The government-default component of the government guarantees extended to the independent power producers (IPPs) that will be selected to build new solar and wind projects under the upcoming seventh bid window (BW7) of South Africa’s programme for the procurement of renewable energy will be reduced from 100% to 80%.

IPP Office head Bernard Magoro tells Engineering News that the reduction follows a National Treasury review of the Government Support Framework Agreement, as well as consultations with the market over the past year.

He also stresses that the liquidity protection aspect remains intact; a component put in place at the start of the Renewable Energy Independent Power Producer Procurement Programme (REIPPPP) to guarantee payments to IPPs should Eskom, the single buyer of electricity arising from the scheme, be unable to honour its obligations.

Given Eskom’s precarious financial position, the guarantee framework has proved important for attracting bidders to the REIPPPP. However, it has also increased the level of contingent liabilities held by the National Treasury, which indicated in the 2022 Budget Review that it would assess a reduction or elimination of the guarantee, even though IPP contingent liabilities represented a low risk to the fiscus.

Magoro reports that the change is likely to be the main new adjustment to the procurement architecture when BW7 is launched in September but argues that it should not come as a surprise to prospective bidders and should, thus, also not lessen market appetite.

That said, there is no time to issue a request for information to test the market ahead of the launch of the round, as well as to assess whether the pipeline of shovel-ready projects is sufficient.

The Department of Mineral Resources and Energy has indicated that the next two REIPPPP procurement rounds will have allocations of 5 000 MW apiece, with BW8 expected to be launched in March next year.

GRID SCARCITY

Magoro tells Engineering News that the risks around grid access are likely to remain a far larger issue for potential bidders than the reduction of the guarantee but also insists that significant progress has been made over the past few months to seek a solution to some of the grid problems that materialised during BW6.

During that round, none of the 23 wind projects that competed for a 3 200 MW wind allocation advanced to the preferred-bidder stage, partly owing to the grid capacity in the Western, Eastern and Northern Cape provinces on which the projects depended having been absorbed by developers of private projects. At this stage, it remains unclear how many of those private projects have concluded power purchase agreements, but market intelligence suggests it may be below 500 MW and it does not appear that any have entered construction.

At the time, Eskom had no grid queuing rules and REIPPPP bidders were disallowed, under the rules of the programme, from obtaining firm grid connection budget quotes until they were named as preferred bidders. No such restrictions applied to developers of projects seeking to take advantage of a change to the regulations allowing distributed projects of any size to proceed without a licence, including those that planned to wheel electricity through the grid.

Eskom has since announced a shift from a ‘first come, first served’ model to a ‘first ready, first served’ approach and Magoro reports that the IPP Office has been having weekly meetings with Eskom since BW6 to ensure that there is no repeat of that disappointment during subsequent rounds.

Nevertheless, grid scarcity is likely to be a key feature for some time yet and Eskom’s upcoming Generation Connection Capacity Assessment (GCCA) will be closely analysed, as it will indicate where grid capacity remains available for both the public procurement programme and private projects, where the pipeline has expanded to about 10 000 MW.

Magoro indicates that it is unlikely that the BW7 and BW8 request for proposals (RFP) documentation will have any firm geographic stipulations for new projects but says the upcoming GCCA will make it clear where grid capacity still exists and where it is heavily constrained.

The GCCA is expected to be published in August, ahead of the launch of BW7.

Magoro also expects clarity to be provided next month on the approach that will be taken regarding the reservation of grid capacity for public procurement programmes and on curtailment, which could help unlock scarce grid capacity by allowing for the co-location of projects at a single connection point.

Debate is currently under way within the IPP Office regarding how the costs of curtailed energy, or energy that is produced but cannot be used, should be treated and there should be clarity on the issue ahead of the launch of the next round.

RISK MITIGATION PROGRAMME REMAINS ACTIVE

Grid capacity will also not be released immediately from delayed procurement programmes that remain active, including REIPPPP BW5 and the far more controversial Risk Mitigation Independent Power Producer Procurement Programme (RMIPPPP).

