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Department of Minerals and Energy
South Africa
Danish Cooperation for Environment
and Development (DANCED), Denmark
BULK RENEWABLE ENERGY
INDEPENDENT POWER PRODUCERS
IN
SOUTH AFRICA
January 2001
Preface
This report presents the findings of a project entitled “Independent Power Production
(IPP) in South Africa with an Emphasis on Bulk Electricity Generated through the
Harnissing of Renewable Energy Sources”.
The project was carried out in 2000 for the Department of Mines and Energy (DME),
South Africa, and the Danish Cooperation for Environment and Development
(DANCED), Denmark.
DANCED and DME agreed on this activity in order to identify barriers to the use of
grid connected renewables for bulk power production and to suggest means that the
DME could use to remove these barriers. It was DANCED and DME’s intention to
thus support the energy policy direction laid out in the White Paper on Energy Policy
of December 1998.
The team comprised:
Dr Jorgen Boldt, Ramboll (Team Leader from July 2000)
Mr Jorgen Hvid, Ramboll (Team Leader until July 2000)
Mr Lars Monsted, Ramboll
Dr Terry Olier, IEEC, Thailand
Ms Alix Clark, EDRC, University of Cape Town
Mr Justice Mavhungu, EDRC, University of Cape Town
Mr Anton-Louis Olivier, e3, Cape Town
Dr Douglas Banks, RAPS, Pretoria
Mr Jason Schäffler, RAPS, Pretoria
Mr Frank Hochmuth, MEPC, Cape Town
Mr Steve Thorne, Energy Transformations, Cape Town
Disclaimer:
Views or opinions of the authors expressed herein do not necessarily confirm
or reflect those of the DME or Danced
Table of contents
Summary ........................................................................................................................ 7
1. Background .............................................................................................................. 29
1.1. The Rationale ..................................................................................................... 29
1.1.1. Economic and social development .............................................................. 29
1.1.2. Environmental benefits ............................................................................... 30
1.1.3. Justification for preferential status .............................................................. 31
1.2. Background to Project ....................................................................................... 32
2. South African energy policy and renewable IPPs.................................................... 34
2.1. A historical review............................................................................................. 35
2.1.1. Pre-regulations ............................................................................................ 35
2.1.2. First power act ............................................................................................. 35
2.1.3. Establishment of Eskom .............................................................................. 36
2.1.4. Monopoly of Eskom .................................................................................... 36
2.1.5. First restructuring of Eskom ........................................................................ 36
2.1.6. Post-Apartheid era: NER founded .............................................................. 36
2.1.7. Splitting up of Eskom.................................................................................. 37
2.2. South African Energy Policy ............................................................................. 37
2.3. Renewable energy policy................................................................................... 38
2.3.1. The Energy White Paper ............................................................................. 38
2.3.2. Renewable energy according to the Energy White Paper ........................... 39
2.3.3. The renewable energy strategy of the DME................................................ 40
2.3.4. Non-utility generation ................................................................................. 41
2.4. The international Framework Convention on Climate Change ......................... 42
2.4.1. South Africa’s position towards climate change ......................................... 42
2.4.2. State of the art of the CDM mechanism ...................................................... 44
2.4.3. The potential role of the CDM in the promotion of renewables ................. 45
2.4.4. CDM benefits for renewable IPPs ............................................................... 45
2.4.5. Requirements to policy framework and regulatory framework .................. 46
2.5. Policy barriers and deficits ................................................................................ 47
3. Legal, institutional and regulatory set-up of the power sector................................. 50
3.1. Overview ........................................................................................................... 50
3.1.1. Governance structure................................................................................... 50
3.1.3. ESKOM governance ................................................................................... 53
3.2. The restructuring of the electricity supply industry........................................... 54
3.2.1. Government’s plans for power sector reform ............................................. 54
3.2.2. Possible impacts of EDI reform on bulk renewable energy generation ...... 63
3.2.3. Possible impacts of ESI reform on bulk renewable energy generation....... 64
3.3. Stakeholders....................................................................................................... 69
3.3.1. Government ................................................................................................. 69
3.3.2. State-owned and companies and municipalities.......................................... 70
3.3.3. Commercial Companies .............................................................................. 70
3.3.4. Regulatory bodies ........................................................................................ 71
3.3.5. NGOs and research organisations ............................................................... 71
3.3.6. Unions ......................................................................................................... 72
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3.4. Present legal and regulatory deficits .................................................................. 72
3.4.1. Regulation of access to electricity markets and customers ......................... 73
3.4.2. Guidelines for access to grid ....................................................................... 74
3.4.3. Establishment and enforcement of wheeling rules and tariffs .................... 74
3.4.4. Control of ownership issues by the competition board ............................... 74
3.4.5. Renewable energy Power Purchase Agreements ........................................ 74
4. Renewable energy resources .................................................................................... 76
4.1. Renewable energy technologies suitable for independent power producers ..... 76
4.1.1. Introduction ................................................................................................. 76
4.1.2. Wind ............................................................................................................ 76
4.1.3. Biomass ....................................................................................................... 77
4.1.4. Hydro........................................................................................................... 77
4.1.5. Solar ............................................................................................................ 78
4.2. Comparison of renewable energy technologies for suitability as IPPs ............. 79
4.3. Renewable energy resource assessment ............................................................ 80
4.3.1. Background ................................................................................................. 80
4.3.2. Wind ............................................................................................................ 81
4.3.3. Biomass ....................................................................................................... 82
4.3.4. Hydro........................................................................................................... 85
4.4. Resources with potential for the future.............................................................. 88
4.4.1. Solar ............................................................................................................ 88
4.4.2. Wave Energy ............................................................................................... 89
4.4.3. Energy from Waste...................................................................................... 89
5. Non utility experiences in South Africa................................................................... 90
5.1. Background ........................................................................................................ 90
5.2. Existing non-utility generators .......................................................................... 91
5.2.1. Small hydropower ....................................................................................... 91
5.2.2. The sugar industry ....................................................................................... 95
5.2.3. The wood and pulp industries ..................................................................... 96
5.2.4. Non-renewable generators........................................................................... 98
5.3. Renewable energy IPPs under development ..................................................... 99
5.3.1. Darling Independent Power Producer (DARLIPP) ..................................... 99
5.3.2. Bethlehem Hydro ...................................................................................... 104
5.3.3. Krokodilpoort hydro .................................................................................. 108
5.3.4. Other .......................................................................................................... 108
5.4. Barriers and other factors influencing IPP development in South Africa ....... 111
5.4.1. Conflicting messages................................................................................. 111
5.4.2. Tariffs ........................................................................................................ 111
5.4.3. Project developer profile ........................................................................... 112
5.4.4. Demand for generation capacity ............................................................... 112
5.4.5. Stranded Assets ......................................................................................... 113
5.4.6. Power purchase agreements ...................................................................... 113
5.4.7. Financing: Equity ...................................................................................... 114
5.4.8. Financing: Debt ......................................................................................... 114
5.4.9. Concessionary and venture finance ........................................................... 115
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6. Financial and economic evaluation of renewable energy ...................................... 117
6.1. Introduction ..................................................................................................... 117
6.2. Financial aspects .............................................................................................. 117
6.3. Real cost of coal-fired power generation ......................................................... 118
6.3.1. Direct costs ................................................................................................ 118
6.3.2. Electricity tariffs ........................................................................................ 122
6.3.3. Subsidies and cross-subsidies.................................................................... 123
6.4. Externalities ..................................................................................................... 124
6.4.1. Direct accountable externalities ................................................................ 125
6.4.2. Indirect and global externalities ................................................................ 126
6.4.3. Total production costs of coal based energy ............................................. 127
6.4.4. Total production costs without subsidies and with externalities. .............. 127
6.5. Real costs of REIPPs ....................................................................................... 128
6.5.1. Mini hydro systems ................................................................................... 128
6.5.2. Industrial bagasse ...................................................................................... 129
6.5.3. Wind power ............................................................................................... 130
6.6. Comparison of costs ........................................................................................ 132
6.7. Power purchase regulation for distributed generators ..................................... 133
6.8. Employment aspects ........................................................................................ 137
7. Review of International Renewable Energy Policies............................................. 139
7.1. Introduction ..................................................................................................... 139
7.2. Incentives ......................................................................................................... 139
7.2.1. Production Incentives ................................................................................ 141
7.2.2. Investments subsidies ................................................................................ 142
7.2.3. Set-asides ................................................................................................... 142
7.2.4. Green marketing. ....................................................................................... 144
7.2.5. Power purchase agreements. ..................................................................... 145
7.2.6. Loan guarantees......................................................................................... 145
7.3. International Initiatives .................................................................................... 146
7.4. Country Experiences with Grid-Connected Renewable Energy Policies ........ 147
7.4.1. Denmark .................................................................................................... 147
7.4.2. Germany .................................................................................................... 148
7.4.3. India........................................................................................................... 149
7.4.4. Netherlands................................................................................................ 150
7.4.5. Spain .......................................................................................................... 151
7.4.6. Sweden ...................................................................................................... 151
7.4.7. United Kingdom (UK) .............................................................................. 151
8. Recommendations .................................................................................................. 154
8.1. Policy and legislation – immediate initiatives ................................................. 155
8.1.1. Recommendation 1: Renewable energy IPP set-aside programme ........... 155
8.1.2. Recommendation 2: Interim power purchase regulation .......................... 157
8.2. Policy and legislation – longer term initiatives ............................................... 158
8.2.1. Recommendation 3: Power purchase regulation. ...................................... 158
8.2.2. Recommendation 4: IRP inclusion of renewable energy IPPs .................. 158
8.2.3. Recommendation 5: Electricity information ............................................. 159
8.2.4. Recommendation 6: Capacity development, government......................... 159
8.2.5. Recommendation 7: Capacity development, civil society ........................ 160
8.3. Regulation – tariffs and grid connection ......................................................... 160
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8.3.1. Recommendation 8: Transparent licensing. .............................................. 160
8.3.2. Recommendation 9: Technical grid connection code ............................... 161
8.3.3. Recommendation 10: Renewable energy tariff structure .......................... 162
8.4. Support activities ............................................................................................. 163
8.4.1. Recommendation 11: Long term barrier removal. .................................... 163
8.4.2. Recommendation 12: Investment capital for renewable energy ............... 163
8.4.3. Recommendation 13: Green power marketing.......................................... 164
8.5. Demonstration activities .................................................................................. 165
8.5.1. Recommendation 14: The Darling Wind Farm ......................................... 165
8.5.2. Recommendation 15: Mini-hydro ............................................................. 166
8.5.3. Recommendation 16: Cogeneration in sugar industry. ............................. 166
8.5.4. Recommendation 17: Cogeneration in wood/pulp industry...................... 166
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SUMMARY
There are significant benefits in diversified and small scale additions to the
generation mix in improved quality of supply, diversification, better following
the demand growth, technical (voltage relief etc), local job creation, and
contributes to clean up the energy sector. Renewable energy technologies
have proven their ability to provide grid power both in South Africa and
internationally.
South Africa is purposefully moving toward competition in the generation
sector. In the South African regulatory regime, distinction must be made
between different classes of independent power producers, which require
different regulatory frameworks: large scale, green field, brown field and
small scale (mostly renewable energy).
We propose creating an annual window of about 200 MW for 5 years. The
window would specifically target renewable energy independent power
producers to sell into the grid at competitive prices under a temporary
regulatory framework that takes into account the unique requirements of small
IPPs such as: easy and appropriate grid access, known and cost based
wheeling charges, and power purchase agreements.
THE RATIONALE
Renewable energy sources are environmentally clean sources with additional
economic and social benefits. They have received considerable and growing attention
around the world the last two decades, initially because they have strong potential for
mitigating environmental impacts from electricity generation.
The so-called bulk renewable energy independent power producers, delivering
electricity to the national grids, are the focus of the present report.
Economic and social development
Renewable energy resources can be an important part of economic and social
development strategies. If appropriate market conditions are created to ensure
essential penetration of renewable energy technologies, most of the equipment may be
produced in South Africa. The world market is rapidly increasing, so there is a large
export potential. The possible impact on macro economy and employment is
substantial. At the same time, many exporting South African companies have come
under pressure from their overseas clients regarding environmental issues.
The issue of employment is found important in many countries. Although no
calculations have been made specific to South Africa, the following table summarises
studies done elsewhere and shows the potential job creation benefits of a renewable
energy strategy, when compared to either coal or nuclear power stations.
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Resource
Coal fired power plant
Photovoltaics
Solar thermal electricity
Wind-generated
electricity
Biomass-derived
electricity
Hydro-derived electricity
Information Source
New York State
American Wind
Energy Ass.
Danish Study
World Watch
Institute
[man-years, same
amount of energy]
[jobs per mil. US$
invest.]
[jobs per mil. US$
invest.]
[jobs per TWh]
6,200
13.1
7.4
13
116
14,200
10.0
14
248
542
17.0-22.6
4.0
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As many renewable energy technologies by nature are generating intermittent
electricity, they are best suited for grid-connected electricity generation, so that the
grid can function as back up in periods with low or no generation.
Some renewable energy technologies are also suited for off-grid electricity supply,
e.g. in hybrid mini-grids. A hybrid system is a combination of at least two different
generators, one being intermittent (solar, wind), the other being firm (diesel, hydro).
The latter functions as back up for the former and will therefore often be idle.
The intermittent source usually has high initial costs and low operational costs.
Because of the redundant capacity the total investment in a hybrid system is high. For
this reason, private investors are unlikely to invest in such systems.
Introduction of on-grid renewable independent power producers would help increase
the prospects for off-grid solutions. As many technological and non-technological
aspects are equivalent, a higher market volume for these technologies will encourage
a larger number of investors and manufacturers. This will increase competition and in
turn imply lower prices.
The combined higher market volume of on-grid and mini-grid technologies will also
imply that the critical volume for manufacturing the equipment in South Africa will
be reached at an earlier stage. Furthermore, a larger market will strengthen the incountry technological support (education, operation and maintenance, availability of
spare-parts etc.).
All in all, by combining on-grid and mini-grid developments, the job creation
potential is considerably improved.
Environmental benefits
Renewable energy technologies have undisputed positive impacts on local
environments. More recently the interest has also been driven by a global effort to
mitigate climate change.
In 1997 South Africa ratified the international Framework Convention on Climate
Change, one of the outcomes of the Earth Summit in Rio de Janeiro in1992 on
sustainable development. A follow-up summit, the so-called ‘Rio+10 Summit 2002’,
has been scheduled. South Africa has invited the United Nations to host this event.
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In his invitation, Minister of Environmental Affairs and Tourism, Mr Mohammed
Valli Moosa, stated: “Our planet is suffering from a depletion of non-renewable
natural resources. The loss of biodiversity, the unravelling of ecosystems, pollution of
scarce water resources and the very air that we breathe, deteriorating health, climate
changes as a result of global warming, and the corresponding threat to food
production and the life in the sea are concerns that we all share.”
Of South Africa’s total emissions of greenhouse gasses, 38% is attributed to
electricity generation. A sustainable energy strategy addressing this challenge
necessarily involves renewable energy and energy efficiency.
International mechanisms are now being developed to facilitate the transfer of
investments from industrialised countries to developing countries in renewable energy
and related technologies. Foreign investors are already looking for project
opportunities in South Africa.
Justification for preferential status
The justification for introducing policies favouring renewable energy can be defined
at two levels, creating a level playing field and assigning special status. Currently the
comparison between renewable energy and conventional generation is unfair because
the environmental costs of conventional generation are not fully accounted for, neither
in the future planning of resources nor in current pricing of generation output. In
addition comparisons are often made between renewable energy generation and
current electricity tariffs, instead of comparing the total costs of future generating
resources.
First of all, an equal level playing field has to be established. An equal level playing
field consists of several components:
Economy
Renewable energy must be given equal economic opportunities. Some of the
competing energy sources are often subsidised. All energy sources should be
compared economically using the same standards, e.g. a market based economy
without any economic incentives and disincentives (subsidies, taxes, tax
exemptions etc.).
Finance
Traditional power utilities, by virtue of being well established, usually have ready
access to less costly finance (low interest, long maturity), whereas typical
renewable energy owners only can obtain much more expensive finance.
Access to market
The electricity grid is the market place. Renewable Energy should have at least the
same access to the grid as other energy sources. The challenge is to develop a
mechanism for grid connection, which is acceptable for both the seller and the
buyer.
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Organisation
Traditional power plant operators are usually big corporations. They are very
experienced and they can afford to acquire extra technical, economic, financial,
and legal expertise. Small owners often cannot afford to acquire much expertise.
By taking up a strong international IPP developer or utility as partner renewable
energy independent power producers can compete on equal footing. The policy
choice as to whether to provide additional support is in some cases related to
whether the government wants small local enterprises to be able to enter this
market or whether they want to leave it nearly exclusively to international joint
ventures. It is clear in either case that renewable energy independent power
producers can be successful if the competition with conventional generation is
open, fair, and accounts for all the costs. Since all of these requirements are rarely
met, a set-aside is a reasonable method to both level the playing field and gain
valuable experience.
In addition, renewable energy may be given a special status, including more
incentives than other energy sources. The justification is that:




