Part 1: Barriers to Renewable Energy in South Africa
This is the first post in a two part series on renewable energy policy developments in South Africa.
Through the Open Climate Network, Idasa and partner organizations are examining the legal and institutional framework for key policies that will influence South Africa’s progress towards meeting its global climate change commitments. One such policy is the Renewable Energy Feed-in Tariff (REFIT), drafted in 2009 to help South Africa increase the amount of electricity generated by renewable sources to 10,000 GWh by 2013. South Africa has enormous potential to harness electrical power through renewable energy sources such as wind, solar, biomass and biogas generation.1 As long ago as 2003, government committed to increase the contribution of renewable energy in meeting the country’s growing energy needs, but has only relatively recently introduced a number of policy initiatives to promote the generation and use of renewable energy sources.
The Integrated Resource Plan of 2010, for example, increased its target for electricity production from renewable energy sources to 17.8GW by 2030 following public consultations.2 Many analysts question the ambition of this target, which would represent less than 10% of projected 2030 electricity demand. Ensuring that it is met (if not exceeded) will depend on finalizing and making operational a feed-in tariff and associated procurement rules, a process which has been repeatedly stalled over the last two years.
The Renewable Energy Feed-In Tariff (REFIT) guidelines, issued by the National Energy Regulator of South Africa (NERSA) in March 2009, were designed to “kick start and stimulat[e] the renewable energy sector” in South Africa. As elsewhere, REFIT essentially would pay a guaranteed fixed rate for a prescribed number of years to renewable energy generators for supplying electricity to the power grid, thus promoting the creation and sustainability of renewable energy (RE) providers and technology. However, REFIT has encountered several barriers to implementation.
Wariness of Utility Monopoly
One barrier has been a persistent wariness concerning the role and influence of Eskom, the state-owned electricity utility, which has enjoyed a virtual monopoly on electricity generation and distribution. Potential independent power producers (IPPs) were concerned that they would not receive fair treatment as a result of the conflict of interest apparent in Eskom’s position as the national utility and its role as buyer of electricity from IPPs.
Shifting Policies and Regulations
Other factors include the frequent shifts in policy and regulation, which have contributed to investor uncertainty. The Electricity Regulations on New Generation Capacity (“New Gen Regs”), promulgated in August 2009, initially sought to build confidence among potential RE independent power producers by clarifying the roles and authority of sector actors.
The Regulations demarcated clearly separate functions for the Department of Energy (DoE), as the procurer of electricity from RE IPPs. The regulations also limited the power of Eskom to that of buyer and signatory of a power purchase agreement (PPA) independently approved by the regulator. This move initially assuaged fears that Eskom’s dominance would continue unchallenged.
Since then, though, several developments have combined to revive significant market uncertainty in the government’s ability to create an electricity market, which have caused some to question its willingness reduce Eskom’s dominance and to fast-track a determined transition to a lower carbon economy.
In early 2011, NERSA announced its intention to review and probably decrease the tariffs set in March 2009, even though no power had yet been purchased at these initial rates. Although concerns were expressed at what appeared to be the latest in a long history of policy u-turns by government and state agencies,3 it was accepted that the 2009 tariffs were probably unduly generous given the recent cost reductions that had occurred as the technology advanced.
In addition to opening the doors to lower rates, however, the revised New Gen Regs have also complicated the streamlined REFIT approach by reintroducing doubts about the identity of the buyer,4 and introducing extensive Ministerial discretion to the process of determining which power procurement projects would be prioritised, once again shaking investor confidence.
Legal Challenges to REFIT’s Bidding Process
Moreover, a recent intervention by National Treasury has overturned wide acceptance of the lawfulness of REFIT’s simplified bidding system for renewable energy PPAs and licenses. The DoE and Treasury have expressed concern that the REFIT may not be legally compliant with government procurement rules. They have reportedly also indicated that they did not want to repeat some (unspecified) financial errors associated with REFIT programs in other (again unspecified) countries.5
Treasury claims to have received four legal opinions (not disclosed) from different law firms, all indicating that REFIT’s predetermined tariffs are unlawful and unconstitutional. According to these views, REFIT undermines the provisions of s.217(1) of the Constitution, which requires a public procurement system that is ‘fair, equitable, transparent, competitive and cost-effective’.6 The associated legal framework has been interpreted in these opinions to mean that price is always an overriding criterion when public procurement is undertaken, which requires the abandonment of a system predicated on a predetermined price.7 Thus, it is argued, the system prescribes a process that includes competitive bidding on price.8
However, one of the country’s leading lawyers9 has put his name to a contrary opinion, saying that simply because REFIT predetermines the price floor for the public procurement of electricity produced from RE sources, does not preclude the system as a whole from nevertheless allowing competition in other aspects of the bidding system. On this view, bidders will be able to continue to compete on other features, such as functionality, choice of technology, location and contribution to local economic development, and grid compliance, among others.
In light of legal challenges and other considerations, DoE, and Treasury considered an alternative policy design dubbed ‘REBID’. This approach will be considered in a subsequent post.
This post is the work of an Open Climate Network partner. The World Resources Institute is not responsible for the content or opinions expressed by the author.
Scarce water resources, however, are a significant limiting factor for some technologies. See http://mg.co.za/article/2011-08-05-electricity-is-a-thirsty-business/. ↩
Electricity Regulations on the Integrated Resource Plan 2010-2030 Regulation Gazette No. 9531 GG No. 34263 6 May 2011. This represents an increase of almost 50% from the 11.4GW put forward in the IRP prior to the public consultation process, the first in the country’s history. Previously, planning was done internally by Eskom (the utility) and was later led by Nersa (the regulatory agency). ↩
An engineering consultant for RE IPPs was quoted as reiterating ‘the need for policy clarity and alignment’, adding that ‘the delays associated with numerous [changes in policy and regulation] documentation have been going on for “far too long”.’ See http://www.engineeringnews.co.za/article/ipps-keen-to-invest-but-more-policy-clarity-needed-2010-12-02 and http://www.engineeringnews.co.za/article/stable-policy-implementation-needed-to-encourage-renewable-energy-investment-2011-03-29 ↩
The August 2009 New Gen Regs describe the buyer as an independent system and market operator – ‘ISMO’. Government has recently tabled draft legislation in Parliament to establish ISMO. ↩
http://www.engineeringnews.co.za/article/sa-finally-sets-renewables-bidding-process-in-motion-2011-07-31. Government has placed disconcertingly little written detail on the public record about its concerns. ↩
These requirements are legislated in the Public Finance Management Act, 1999, read with Treasury Regulations, as well as in the Preferential Procurement Framework Act, 2000. ↩
Such a process in regard to RE has been dubbed ‘REBID’ ↩
Adv Wim Trengove SC, in an opinion dated 13 June 2011 ↩