“We currently have 16 BW5 projects outstanding that have signed contracts and are currently concluding financial close. These projects have a total capacity of 1 574 MW,” Magoro tells Engineering News.

Commercial operation deadlines, from November 2024 to August 2025, have now also been set for the projects that have not entered construction, implying that there is a greater risk of delayed projects facing penalties if they fail to begin operating in line with the agreed dates.

Magoro also confirms that the deadline for the outstanding RMIPPPP projects, including the powerships, has been extended again, this time until the end of December. An agreement has also been reached between Eskom and the bidders to extend grid connection budget quotes from the end of July to the end of the year to align with the new deadline.

The extensions, which have already been heavily criticised, have been justified on the basis that government – partly owing to a year-long legal challenge – did not have all the approvals in place for the signing of the projects, with Eskom having provided its approval only in May this year.

“Until all the approvals are in place from our side, it is very difficult for us to put pressure on the projects,” Maroga says.

Nevertheless, the future of the powership projects and the 20-year power purchase agreements remains uncertain, with Electricity Minister Dr Kgosientsho Ramokgopa having indicated that he will object to any powership contract that exceeds five years and with various environmental authorisations still outstanding.

PROCUREMENT ARCHITECTURE

Meanwhile, Magoro indicates that, besides the changed guarantees framework, the procurement architecture for BW7 is likely to mirror the that used for the Energy Storage Independent Power Producer Procurement Programme (ESIPPPP), under which government is seeking to procure 513 MW, or at least 2 052 MWh, of battery storage.

Under the ESIPPPP, 90 points are allocated to price and 10 points to economic development, which covers ownership, job creation, local content, management control, skills development, enterprise and supplier development, as well as socioeconomic development.

The economic development component is neither obligatory nor a qualifying criterion, however. This, in line with the Constitutional Court’s declaration of the regulations under the Preferential Procurement Policy Framework Act to be invalid. Those regulations were used previously by the IPP Office and others to include economic development as obligatory qualifying criteria in tenders.

“Even though we don't have economic development as a qualification criterion, we will still use such commitments to rank projects in our evaluation process and we believe that most of our participants understand the need for economic development and I personally don't expect bidders to neglect this in their bids,” Magoro asserts.

He is unable to say how ESIPPPP bidders have responded to this change, given that the bid submission deadline was postponed from July 5 to August 2, in response to delays in the issuance of cost estimate letters (CELs) for grid connections. Eskom paused the issuance of such letters in a bid to revamp its grid-access rules, which have now been published, and the utility has indicated that outstanding CELs are being prioritised.

“We hope to make up time during the bid evaluation phase, which was originally scheduled to take place over two months, but we are now looking to complete it in about a month.”

The IPP Office hopes to use lessons gained during the process to help it in preparing its next battery storage request for proposals for 1 230 MW, which will be launched in March 2024.

GAS TO POWER?

Meanwhile, it is also advancing its plans for the procurement of gas-to-power IPPs, with a decision having now been made to split the 3 000 MW programme into two.

A 2 000 MW site-agnostic RFP will be released by the end of September and followed later with a 1 000 MW programme to be located at Coega, in the Eastern Cape.

While work is under way at the Central Energy Fund and Transnet National Ports Authority to developed gas import infrastructure at Coega and Richards Bay, Magoro reports that the gas supply component for the 2 000 MW programme may be left up to the bidders, as was the case with the RMIPPPP.

He is confident that many of the issues that have disrupted the recent public procurement processes, including the supply chain problems that affected BW5 in particular, are now under control.

Nevertheless, he remains concerned about the lack of grid capacity, which he says needs to be addressed in parallel to the current public and private efforts to introduce new generation.

Asked whether the IPP Office could play a role in procuring grid infrastructure from the private sector as it has done in the area of generation, he replies: “Eskom has made it clear that they are ready to execute and that have their strategy to do so. All I can say is that the model for grid procurement is exactly the same as what we are doing, it would just be for a different product. So, it should not be difficult to execute should it come our way.”