Renewable energy sources are environmentally friendly. Using renewable energy
will therefore reduce the economic burden of mitigating energy sector
environmental impacts.
Renewable energy sources are domestic energy sources, thereby saving foreign
exchange and improving the security of supply.
Disposal of biomass residues poses considerable environmental problems. Using
the residues for energy production offers a solution to these problems. However, it
may be necessary to keep some of the residues for soil protection.
World wide, renewable energy is a fast growing industry. Being pro-active in this
field therefore opens up opportunities for export industries.
SOUTH AFRICAN POLICY ON RENEWABLE ENERGY
The South African government pays strong attention to economic and social
development, but it also addresses the interdependencies and synergies between
development and the energy sector. Through these linkages the energy sector can
greatly contribute to a successful and sustainable national growth and development
strategy.
The new government has adopted a macro-economic strategy, Growth, Employment
and Redistribution (GEAR), which aims at promoting growth through exports and
investment; and promoting redistribution by creating jobs and reallocating resources
through the budget.
The advantages of renewable energy are set out in the Energy White Paper (1998),
particularly for remote areas where grid electricity supplies is not feasible. The
Government believes that renewable energy can in some cases provide the least cost
energy service, particularly when and environmental costs are included, and will
therefore provide focused support for the development, and applications of renewable
energy. Government policy is based on an understanding that renewables are energy
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sources in their own right, are not limited to small-scale and remote applications, and
have significant medium and long-term commercial potential.
In 1998, the Department of Minerals and Energy produced two internal renewable
energy strategy papers entitled "Towards an implementation plan" and also "An
implementation action plan". The intent of these documents was to further develop the
issues set out in the EWP.
The Energy White Paper encourages the entry of multiple players into the generation
market. Initially this policy will be implemented by obliging the national transmission
system to publish National Electricity Regulator approved tariffs for the purchase of
co-generated and independently generated electricity on the basis of full avoided
costs.
PERSPECTIVES WITH THE GLOBAL AGREEMENTS ON CLIMATE
CHANGE
South Africa ratified the United Nations Framework Convention on Climate Change
in August 1997, just in time to formally participate in the important 3rd Conference of
Parties in Kyoto, Japan. In keeping with their communication commitments as a party
to the Convention, the SA Government undertook the preparation of an inventory of
emissions.
In 1990, the base year for emissions reporting, South Africa emitted an estimated
(using a top-down method) total of CO2 equivalent an amount of 373,922 Gg/year for
the 3 main greenhouse gasses, CO2, CH4 and N2O. This excludes the amount
sequestered in woodlands and plantations (20,614Gg) in the same period. Of the
emissions 38% is attributed to electricity generation and 89% of the CO2 equivalent is
emitted in total from the energy sector.
The Government’s view on Climate Change Policy was delivered in the National
Assembly on 6th June 2000 by the Deputy Minister of Environmental Affairs and
Tourism, Ms. R. Mabudhafasi.
“SA’s ratification of the FCCC signifies government’s commitment to join the
global community finding solutions to the escalating greenhouse
concentrations in the atmosphere.” The Deputy Minister proceeded to list 3
areas where action would be taken including lighting and heating in homes,
energy intensive industries and the export sector. She also pointed to
“collective action” between minerals and energy, trade and industry, water
affairs and forestry, transport, and agriculture culminating in a “Response
Strategy which outline has been approved by Cabinet and is due for
finalisation in December 2000.”
The Clean Development Mechanism (CDM) is a mechanism that allows industrialised
countries to invest in carbon mitigating efforts in the developing countries in order to
supplement their domestic actions in meeting their commitments. CDM projects are
obliged to contribute to sustainable development in reducing emissions.
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It is most likely that the international market for carbon will establish the price paid
for CO2. If this assumption proves correct, the price will be subject to variations of
supply (how many and how big the projects) and demand (the interest of buyers and
technology transferors, and proximity to emission targets and the end of commitment
periods).
A quick calculation using US$10/ton CO2 would, in a wind project developed in
South Africa (coal powered electricity baseline), result in a carbon payment of US$
0.01131/kWh (equivalent to SAR 0.08/kWh). Over the life of the project, this would
imply a 20% offset of the capital cost of wind turbines. This constitutes a considerable
benefit to a renewables project.
Key to government policy implementation would be to remove barriers to the
increased use of renewables and to set achievable goals for the contribution of
renewable energy to the national energy mix.
LEGAL, INSTITUTIONAL AND REGULATORY SET-UP OF THE POWER
SECTOR
ESKOM is the national electricity supplier of South Africa. In 1999, Eskom has split
into an unregulated component (Eskom Enterprises) and a regulated component
(Eskom).
The electricity supply industry is regulated by the National Electricity Regulator,
established by the electricity act of 1987. Its routine regulatory activities include
licensing, tariff approval, handling of disputes and customer complaints, monitoring
the quality of supply and service standards and others.
The Department of Minerals and Energy prepares and suggests energy policy and
legislation to cabinet for presentation to parliament.
THE RESTRUCTURING OF THE POWER SECTOR
The South African government is currently considering implementing great change
into the electricity distribution industry and the electricity supply industry. The
overall objective of distribution reform is to consolidate the highly fragmented
industry, while the objective of the supply industry reform initiatives is to create a
more efficient and effective power supply industry.
Rationalisation of the Electricity Distribution Industry
The South African electricity distribution industry is highly fragmented. There are
substantial differences in the financial health of the 400 or so municipalities - many
distributors are not even financially viable. There is currently a wide disparity in the
prices paid by the various customer segments that cannot fully be explained by the
costs associated with serving these segments. Economies of scale, skill and
specialisation are not being captured by many of the small distributors. Furthermore,
electrification needs are unevenly distributed across regions with some of the poorer
regions having the greatest need.
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To address these concerns, Government now plans to consolidate the distribution
industry into a maximum number of financially viable regional electricity distributors.
Emerging views are that six such regional entities should be established, with each
containing a major economic centre. It is likely that the part of Eskom operating
distribution facilities will be eventually transferred to these consolidated regional
entities.
Rationalisation of the electricity distribution industry will not in itself have
considerable impact on the fate of bulk renewable energy generation in South Africa.
The soon to be created regional distributors however will naturally become the main
clients of generators producing power from renewable energy sources.
Reform of the Electricity Supply Industry
For some years now, the Government of South Africa has been considering
significant change in the electricity supply industry. To date no decisions have been
made but a likely model for reform has emerged. The likely reform path is illustrated
in Figures 1 through 3 below.
Under the Purchasing Agency model, Eskom dominates the electricity industry.
Eskom controls Generation, Transmission and the unregulated Eskom Enterprises.
Regional Electricity Distributors are in place. Any new generator entering the market
sells power to Eskom. However, the new investments into the industry are not easily
attracted because investors are concerned about the potential conflict of interest in
Eskom, as owner of Transmission as well as various generation plants. Open, nondiscriminatory access is not guaranteed. Independent power producers entering this
market would only do so on condition that long-term power purchase agreements are
established.
Eskom Holdings
Eskom Generation
Internal
Pool
Eskom Transmission
Eskom Enterprises
IPP
RED 1
RED 2
RED 3
RED 4
RED 5
RED 6
Large
customers
Customers
Figure 1: Purchasing Agency Model.
Source: Adapted from Hunt & Shuttleworth (1996)
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According to the Generation Oligopoly model, Eskom continues to control
Generation and the unregulated Eskom Enterprises. Eskom Generation units are
grouped into different clusters under the control of Eskom Holdings. These different
operating divisions bid separately to sell power to the pool. Transmission is
established as a separate state-owned company. An external power exchange is
established. According to this model, Eskom may continue to exert market power
through its various subsidiaries. Within this context, it is still unlikely that
independent power producers would invest in large generation plants.
Eskom Holdings
Generation 1
Generation 2
Generation 3
Eskom Enterprises
Power
Pool
IPP
State-owned independent transmission company
RED 1
RED 2
RED 3
RED 4
RED 5
RED 6
Large
customers
Customers
Figure 2: Generation Oligopoly Model.
Source: Adapted from Hunt & Shuttleworth (1996)
According to the Wholesale Competition Model illustrated in Figure 3, Eskom is left
with a highly diluted portfolio of generation assets (in addition to Eskom Enterprises).
The remainder of Generation is separated into a number of competitive independent
companies. These could be privatised through, for example, black economic
empowerment provisions, a private equity offering or an initial public offering.
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Eskom Holdings
Generation 1
Generation 2
Generation 3
Eskom Generation
Eskom Enterprises
Power
Internal
Pool
State-owned independent transmission company
RED 1
RED 2
RED 3
RED 4
RED 5
RED 6
Large
customers
Customers
Figure 3: Wholesale Competition Model.
Source: Adapted from Hunt & Shuttleworth (1996)
Retail competition could be introduced after this stage. It is unlikely, however, that
this will happen for some time to come.
Possible impacts of ESI reform on bulk renewable energy generation
Unbundling
In South Africa, unbundling initiatives could have significant impact on bulk
generation of renewable energy. Unbundling would be complete in the model
characterised by Figure II. Under the Generation Oligopoly model, Eskom no longer
controls transmission. ‘Fair’ access to the transmission network can be assumed.
Commercialisation and corporatisation
It is likely that commercialisation and corporatisation initiatives will have significant
effect on investment in renewables in bulk power markets because cost structure will
become more transparent and cross subsidies will be reduced or eliminated. As
Eskom moves towards more cost-reflective tariffs, investment in bulk renewable
energy generation is likely to become increasingly achievable by independent power
producers.
Competition
The introduction of wholesale competition to the South African power sector is not
likely to favour renewables in bulk power markets. Compared with long-term
bilateral power purchase agreements, short-term or spot markets make it more
difficult to finance and develop all generation options and make renewables, where
costs are often front-loaded because the costs are usually largely capital and cheap or
free fuel costs, even more disadvantaged.
Spot markets are particularly unfriendly to the development of “intermittent”
renewable resources. The inability to generate power on demand is more of a
drawback in spot markets, which places a premium on generators that can assure
power availability during peak periods.
When, and if retail competition is introduced into the power sector in South Africa,
investment in bulk renewable energy generation is even less likely to be sustained,
15
unless a considerable “green power” market develops. This would be primarily
because generators and regional distributors will be increasingly conscious about
retaining customers, and the primary determinant of this is likely to be related to the
tariff level (and perhaps service) offered.
Privatisation
Privatisation initiatives are unlikely by themselves to increase the market share of
bulk generated renewable energy generation. Independent power developers face a
highest cost of capital and a shorter repayment period than the vertically integrated
utilities.
Bulk renewable energy generators face other barriers in obtaining long-term power
contracts. Transaction costs incurred to participate in the bidding process may favour
certain technologies. Per megawatt, the costs of preparing a bid for a thermal project
are less than for a renewable project. This is because of scale and a motivation for a
special regulatory framework.
RENEWABLE ENERGY RESOURCES
South Africa is endowed with abundance in renewable energy resources most notably
solar, biomass and wind. Exploitation of these resources for energy generation
purposes has the potential to contribute up to 20% of national electricity production
by 2020.The table provides a summary of renewable energy resource availability.
Resource
Total energy contribution
(PJ/year)
1
Wind
6,2
Bagasse 2
47
1
Wood
44
3
Hydro
40
1 Based on total theoretical potential of total resource
2 Based on total energy value of current harvest
3 Harvestable potential
The renewable energy technologies that are viable in the South African context in the
medium term (5-10) years are:



Wind
Hydro
Biomass (bagasse and wood waste)
These are mature technologies that are well established internationally and South
Africa has an ample resource base.
In the longer term, the technology, which shows the highest technical potential, is
solar thermal electric or solar PV (depending on the economics). South Africa has a
very good solar energy resource that could enable low cost energy production as
technology costs continue to decline.
16
Resource availability and potential is but one of the factors that determined the
viability of grid connected renewables. In the very long run the availability and scope
of the different resources renewables and non-renewable will become a stronger
determinant. A range of factors must be considered before making a decision on the
commercial viability of grid connected power production whether from renewable
energy technologies or from other energy sources. These include factors such as
sufficient demand for power from specific customers or a electricity pool, economies
of scale, type of production (base load, peak load, intermittent or constant) and so
forth. Developing a renewable energy powered power plant invariably requires indepth local assessment of the resource for a minimum of an annual cycle. This results
in a further lengthening of the project development cycle.
The biomass sector, wood, pulp and sugar mills; could skip this extended local
resource assessment. In these sectors the resource availability is known and
determined by a controlled agricultural production process. For large scale solar or
wind plants however, on site measurements are still essential.
Non utility generation experiences in South Africa
Existing renewable energy generators
The National Electricity Regulator (NER) has licensed most existing generating plants
as electricity generators according to the Electricity Act of 1987. The Act requires
plants that generate more than 5GWh/annum for resale as well as all municipal
generators obtain an NER license. In 1995 the NER approached all the known cogenerators of electricity and the self-generating municipalities as well as Eskom as
part of the licensing process. Private generating capacity was also identified in the
process. A license is provided for a generating plant and not for an operator. Eskom
therefore has been licensed for each of its power stations. The breakdown of the 50
currently licensed power stations is
 Eskom
24 plants
 Municipal
18 plants
 Private
8 plants
Non-utility generation contributes 8.2% by power capacity (3272 MW licensed
capacity) of South African electricity generation capacity. Eskom provides the
remainder (39870MW licensed capacity), (NER “Electricity supply statistics for
South Africa”1998). Of interest to this study are the 26 non-Eskom operated licensed
plants, other existing plants which have the potential to be developed as IPPs (so
called brownfield projects) as well as a number of new or ‘greenfield’ projects.
There is no formal distinction made in South Africa between renewable and nonrenewable energy powered electricity generators in terms of generation licensing.
Generators are listed and grouped according to fuel use such as coal, hydro or gas and
utility or non-utility. It is however possible to separate out those generators that use a
renewable energy fuel source such as biomass or small-scale hydropower. The NER
has licensed 4 small hydro power plants operated by Eskom and 8 renewable energy
based non-Eskom operated power plants. Of these 4 are bagasse burning sugar mills,
3 are municipal owned hydro power plants and one is a privately owned small hydro
power station (Friedenheim Hydro).
17
Friedenheim hydro is the closest to an IPP that South Africa has at present. What
makes Friedenheim hydro unique is that it sells the bulk of its power to a third party
under a power purchase agreement and its own consumption is a small component of
the power produced. All the other plants, be it a bagasse mill or a municipal hydro
station, are owned by the purchaser of the power and only a small surplus is sold. The
table below lists licensed renewable energy power produces in South Africa. These
plants all have the potential of being turned into IPPs.
Licensed renewable energy power producers
Name
Private hydro
Friedenheim
Municipal hydro
Lydenburg
Ceres
Piet Retief
Eskom Hydro
Collywobbles
First Falls
Second Falls
Ncora
Gariap
Vanderkloff
Sugar mills
TH Amatikulu
TH Darnall
TH Felixton
TH Maidstone
Transvaal Suiker
TOTAL
Licensed
Capacity
Maximum
power
produced
Net energy
sent out
Private
consumption
Load
factor
MW
MW
MWh
MWh
%
3
2
14 434
1 041
73.7
2
1
1
2
1
1
6 000
413
2 900
0
0
0
34.2
8.6
33.1
42
6
11
2
42
6
11
2
257 544
36 792
67 452
12 264
0
0
0
0
70*
70*
70*
70*
12
13
32
29
20
174
10
7
22
20
174
43 775
27 388
79 935
79 582
628 479
43 775
27 388
79 935
44 917
231 721
51
44.7
41.5
45.4
-
*Assumed
The sugar mills show the best potential for IPPs. It is possible to increase electricity
production from the present 30kWh/ton bagasse to 120kWh using the present steam
based technology and to reach up to 460kWh/ton through advanced combined cycle
gasification processes. The sugar industry is already aware of the potential for
commercial power generation through the experiences in other sugar growing regions
such a Mauritius.
Potential and proposed IPPs
At the time of writing the NER has received licence applications or pre application
project descriptions from three potential renewable energy IPPs. Of these, DARLIPP
(5-10MW wind) and Bethlehem Hydro (10MW) are at the feasibility phase of
development and could be implemented within the next 1-2 years. The other project is
Green Energy (30MW wave), which is still in a pre-feasibility phase.
18
Apart from the renewable energy IPPs under development a number of non-renewable
energy based power projects have been submitted to the NER for licensing or as preapplication descriptions of potential IPPs. It is clear that the proposed renewable
energy IPPs are of a smaller scale than the non-renewable energy power plants. This
fact that small IPPs tend to be based on renewable energy technologies is due to the
relatively small economies of scale that can be achieved by these technologies.
It is likely that once a project such as Darling is established that many other potential
IPPs will be identified and developed. The table below lists the medium term (510years) potential for renewable energy IPPs based on a qualitative analysis of the
electricity sector and likely electricity generators
Short-term potential renewable energy IPPs in South Africa
Technology
Wind
Present
generation
0
Potential
Export date
2002
Potential
Export Capacity
5-50 MW
Constraints
Hydro
67 MW
2000
100-150 MW
Few good sites
available
Bagasse
59 MW
2002
400-600 MW
Cost of upgrading
Wood & Pulp
TOTAL
279 MW
405 MW
2002
300 – 500 MW
800 – 1 300MW
Cost of upgrading
High cost of generation
Barriers and factors influencing IPP development in South Africa
A number of factors influence the development of IPPs in South Africa. These
include:

Conflicting messages
Although the Energy White Paper sets a policy direction of encouraging ‘ the
development of renewable and environmentally sound electricity generation
technologies’ and to’ encourage more players to enter the generation industry in
order to develop a competitive power’ market’, the Electricity Act protects
Eskom’s monopoly interests. The National Electricity Regulator has not
established the conditions necessary to increase and encourage competition by for
example implementing regulations to enable long-term power purchase
agreements.

Tariffs
The main factor that is keeping new private generation development at bay is the
low cost of Eskom’s electricity at present. The incremental operational
expenditure cost of new generation ranging from hydro to coal and gas is
estimated in the range of R 0.14- 0.18/kWh. Compared with Eskom’s current
average tariff of R0.12 (1999 Eskom Annual Report), this leaves little scope for
recovering capital costs. Looking at the medium term, especially at when Eskom
generation surplus is expected to end (2005-2010) it is inevitable that electricity
tariffs will increase. The increased average tariff has been estimated at about R
0.25-0.4/kwh by 2010. This paints a completely different picture. A whole range
of generation technologies and IPP will be competitive at this range of tariffs.
19
Another consideration is the need to wheel power from the IPP through the
transmission network to a customer. The transmission network is controlled by
Eskom, which in the absence of an established wheeling tariff is at liberty to use
arbitrary wheeling charges to prevent grid access.

Project developer profile
The development of an IPP is a business venture and should therefore be driven
from the commercial and business sectors. In South Africa there is at present
little interest or involvement of the commercial sector in the development of
IPPs. The reason for this is that under present circumstances IPPs are not a viable
business venture. The country lacks the appropriate legal and regulatory
framework, the electricity sector is in a state of flux due to imminent restructuring
and there is no significant bulk demand for power. Trying to develop an IPP
under these conditions incurs long and costly project lead times with no
immediate returns.

Demand for generation capacity
The strongest incentive to bring new generation capacity online is a present or
foreseen power shortage. That situation does not exist in South Africa at the
moment. In fact South Africa currently has an excess of electricity potential to the
order of 8 000 MW. Looking into the future it is expected that South Africa will
require new base load power between 2005 and 2010 and peak power earlier than
that.

Stranded Assets
The potential threat that undercutting Eskom poses is that of stranded assets. If
more and more capacity is brought online selling power at a rate below that of
Eskom eventually demand to Eskom will decrease to such an extent that it will
have to reduce its generation levels and even shut down a power station. This
fully or partially shut down power station becomes a stranded asset.
In reality there is quite a bit of scope for bringing new capacity on line without
stranding any Eskom assets. As long as the increment at which new power is
added remains small compared to Eskom total generating capacity the stranding
impact is negligible. Adding a 5-10 MW to the system of close to 40 000Mwis
unlikely to attract much notice

Financing: Equity
International utilities with green energy targets or quotas and IPP developers are
keen to invest in commercially viable sustainable energy projects. The money is
there; we just need to get the right projects.

Power purchase agreements
Critical to the successful development of an IPP in an electricity market such as
South Africa is securing a power purchase agreement. A PPA is a contractual
commitment to buy the power produced by the IPP subject to certain conditions.
Power purchase agreements establish real revenue flows, which are considered by
lending institutions and investors in making financing and investment decisions.
In the absence of a fully functional merchant power market and excellent
20
information on energy production and demand, power purchase agreements will
remain necessary financing pre-requisites.
The Electricity Act of 1987 provides for the National Electricity Regulator (NER)
to licence all electricity generators above the threshold generation of 5 GWh/year.

Financing: Debt
South Africa has a well functioning and very competitive banking sector. Most of
the larger banks have project finance divisions, which specialise in the financing
of projects such as IPPs. These banks will be more than willing to provide
finance to IPP projects provided that the security and comfort of a power
purchase agreement can be provided

Concessionary and venture finance
An alternative to conventional project finance is to ‘subsidise’ the project through
concessionary financing. Fortunately for the renewable energy sector there is a
growing market for concessionary and venture financing available for sustainable
energy projects. This can range from Global Environmental Facility (GEF) funds
to bilateral climate change programmes such as AIJ/CDM and from development
banks such as the DBSA or venture funds such as the REEF and energy
investment services such as E&Co.
FINANCIAL AND ECONOMIC EVALUATION OF RENEWABLE ENERGY
The ”White Paper on Energy Policy for the Republic of South Africa” (1998) stated
the Government’s expectations on electricity pricing: “Price signals should result in
economically optimal investments in electricity infrastructure and consumption of
electrical energy. Government is of the view that this will generally be achieved
through the use of cost-based electricity tariffs which include capital replacement
costs (long-run marginal costs).”
On this background, the aim of the project has been to determine the Long Run
Marginal Cost (LRMC) for traditional coal-fired generation and compare this with the
LRMC of renewable energy independent power producers. The most likely future
generating resources are coal based. As such this is the appropriate comparison point
for LRMC. If South Africa includes nuclear projects in future generation options; this
would be the more appropriate LRMC comparison.
The last few years have resulted in excess capacity. At the same time the South
African Rand has devalued considerably. For these reasons, the present study has
found that international data on investment costs provide a more realistic estimate of
the LRMC than historical data from South Africa.
21
The real cost of coal-fired power generation in South Africa has been estimated at
(ZARcents per kWh):
LMRC of coal-fired
electricity generation
in South Africa
Capital cost
O&M
Fuel
Total cost
Without desulphurisation
and NOx equipment
With desulphurisation and
NOx reduction equipment
8.6
2.8
2.6
14.0
12.9
3.8
2.6
19.3
For non-utility electricity generation the White Paper on Energy Policy stated that the
tariffs shall be approved “on the basis of full avoided costs”. “By including
environmental costs into the pricing structure for further development of renewable
and environmentally benign generation technologies such as hydro, wind, solar
thermal, and waste incineration will also be encouraged”.
The direct environmental costs of coal-based electricity generation in South Africa
have been estimated to be in the order of 5 – 6 ZARcents/kWh. Including the impacts
on the global climate would add extra 2 – 10 cents/kWh.
The project has compared the real cost of coal-fired generation with renewable energy
IPPs. The results are shown in the figure below:
22
Generation costs in ZARcents/kWh
40.0
30.0
20.0
10.0
Capital cost
O&M
Fuel
Environ
CO2
Total costs
h
N
uc
l
ea
rH
ig
rL
ow
ea
N
uc
l
Ba
ga
s
se
d
W
in
H
C
oa
l
yd
ro
0.0
Losses
Total generation costs of various technologies. For each technology the column to the
right presents the total cost. For some, the cost components are shown to the left.
REVIEW OF INTERNATIONAL RENEWABLE ENERGY POLICIES
Where renewable energy use has thrived around the world, favourable energy policies
have been responsible for this growth. Governments have chosen to put supportive
policies in place to overcome market entry barriers. Barriers to widespread use of
renewable energy include:
 Traditional generation technologies such as coal appear cheaper because their
environmental impacts are not fully included in the costs;
23

