally starting to become more aligned. The question is how quickly they can act, because it will still take a few years to build these plants and there is going to be more pain for the country. But I think the time is now for that turnaround and recovery which everyone has been longing for for so many years.”

Power infrastructure in South Africa, eSwatini and Lesotho

Updated in September 2020, this double-page map provides a detailed overview of the power sector in South Africa, with inset maps for eSwatini and the region around Pretoria, Johannesburg, Middelburg and Sasolburg.

The locations of power generation facilities that are operating, under construction or planned are shown by type – including liquid fuels, natural gas, gas and liquid fuels, coal, other thermal, nuclear, hydroelectric, solar (PV and CSP), wind biomass/biogas and binmass & coal.
Read more

 

Tariff tussles

One area where agreement between state actors remains to be found is in the tariff methodology. Nersa was forced to approve a 15.64% tariff increase from 1 April after it lost a High Court challenge by Eskom to its tariff decisions (AE 432/9). Announcing the decision on 16 February after the Gauteng High Court ordered R10bn be added to Eskom’s allowable revenue for the year, Nersa said it would continue with an appeal.

Ramaphosa was clear on the importance of raising tariffs. “We are working closely with Eskom on proposals to improve its financial position, manage its debt and reduce its dependence on the fiscus,” he said. “This requires a review of the tariff path to ensure that it reflects all reasonable costs and measures to resolve the problem of municipal debt.”

Eskom is looking at options to reconfigure its tariffs to reflect the changing energy landscape, including a split tariff including a daily fixed charge and usage charge. This approach allows utilities to recoup the costs of being the electricity supplier of last resort and providing a connection while household solar systems proliferate and reduce grid usage. The split has been criticised for making household solar power less commercially attractive for consumers, potentially slowing the switch away from polluting fuels.

Repowering Eskom

Since opening its Just Energy Transition Office a year ago, Eskom has been working hard to develop a coherent strategy bringing together its approaches to the transition to low carbon energy sources and social and economic justice. The first major steps are expected soon as the utility prepares tenders for the repowering and repurposing of its oldest coal power plants.

“Eskom will be looking to partner with investors to repurpose and repower part of its coal fleet. This will be done in a way that stimulates investment, local economic activity and local manufacturing, as part of a just transition,” Ramaphosa said.

The office is based within the Office of the Chief Executive at the holding company and coordinates projects at Eskom’s three subsidiary companies as well as arranging and monitoring funding and ensuring alignment with government policy.

“We have quite a deliberate strategy in terms of how we see the just energy transition,” Just Energy Transition Office head Mandy Rambharos told African Energy. “We’ve had climate and socioeconomic development strategies for many, many years. But you can’t separate the climate issues from environmental, social and economic issues, which is why we have combined them into a single strategy. We’ve said before that the energy transition – decarbonisation and the move towards net zero – is as important for us as the just part. We can’t do one without the other.”

Eskom has been carrying out socioeconomic studies for each of the power stations it expects to decommission in the coming years.

“We all know we can’t replace coal jobs one-to-one with renewables jobs, so we’re working very closely with others, like the Department of Trade, Industry and Competition, to look at local manufacturing, trying to get re-industrialisation going in the country. Repurposing and repowering of power stations falls very obviously within our ambit and we’re looking to accelerate at least one power station this year,” Rambharos said. Alongside repowering, Eskom is looking at business and industrial parks on the sites.

The repowering tenders are likely to attract significant interest. Eskom will provide the land, environmental authorisation, permissions and grid connection for the new power plants, making investing potentially much simpler for private investors than in the IPP programmes.

Komati, which only has one coal unit still running, is expected to be the first to be tendered later this year, followed as quickly as possible by Grootvlei, and later by Hendrina and Camden. Eskom is hoping it will be able to learn quickly from the Komati process.

“We want to get a project off the ground as soon as possible. Once we have the first one done, the others will follow quickly,” Rambharos said. “We are currently doing all the internal governance work around the RfP, technical assessments, talking to development finance institutions about funding, and a lot of energy modelling work.”

While the 50-year dead stop dates for the coal plants are guiding the tender process, Rambharos said new solar PV plants could also be developed before then.

However, a lot remains to be resolved. Eskom has not done public-private partnerships before and intends to be an active partner in the projects. A transaction advisor is being brought in to help develop the structure, but this has not yet been settled. Eskom also needs to ensure the structure and procurement process are in line with the Public Finance Management Act.

Perhaps more difficult are regulatory hurdles. “We’re looking at what the framework of policy, licensing, approvals are needed to launch these partnerships and we are also working hard on policy alignment with the government,” Rambharos said. “We would have to apply for a separate generation licence for the PV plant and then at a later stage if we were converting to gas, we would have to apply for a licence for gas.

“We would also have to apply for an allocation from the IRP. As long as we’re in the capacity and technology framework of the IRP we are fine, but if we wanted to use biomass, for example, we would need to apply for a deviation. That is why we have a separate workstream on policy, because these things take a long time.”

While Rambharos is optimistic about releasing an RfP within months, the approvals process means the launch might take longer. Rambharos said Eskom is looking at whether the RfP could be launched in parallel with the regulatory and legal applications processes, to speed up development.

Repowering tenders will not be technology agnostic and Eskom has already carried out technical assessments at the different sites. “For Komati, it is clear to us that to get it done quickly the best technology would be solar PV and storage, so that is what we are pursuing. But these sites are big and there’s the possibility that the next phase could also bring in gas to repower the existing coal unit. We don’t see the technologies as mutually exclusive,” Rambharos said.

“In terms of gas, the big question marks are accessibility, availability and cost. The Rompco pipeline is very close to Komati and we are having discussions with Sasol to understand what their plans are, but there are still big question marks. We’ve been saying that we need natural gas to enable a large rollout of renewables because batteries are expensive right now and hydrogen is a bit too far away, so we need gas. At the moment the discussions around gas are just discussions and we are looking at where the sector will go with the risk mitigation programme and government gas strategy.”

Total and Gigajoule’s Maputo LNG import project is scheduled to reach financial close by year-end. The project would feed the Rompco pipeline using LNG as production begins to decline at Sasol’s Pande and Temane fields, ensuring gas is available in the future.

As well as repowering coal power plants, Eskom has rights to develop a greenfield power plant in Richards Bay with up to 3GW capacity, and plans to convert Ankerlig and Gourikwa from diesel to gas. The plans are dependent on the sources of gas that become available, from LNG, pipelines from Mozambique or ultimately domestic gas supply. Eskom is also looking to develop a pipeline of renewable projects in the Northern and Eastern Cape.

South Africa Power Report 2021/22

South Africa is in a race against time to ramp up electricity production to avoid further escalations in load-shedding and prevent the financial situation at Eskom spiralling further out of control.

African Energy’s forthcoming South Africa Power Report 2021/22 examines the challenges facing each constituent part of the electricity supply industry – from generation, distribution, transmission to politics and macroeconomics – to provide a complete overview.
Find out more

Dan Marks

Power editor

Dan oversees research and development of the African Energy Live Data platform and is power editor for African Energy’s newsletter. Read more

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