Renewable energy technologies are believed to hold the best promise for
sustainable economic and social development because they minimise the hidden
human costs of pollution; and
 Current reliance on carbon based fuels is causing changes to the earth’s climate
which will prove catastrophic, wreaking social, environmental, and economic
havoc.
These policies make investments in renewable energy capacity attractive to power
producers through either subsidies designed to offset hidden environmental subsidies
of fossil fuels, or requirements for renewable energy power generation designed to
force maturation of renewable energy technologies by successive cycles of use and
improvement. In essence the justification for introducing policies favouring renewable
energy is to create an equal or “level” playing field between all resource alternatives.
It is not only important that renewable energy use be increased, but also that this
growth is sustainable. Large subsidies can foster tremendous use of renewable energy,
but since most subsidies are not sustainable, it is important for the technologies to
become cost-competitive for sustainable and commercial markets to be developed.
If the goal is to maximise renewable energy generation, then a fixed incentive or setaside should apply to all technologies. Set-asides are blocks of energy supply that are
earmarked for renewable energy capacity. Competitive bids can be used to determine
the energy supplier or standard offers can be set with energy suppliers meeting
capacity on a first-come, first-serve basis. This minimises the incentive payments for
maximum use of renewable energy, and it allows for future cost reduction of
technologies which are currently too expensive to be deployed.
If the goal instead is to deploy and begin commercialisation of certain technologies,
then individual incentives or set-asides can be set for each technology.
24
There are many methods for governments to promote renewable energy. A summary
is presented in the table below.
Tool
Production incentives
Advantages
Easy to implement,
Easy for developers,
Encourages renewable
energy production.
Disadvantages
Does not directly address
high first cost barrier.
Can be abused if incentive
too high.
Investment incentives
Overcomes high first cost
barrier
Encourages investment, not
production
Renewable Set-Asides
Allows control over amount
of renewable capacity added,
Competitive bidding
encourages cost reductions
Power Purchase Agreements
Long-term, standard
agreements help developers
and facilitate investment
Environmental Taxation
Correct energy prices
including costs of
environmental impacts
provides a more level playing
field for renewables
Can be very bureaucratic.
Bids may be controlled by
one entity.
May lead to lumpiness in
installations.
Difficult to achieve when the
electricity supply industry is
in the process of
restructuring
Taxes are often politically
unfavourable
Externality Adders
Allows for full-cost
Implementation does not
accounting in power planning always follow planning
Research, Development and
Demonstration
Builds long-term foundation
for technological and
industrial development
Government Assisted
Business Development
Builds market infrastructure
Green Marketing
Allows choice in power
purchases
Difficult to pick a
technological winner to
invest RD&D in
May be under-subscribed
Of these, the methods that have been most successful in promoting large-scale
renewable energy development are investment incentives, production incentives, and
set-asides. Some options, such as environmental taxation, RD&D, and green
marketing, have been helpful, but have not had the same impact. Other options, such
as establishment of standard power purchase agreements, may be a necessary
condition for renewable energy promotion, but they may not be sufficient.
Some international finance institutions have launched global investment and market
transformation initiatives. Otherwise, lessons learned form other countries are
25
worthwhile. The main report describes the experiences from United Kingdom, the
Netherlands, Denmark, Germany, India, and Sweden.
RECOMMENDATIONS
There are five areas according to which the recommendations can be grouped.
1. Policy and legislation – immediate initiatives
Recommendation 1: Renewable energy IPP set-aside programme
Through a cabinet memorandum set aside approximately 200 MW of generation
capacity for a transparent solicitation procedure to select the most competitive
renewable energy projects to test and expand the prospects for the development of
renewable energy IPPs in South Africa.
Eskom Transmission shall be obliged to purchase the electricity generated. The
Regional Electricity Distributors shall be enabled to purchase some of the generated
electricity, if they so wish. Award of a power purchase agreement shall be an integral
part of winning the bid.
Eskom may be enabled to establish a fraction of the set-side itself, but independent
power producers should establish most of the capacity.
Recommendation 2: Interim power purchase regulation
Develop an interim regulation regarding conditions for the grid-connection of power
from small and distributed generators to facilitate the implementation of the set-aside
programme (recommendation 1).
2. Policy and legislation – longer term initiatives
Recommendation 3: Power purchase regulation.
On the basis of the interim power purchase regulation (cf. recommendation 2) a
regulation regarding conditions for the grid-connection of power from small and
distributed generators beyond the set-aside programme should be developed.
Recommendation 4: IRP inclusion of renewable energy IPPs
Create a long-term plan for the inclusion of renewable energy IPPs into the electricity
system. The plan should be based on an Integrated Resource Planning framework that
explicitly considers environmental, social, and economic costs and benefits of
resource alternatives.
26
Recommendation 5: Electricity information
Make all essential power sector data publicly available (e.g. generation costs, future
investments, and external impacts) through a central electricity information service.
Recommendation 6: Capacity development, government
Sustainable capacity development within DME and NER seems to be a crucial
precondition for the longer-term success of renewable energy in the country. Other
relevant government and non-governmental institutions may also need strengthening
in this field.
Recommendation 7: Capacity development, civil society
Develop mechanisms to support potential owners of renewable energy IPPs and
organisations promoting renewable energy.
3. Regulation – tariffs and grid connection
Recommendation 8: Transparent licensing.
Develop transparent and accountable licensing conditions together with more
consistent IPP license procedures.
Recommendation 9: Technical grid connection code
Establish a national grid connection code, which specifies connection requirements
appropriate to the size and other characteristics of the resource and does not impose
inordinate financial or technical burdens. This includes synchronisation conditions
and rules for sharing the connection installation costs.
Recommendation 10: Renewable energy tariff structure
To ensure a development of renewable energy IPPs beyond the set-aside programme,
end-user tariffs should be set which reflect the following conditions:

The avoided-cost principle should reflect the long run marginal cost of
electricity, not only the short run marginal cost.
 IPPs situated close to loads should be credited for avoided line losses. This is in
line with the transmission network charges of the proposed wholesale electricitypricing system (WEPS) as outlined in section 6.3.1 on transmission costs.
 Tariffs should be based on full cost accounting.
 Tariffs should include environmental externalities. In case this results in overrecovering of the expenses, the surplus income can be transferred to
environmental mitigation measures.
Third party access to the transmission system and the distribution systems should
involve reasonable wheeling and banking tariffs defined by NER
27
4. Support activities
Recommendation 11: Long term barrier removal.
In parallel with the recommendations in the areas of demonstration and regulation,
and based on the experiences from the concrete projects, proper long-term and general
solutions to mitigate all essential barriers shall be systematically identified and
implemented in order to further nourish the development of renewable IPPs.
Recommendation 12: Investment capital for renewable energy
The availability and accessibility of investment capital for small project developers
should be improved. Innovative ways of accessing low-cost finance should be made
available to IPPs. Several options have been developed internationally. A project
should be launched to investigate such options and come up with recommendations in
this area.
Recommendation 13: Green power marketing
Allow a “Green Power” option to cover the incremental costs of renewable energy
power producers. The best option for a “green power” based electricity sale, within
the time frame considered for this project, would be to recruit from industrial
customers.
5. Demonstration activities
Recommendation 14: The Darling Wind Farm
Implement the Darling Wind Farm demonstration project.
Recommendation 15: Mini-hydro
Establish a mini-hydro power plant as a national demonstration project.
Recommendation 16: Cogeneration in sugar industry.
Establish a combined heat and power plant in a sugar industry using bagasse as fuel as
a national demonstration project.
Recommendation 17: Cogeneration in wood/pulp industry
A combined heat and power plant in a wood or pulp/paper industry using wood
residues as fuel as a national demonstration project.
28
1. BACKGROUND
1.1. The Rationale
Renewable energy sources are environmentally clean sources with additional
economic and social benefits. They have received considerable and growing attention
around the world the last two decades, initially because they have strong potential for
mitigating environmental impacts from electricity generation.
The so-called bulk renewable energy independent power producers, delivering
electricity to the national grids, are the focus of the present report.
1.1.1. Economic and social development
Renewable energy resources can be an important part of economic and social
development strategies. If appropriate market conditions are created to ensure
essential penetration of renewable energy technologies, most of the equipment may be
produced in South Africa. The world market is rapidly increasing, so there is a large
export potential. The possible impact on macro economy and employment is
substantial.
At the same time, many exporting South African companies have come under
pressure from their overseas clients regarding environmental issues. Successful
implementation of ISO 9000 series has become an important part of export strategies
and ISO 14000 series certifications are now being sought by firms around the world
as environmental criteria become part of standard trade considerations. ISO 14000
series have explicit energy requirements including efficiency and non-polluting
sources.
The issue of employment is found important in many countries. Although no
calculations have been made specific to South Africa, the following table summarises
studies done elsewhere and shows the potential job creation benefits of a renewable
energy strategy, when compared to either coal or nuclear power stations.
Resource
Coal fired power plant
Photovoltaics
Solar thermal electricity
Wind-generated
electricity
Biomass-derived
electricity
Hydro-derived electricity
Information Source
New York State
American Wind
Energy Ass.
Danish Study
World Watch
Institute
[man-years, same
amount of energy]
[jobs per mil. US$
invest.]
[jobs per mil. US$
invest.]
[jobs per TWh]
6,200
13.1
7.4
13
116
14,200
10.0
14
248
542
17.0-22.6
4.0
29
8
As many renewable energy technologies by nature are generating intermittent
electricity, they are best suited for grid-connected electricity generation, so that the
grid can function as back-up in periods with low or no generation.
Some renewable energy technologies are also suited for off-grid electricity supply,
e.g. in hybrid mini-grids. A hybrid system is a combination of at least two different
generators, one being intermittent (solar, wind), the other being firm (diesel, hydro).
The latter functions as back-up for the former and will therefore often be idle.
The intermittent source usually has high initial costs and low operational costs.
Because of the redundant capacity the total investment in a hybrid system is high. For
this reason, private investors are unlikely to invest in such systems.
Introduction of on-grid renewable independent power producers would help increase
the prospects for off-grid solutions. As many technological and non-technological
aspects are equivalent, a higher market volume for these technologies will encourage
a larger number of investors and manufacturers. This will increase competition and in
turn imply lower prices.
The combined higher market volume of on-grid and mini-grid technologies will also
imply that the critical volume for manufacturing the equipment in South Africa will
be reached at an earlier stage. Furthermore, a larger market will strengthen the incountry technological support (education, operation and maintenance, availability of
spare-parts etc.).
All in all, by combining on-grid and mini-grid developments, the job creation
potential is considerably improved. In this connection, it is noteworthy that there is a
large need for job creation in Western and Northern Cape, where the wind and solar
resources are highest.
1.1.2. Environmental benefits
Renewable energy technologies have undisputed positive impacts on local
environments. More recently the interest has also been driven by a global effort to
mitigate climate change.
In 1997 South Africa ratified the international Framework Convention on Climate
Change, one of the outcomes of the Earth Summit in Rio de Janeiro in1992 on
sustainable development. A follow-up summit, the so-called ‘Rio+10 Summit 2002’,
has been scheduled. South Africa has invited the United Nations to host this event.
In his invitation, Minister of Environmental Affairs and Tourism, Mr Mohammed
Valli Moosa, stated: “Our planet is suffering from a depletion of non-renewable
natural resources. The loss of biodiversity, the unravelling of ecosystems, pollution of
scarce water resources and the very air that we breathe, deteriorating health, climate
changes as a result of global warming, and the corresponding threat to food
production and the life in the sea are concerns that we all share.”
30
Of South Africa’s total emissions of greenhouse gasses, 38% is attributed to
electricity generation. A sustainable energy strategy addressing this challenge
necessarily involves renewable energy and energy efficiency.
International mechanisms are now being developed to facilitate the transfer of
investments from industrialised countries to developing countries in renewable energy
and related technologies. Foreign investors are already looking for project
opportunities in South Africa.
1.1.3. Justification for preferential status
The justification for introducing policies favouring renewable energy can be defined
at two levels, creating a level playing field and assigning special status. Currently the
comparison between renewable energy and conventional generation is unfair because
the environmental costs of conventional generation are not fully accounted for, neither
in the future planning of resources nor in current pricing of generation output. In
addition comparisons are often made between renewable energy generation and
current electricity tariffs, instead of comparing the total costs of future generating
resources.
First of all, an equal level playing field has to be established. An equal level playing
field consists of several components:
Economy
Renewable energy must be given equal economic opportunities. Some of the
competing energy sources are often subsidised. All energy sources should be
compared economically using the same standards, e.g. a market based economy
without any economic incentives and disincentives (subsidies, taxes, tax
exemptions etc.).
Finance
Traditional power utilities, by virtue of being well established, usually have ready
access to less costly finance (low interest, long maturity), whereas typical
renewable energy owners only can obtain much more expensive finance.
Access to market
The electricity grid is the market place. Renewable Energy should have at least the
same access to the grid as other energy sources. The challenge is to develop a
mechanism for grid connection, which is acceptable for both the seller and the
buyer.
Organisation
Traditional power plant operators are usually big corporations. They are very
experienced and they can afford to acquire extra technical, economic, financial,
and legal expertise. Small owners often cannot afford to acquire much expertise.
By taking up a strong international IPP developer or utility as partner renewable
energy independent power producers can compete on equal footing. The policy
choice as to whether to provide additional support is in some cases related to
whether the government wants small local enterprises to be able to enter this
31
market or whether they want to leave it nearly exclusively to international joint
ventures. It is clear in either case that renewable energy independent power
producers can be successful if the competition with conventional generation is
open, fair, and accounts for all the costs. Since all of these requirements are rarely
met, a set-aside is a reasonable method to both level the playing field and gain
valuable experience.
In addition, renewable energy may be given a special status, including more
incentives than other energy sources. The justification is that:




Renewable energy sources are environmentally friendly. Using renewable energy
will therefore reduce the economic burden of mitigating energy sector
environmental impacts.
Renewable energy sources are domestic energy sources, thereby saving foreign
exchange and improving the security of supply.
Disposal of biomass residues poses considerable environmental problems. Using
the residues for energy production offers a solution to these problems. However, it
may be necessary to keep some of the residues for soil protection.
World wide, renewable energy is a fast growing industry. Being pro-active in this
field therefore opens up opportunities for export industries.
In a comprehensive approach, such advantages should be balanced against
disadvantages, e.g. biomass fuel is a local fuel (costly to transport), and renewable
energy generators are usually not as reliable as fossil fuel generators.
1.2. Background to Project
The Danish Co-operation for Environment and Development (DANCED) was
established in 1993 as a follow-up to the United Nations Conference on Environment
and Development (UNCED) held in Rio de Janeiro in 1992. The overall objective of
DANCED is to contribute to restoring the global environment in accordance with the
recommendations of UNCED (Agenda 21). DANCED is managed by the Danish
Ministry of Environment and Energy in co-ordination with the Ministry of Foreign
Affairs.
Support to the area of sustainable energy has been on the DANCED agenda since
1995. In the 1996 Danida/DANCED Strategy for Danish Regional Environmental
Assistance in Southern Africa, "Sustainable Exploitation of Energy Sources" was
specified as a potential area for support. "Sustainable energy" is one of the four
identified themes for DANCED support in the South Africa - Danish Country
Programme for Environmental Assistance 1998-2002 (1998).
The Department of Minerals and Energy (DME) is serving as the "lead agent" for the
development of future activities for possible DANCED support.
DME and DANCED have been actively exploring support to the energy sector in
South Africa since the start of the programme in 1995. The following initiatives have
been undertaken:
32
 DANCED Programme Formulation Mission, January 1995;
 Sustainable Energy Programme Appraisal Mission, 30 September - 13 October
1995;
 Input into the South African "Energy Policy Discussion Document" on renewable
energy, November 1995;
 Energy Study Tour to Denmark, May 1997;
 Development of the REFSA Project, July 1996 - September 1997;
 Development of the Phase I Sustainable Energy and Environmental Development
(SEED) Projects, 1996 - October 1998;
 Energy Efficiency in Low Cost Housing Component of the Midrand "Green City"
Project, July 1997 - July 1998.
In 1999 DME and Danced agreed to initiate a project entitled “Background Research
Mission on Independent Power Production (IPP) in South Africa with an Emphasis on
Bulk Electricity Generated Through the Harnessing of Renewable Energy Sources”.
The objective was to clearly describe the current state of independent power
production (IPP) in South Africa with specific emphasis on the identification of
barriers to the development of bulk (grid connected) renewable energy. From this,
clear recommendations for a possible strategy for progress should be elaborated, if
deemed both appropriate and necessary.
The project started with a scoping mission 14 – 27 March 2000. During this mission a
methodology was developed and the composition of the consulting team was
finalised.
The Team has had the following members:
 Jorgen Boldt, Ramboll, Denmark (Team Leader). Replaced Jorgen Hvid, also
Ramboll, in July 2000.
 Terry Oliver, International Institute for Energy Conservation (IIEC), Bangkok,
Thailand.
 Frank Hochmuth, MEPC (Minerals & Energy Policy centre) Associate,
Johannesburg.
 Alix Clark, independent consultant, Cape Town. Until August 2000 with the
Energy & Development Research Centre (EDRC), University of Cape Town.
 Justice Mavhungu, Energy & Development Research Centre (EDRC), University
of Cape Town.
 Anton-Louis Olivier, energy & environmental management (e3), Menlopark.
From September 2000 with the UNEP Collaborating Centre on Energy and
Environment (UCCEE), Denmark.
 Steve Thorne, Energy Transformations, Cape Town.
 Douglas Banks and Jason Schäffler, Rural Area Power Solutions (Pty) Ltd
(RAPS), Pretoria.
 Lars Monsted, Ramboll, Denmark
33
2. SOUTH AFRICAN ENERGY POLICY AND
RENEWABLE IPPS
The emerging energy supply industry in the Transvaal and Southern Rhodesia at the
beginning of the last century was non-regulated and private. A number of independent
power companies existed in the time period from 1882 until 1900. Most of these
companies operated power stations for a dedicated purpose: the provision of
streetlights, or the provision of power to mines. Power systems were not networked
but isolated from each other. It is interesting to note that at that time South Africa was
already technologically up to standard with the rest of the world: Kimberley had
electric streetlights before these were introduced in London.
Initially, the use of electric power was largely restricted to illumination and driving
small mining equipment. However, in the beginning of the 20th century, the power
requirements of the mining companies increased because of increased challenges in
the exploitation of gold deposits and availability of new technology. This eventually
led to the establishment of the Victoria Falls and Transvaal Power Company Limited
in 19061. The VFP bought out a number of independent power companies such as the
Rand Central Electric Works and the General Electric Power Co Ltd. By 1915, four
thermal power stations had a total installed capacity of 160 MW.
The Power Act introduced on 28 May 1910 by the Transvaal Colonial Government
limited the future existence of the VFP. It authorised the expansion of the company,
but provided for the state's expropriation of all electricity companies after a period of
35 years. This is most likely the first interference of the government in the provision
of electricity for control reasons.
From then on, government became increasingly involved in the provision of electric
power. The government commissioned studies to assess the country's electrification
prospects and passed an electricity act in 1922. This was shortly followed by the
establishment of The Electricity Supply Commission (ESCOM) in 1923, which was
made responsible for establishing and maintaining electricity supply on a regional
basis.
The above story is not unique to South Africa. All over the world, the development of
power supply followed similar events. Electricity was seen to important to the
industrial development of nations to leave it totally to the private sector. However,
there are two things that need to be considered:


The then governments were able to act very swiftly because they were mostly not
democratically elected, i.e., they were able to operate in a business-like manner.
The power relationship between government and the private sector was very
different than it is today.
Today, a well-regulated private power sector has internationally proven to be the best
vehicle for the provision of sustainable and reliable power supply service. Modern
1
Source: Eskom heritage publication. The Power company was actually first called Victoria Falls Power
Company Limited because it had the intention of harnessing the power of the Victoria Falls, a concept
that was soon abandoned.
34
governments do not choose to become involved in the operations of power supply
companies, but focus on channelling the drive into the direction needed by the country
through appropriate regulatory frameworks.
2.1. A historical review
2.1.1. Pre-regulations
In the beginning electricity was generated and supplied without any regulation.
Available end-user energy consisted of primary energy sources such as coal, wood
etc. Electricity was slowly introduced when the discovery of gold on the
Witwatersrand in 1886 led to Johannesburg installing an electricity reticulation
system in 1891.
In 1889, the company Siemens & Halske was granted the concession to supply
electricity to Johannesburg and Pretoria. This company also obtained a concession to
transmit electricity to the mines of the Witwatersrand in 1894.
South African mining companies realised that the power generated by steam engines
for street lighting was inadequate for their needs. They joined forces to build small
"power stations" to supplement existing supplies of electricity. The notion of a central
electricity undertaking gained the support of businessmen, engineers and others. This
culminated in the establishment of the Victoria Falls Power Company Limited (VFP)
on 17 October 1906.
Shortly after the Anglo-Boer War, expert opinion recommended that large centralised
power stations would supply more reliable and cheaper electrical power than small
dedicated power stations. Power became rapidly and increasingly more important and
by 1915 four thermal power stations collectively had a total installed capacity of more
than 160 megawatts. South African Energy Policy grew out of a need to control the
operation of the first ever power company that operated in South Africa, the VFP.
2.1.2. First power act
The Power Act, introduced on 28 May 1910 by the Transvaal Colonial Government,
limited the future existence of the VFP. The Act authorised the operational expansion
of the VFP, but provided for the State’s expropriation of the company, or any other
electricity undertaking, after a period of 35 years. The State viewed the provision of
electricity as a public service under its authority.
Charles Hesterman Merz, a universally recognised expert in power station design and
electrification of railways, visited South Africa in 1918 and 1919 to assess the
country’s electrification prospects. A government-appointed committee investigated
the implications of the Merz Report. The findings of this committee led to
government passing the Electricity Act in September 1922.
35
2.1.3. Establishment of Eskom
The government announced in the Government Gazette of 6 March 1923 the
establishment of The Electricity Supply Commission (Escom), effective from 1
March 1923. The Commission was responsible for establishing and maintaining
electricity supply undertakings on a regional basis. Electricity supplied to government
departments, railways and harbours, local authorities and industry was to be efficient,
cheap and abundant. In 1925, the Commission obtained four power supply licences. A
year later it commissioned two coal-fired power stations. Two years after that, it
commissioned two more coal-fired power stations.
Despite the serious consequences of an economic depression (c. 1930), Escom’s
electricity sales increased though power supply system expansion was delayed.
However, the discovery of new gold fields to the west of the Witwatersrand and a rise
in the gold price brought new life to the electricity supply industry.
Demand from new gold fields in the Orange Free State, and applications from towns,
mines and industries for electrical power supply, led to the expansion of Escom’s
licensed area by 41 000 square kilometres.
2.1.4. Monopoly of Eskom
In accordance with conditions first stipulated in the Power Act of 1910 and included
in the Electricity Act of 1922, in 1948 Escom expropriated and took over all assets of
the VFP. The monopoly of Escom, later called Eskom, started. Increasing electricity
demand from industrial growth challenged Escom in the post-war period. Between
1945 and 1955 the capacity of Escom’s power stations more than doubled.
Eskom established a national power network in the 1960s. This network was destined
to link the Transvaal power stations with the Cape Province undertaking.
2.1.5. First restructuring of Eskom
In 1985, Escom was restructured to meet the electricity demands of a changing South
Africa. In 1986 the last White Paper on energy policy was published in the apartheid
era. An Electricity Council (appointed by the government) replaced the Electricity
Supply Commission (Escom). In 1987, Escom was renamed Eskom.
2.1.6. Post-Apartheid era: NER founded
The general approach to policy formulation changed. It and places greater emphasis
on transparency, inclusiveness and accountability.
In response to democratisation, a number of negotiating processes began
spontaneously within the energy sector, usually in stakeholder-based forms such as
the Liquid Fuels Industry Task Force and the National Electrification Forum.
Government's wish to integrate these and provide policy stability led to it formally
launching the energy policy white paper process in 1994. The Government released
the Energy White Paper in 1998.
36
Already by 1992, almost one million more people were receiving an electricity supply
and 260 electrification projects were underway. Eskom decided that a reduction in the
real price of electricity would stimulate economic growth in South Africa. Eskom’s
efforts resulted in the lowest tariffs in the world.
Low incomes meant people could not afford electricity and therefore used other
heating fuels. This contributed to natural vegetation degradation, and increased
respiratory diseases from generation air pollution
At a National Electrification Forum (NELF) meeting in 1994, the Government
adopted a recommendation to replace the Electricity Control Board with a National
Electricity Regulator (NER). A levy imposed on electricity generators funds The
NER. All customers of electricity pay the cost. Customers of electricity therefore pay
for the protection that they receive from the NER, and the general body of taxpayers
is relieved of this obligation. (More information about the NER is in chapter 3)
The NER was empowered to ensure the orderly, effective generation and distribution
of electricity throughout South Africa. Eskom took over the distribution responsibility
in a number of municipalities. It continues to devote attention to improving the quality
of supply, metering and billing systems. Since 1995, about 800 more households have
been connected every working day.
2.1.7. Splitting up of Eskom
In February 1999, the Minister for Public Enterprises and Eskom’s Chairman
announced that Eskom would be restructured into two main divisions. Eskom’s new
strategic intent is “To be a pre-eminent African energy and related services business,
with global stature.” Eskom Enterprises was relieved of any regulatory requirements
and is positioned to take Eskom’s influence into Africa. Organised labour accepted
this restructuring in August of 1999.
2.2. South African Energy Policy
The South African government policy pays strong attention to the development of the
energy sector, but it also addresses the interdependencies and synergies to other
economic sectors. Through these linkages, the energy sector can greatly contribute to
a successful and sustainable national growth and development strategy.
The new government has adopted a macro-economic strategy, Growth, Employment
and Redistribution (GEAR), which aims at promoting growth through exports and
investment; and promoting redistribution by creating jobs and reallocating resources
through the budget. GEAR replaced the first reform programme devised by the new
government, the Reconstruction and Development programme.
Energy policy has been recognised as an important factor contributing to economic
growth and employment creation aims. The rural electrification targets of the
Reconstruction and Development programme are an example of energy policy and
social and economic development linkages. The Government corporate governance
37
protocol for state-owned entities, including the energy sector, takes the focus further
by including a programme on the restructuring and privatising of national assets.
The privatisation drive and the opening up of the South African economy have
created a much more complex environment of energy supply, demand and pricing that
demand more intricate energy sector decisions.
Because the South African economy is opening up, international factors now more
transparently influence the energy sector. Significant shifts have occurred in
international energy policies since the oil crises. South Africa is gaining valuable
information from these international learning curves. Perhaps the most significant
international shift is using greater supply diversification and flexibility to achieve
energy security. As a consequence the international energy sector is relying
increasingly on market-based pricing. To compete in this context, South Africa is
intensifying its commercialisation efforts the energy sector. The creating effective and
competitive energy markets in a previously monopolistic environment requires setting
up regulatory regimes in a speedy and sophisticated manner.
The regional integration of South Africa's energy decisions, regulations and
operations is an important consideration. In the Southern African region, the Southern
African Development Community (SADC) has decided to adopt an energy cooperation policy and strategy.
In contrast to other sections of the economy, the energy sector has in many cases
larger environmental impacts than most other economic sectors. Due to the
heightened awareness of these environmental impacts, investments in energy are
increasingly subjected to greater environmental scrutiny. In this context, energy
policies increasingly target to reduce emissions and adverse environmental impacts of
energy operations and energy usage. One of the avenues pursued is to promote
research and development of alternative and renewable energy sources. In recent
years several renewable off-grid energy projects have been planned and begun.
However, most of these initiatives focus on off-grid renewable energy supply, mainly
targeted at small, decentralised units that operate at very high marginal costs and only
generate a small amount of the potential energy requirements.
2.3. Renewable energy policy
2.3.1. The Energy White Paper
The ”White Paper on Energy Policy for the Republic of South Africa”, published by
the Department of Minerals and Energy, December 1998, is the most recent and
comprehensive energy policy document for South Africa.
One of five energy sector policy objectives is: “Given increased opportunities for
energy trade, particularly within the Southern African region, government will pursue
energy security by encouraging a diversity of both supply sources and primary energy
carriers” (page 12).
38
Some of the medium-term policy priorities are (page 14-15):
 “Stimulate the development of new and renewable sources of energy”
 “Adjust electricity market structures to achieve effective forms of competition”
 “Establish regulations which promote a cost-of-supply approach to electricity
pricing for non-domestic consumers”
 “Investigate an environmental levy on energy sales to fund the development of
renewable energy, energy efficiency and sustainable energy activities”
The issue on electricity pricing is further elaborated on page 39: “Price signals should
result in economically optimal investments in electricity infrastructure and
consumption of electrical energy. Government is of the view that this will generally
be achieved through the use of cost-based electricity tariffs which include capital
replacement costs (long-run marginal costs).” On how quickly this can be achieved,
the paper notes: “cost-reflective tariffs will be applied at electricity distributor supply
points in due course” (page 40).
For non-utility generation, the tariffs shall be approved “on the basis of full avoided
costs”. “By including environmental costs into the pricing structure for further
development of renewable and environmentally benign generation technologies such
as hydro, wind, solar thermal, and waste incineration will also be encouraged”. (page
42).
However, “South Africa has to maintain the competitive advantage of low, stable and
cost-reflective electricity prices” (page 28), and “recognising that many households
are presently unable to afford cost based tariffs, government acknowledges that
moderately subsidised tariffs for poor domestic consumers are necessary for equity
reasons.” (page 39)
On electricity transmission, the White Paper states (page 44): “Government will
legislate for transmission lines to provide for non-discriminatory open access to
uncommitted capacity, transparency of tariffs, and disclosure of cost and pricing
information to the National Electricity Regulator.”
2.3.2. Renewable energy according to the Energy White Paper
The advantages of renewable energy are set out in the EWP, particularly for remote
areas where grid electricity supply is not feasible. Government believes that in some
cases, renewable energy can provide the least cost energy service, particularly when
social and environmental costs are included, and will therefore provide focused
support for the development, and applications of renewable energy.
This narrow view reflects the hesitance of trying out unfamiliar technologies within a
changing paradigm of increasing social and environmental linkages and concerns. It
is good that the government recognises that renewables can be least cost. It is less
clear that the government or electric sector institutions fully understand the
relationship between actually including environmental costs in energy decisions, and
optimising the benefit cost ratios for energy decisions. It is good news that the
government will support production of solar power and non-grid electrification
systems, such as the further development of home solar (SHS), solar cookers, solar
39
pump water supply systems, solar systems for schools and clinics, solar heating
systems for homes, hybrid electrification systems, and wind power.
All of the above will be largely targeted at rural communities. Power from the Cahora
Bassa hydroelectric scheme, and other similar options, in southern and central Africa
will be tapped, if suitable agreements can be worked out between the participants at
government level. Government will promote appropriate standards, guidelines and
codes of practice for renewable energy and will establish renewable energy
information systems.
Government policy on renewable energy is thus concerned with meeting the
following challenges:




ensuring that economically feasible technologies and applications are
implemented;
ensuring that an equitable level of national resources is invested in renewable
technologies, given their potential and compared to
investments in other energy supply options; and
addressing constraints on the development of the renewable industry.
Government policy is based on an understanding that renewables are energy sources
in their own right, are not limited to small-scale and remote applications, and have
significant medium and long-term commercial potential.





Government will provide focused support for the development, demonstration and
implementation of renewable energy sources for both small and large-scale
applications.
Government will support renewable energy technologies for application in
specific markets on the basis of researched priorities.
Government will facilitate the production and management of woodlands through
a national social forestry programme for the benefit of rural households, where
appropriate
Government will promote the development and implementation of appropriate
standards and guidelines and codes of practice for the correct use of renewable
energy technologies
Government will establish suitable information systems of renewable energy
statistics, where justifiable, and will assist with the dissemination thereof.
2.3.3. The renewable energy strategy of the DME
In 1998, on the basis of the long-awaited but not yet published white paper, the DME
produced two internal renewable energy strategy papers entitled "Towards an
implementation plan" and also "An implementation action plan". The intent of these
documents was to further develop and concretise the issues set out in the EWP.
The first paper starts out by summarising the availability of renewable resources in
South Africa, and setting the requirements into the macro context of the South African
socio-economic situation. It gives a list of end-user requirements linked to renewable
energy as immediate market areas to be focused on. The list addresses the market
areas in terms of institutional and infrastructure support requirements, and also in
40
terms of domestic, agricultural, commercial, and industrial requirements. The items
on this list can be grouped into two areas:


off-grid energy, with solar playing the biggest role, mainly for underdeveloped
rural areas but also for commercial applications such as telecommunications
energy efficiency issues, such as passive thermal design of housing
The list does not include wind energy or other grid-connected renewable sources,
except for co-generation. This is in line with the EWP, which has the same priorities,
and reinforces the priorities set out in the EWP.
The second paper depicts a prioritisation of issues to be addressed by the DME in
form of an eight-point action plan. The eight points are:
1. Establishment of a national energisation agency
2. Accessing the Global Environment Facility and other international resources to
expedite renewable energy implementation
3. Implementation of non-grid technologies as a complementary element of the
national rural electrification programme
4. Energisation - the provision of rural energy services
5. Passive solar design of houses for thermal efficiency
6. National solar water heating programme
7. A national public education and marketing campaign on renewables
8. Feasibility studies
Much attention and detail is given to item number three on this list as it addresses the
key objective of the EWP paper in terms of overcoming the inequalities of the past.
Item no 8 (feasibility studies) includes wind energy and also specific support for the
Darling wind project in the form of facilitating a long-term Power Purchase
agreement with Eskom and moral support. Furthermore, the paper recommends the
initiation of a process aiming at the development of a national wind energy strategy.
Other technologies cited under "feasibility studies" are solar thermal power
generation, solar cooking and micro-hydro schemes.
2.3.4. Non-utility generation
The EWP encourages the entry of multiple players into the generation market.
Initially this policy will be implemented by obliging the national transmission system
to publish National Electricity Regulator approved tariffs for the purchase of cogenerated and independently generated electricity on the basis of full avoided costs.
The purpose of this policy is to:



improve energy and capital efficiencies in the national interest;
encourage the development of renewable and environmentally sound electricity
generation technologies; and
encourage more players to enter the generation industry in order to develop a
competitive power market.
41
This policy will enable the economic exploitation of the significant available potential
for non-utility generation in South Africa. Research has indicated that a technical
potential of as much as 6 000 MW of non-utility generation could be exploited. By
including environmental costs into the pricing structure the further development of
renewable and environmentally benign generation technologies such as hydro, wind,
solar thermal, and waste incineration will also be encouraged.
This policy forms part of the integrated resource planning approach to electricity
supply. Implementation should thus be overseen by the National Electricity Regulator
who will be responsible for finalising the details of the methodology for calculating
the full avoided costs of non-utility generation.
It is expected that this policy will encourage further energy-efficient generation option
exploitation, increase competitive pressures on Eskom and provide the National
Electricity Regulator and government with invaluable experience that would be useful
should fundamental change towards a market-based electricity supply industry be
introduced later.
2.4. The international Framework Convention on Climate Change
2.4.1. South Africa’s position towards climate change
South Africa ratified the United Nations Framework Convention on Climate Change
in August 1997, just in time to formally participate in the important 3rd Conference of
Parties in Kyoto, Japan. In keeping with their communication commitments as a party
to the Convention, the SA Government undertook the preparation of an inventory of
emissions.
In 1990, the base year for emissions reporting, South Africa emitted an estimated
(using a top-down method) total of CO2 equivalent an amount of 373,922 Gg/year for
the 3 main greenhouse gasses, CO2, CH4 and N2O. This excludes the amount
sequestered in woodlands and plantations (20,614Gg) in the same period. Of the
emissions the 37.7% is attributed to electricity generation and 89% of the CO2
equivalent is emitted in total from the energy sector see table 1 below, which shows
an estimate of emissions based on a bottom up approach:
Table: 1990 emissions in South Africa
Source
Amount
Gigagrams
Electricity generation
137,333
Heat production
31,669
Manufacturing
25,498
Transport
33,754
Other energy
25,492
Fugitive
36,146
Industrial processes
24,165
Agriculture
41,254
Waste
8,910
% of total in 1990
37.7
8.8
7.0
9.3
7.0
9.9
6.6
11.3
2.4
42
South Africa is by far the largest emitter of GHGs in Africa and is as such considering
its leadership amongst African countries amongst the G77 + China negotiating block.
However, South Africa’s recent ratification of the Convention has resulted in a rather
uncertain start in climate politics manifested in the current scramble for policy
direction currently co-ordinated through the multi-sectoral advisory body, the
National Committee on Climate Change (NCCC).
The Deputy Minister of Environmental Affairs and Tourism, Ms. R. Mabudhafasi
delivered the Government’s view on Climate Change Policy in the National Assembly
on 6th June 2000.
“SA’s ratification of the FCCC signifies government’s commitment to join the
global community finding solutions to the escalating greenhouse
concentrations in the atmosphere.”
The Deputy Minister proceeded to list 3 areas where action would be taken including
lighting and heating in homes, energy intensive industries and the export sector. She
also pointed to “collective action” between minerals and energy, trade and industry,
water affairs and forestry, transport, and agriculture culminating in a “Response
Strategy which outline has been approved by Cabinet and is due for finalisation in
December 2000.”
What is clear from these policy statements is that, despite SA being a non-annex 1
country and therefore not obliged under the convention to meet emissions reductions
targets, it realises its exposure to markets where emissions reductions commitments
have been made. In operationalising these commitments the fossil energy intensity of
these economies will have to be reduced, impacting on oil and coal imports and
potentially the embodied energy intensity of imports to committed markets. On both
counts SA with its coal energy intensive economy appears to be threatened and wants,
prior to sanctions being imposed, to show that it is seriously undertaking an overhaul
of its emissions. But then also not too seriously, as SA does not want to sell off the
“low-hanging fruit” or cheap mitigation options. Nor does SA want to reduce the
“dirty” baselines, prior to the second commitment period beyond 2012, by which
time, no doubt, some level of commitment from non-Annex 1 countries would have
been negotiated.
For the climate-related project developer this approach poses a difficult balancing act.
The task is to design sufficiently large projects to be taken seriously, but not to do so
much as to be accused of “eating the low-hanging fruit”. It is also important not to
shift the baseline lower (in effect shifting the average in such a way as to lower the
future certified emissions reductions.) On the other hand, the project developer would
also like to galvanise increased investment in response to climate change, initiating
domestic action that delivers cleaner services rather than banking on future options. In
effect, banking this opportunity would be to sentence countries and their citizens to
dirty and costly production methods and unhealthy living conditions in the short term.
Alternatively if the ratified Kyoto protocol allows for it, unilateral investments and
the banking of credits could occur in non-Annex 1 countries. This type of approach
would be consistent with the technology transfer commitments expressed under the
UNFCCC articles 4.2 and 4.3. Here, developed country parties commit themselves to
providing “such financial resources, including for the transfer of technologies, needed
by developing country Parties to meet the agreed full incremental costs of
implementing measures that are covered by paragraph 1”.
43
2.4.2. State of the art of the CDM mechanism
Very little can be said about what has been decided about the CDM other than what is
written in the Kyoto Protocol predominantly under article 12. However, an
unprecedented intensity of debate has surrounded this flexibility mechanism since it
was given skeletal form in Kyoto. The CDM mechanism allows annex 1 and nonannex 1 countries to combine efforts in a “common but differentiated” effort to reduce
emissions. In short, the CDM is unprecedented in that it elevates the issues of climate
and sustainable development to the same level. The CDM allows Annex 1 countries to
invest in carbon mitigating efforts in the non-annex 1 countries in order to supplement
their domestic actions in meeting their commitments. CDM projects are obliged to
contribute to sustainable development in reducing emissions. Key unresolved issues
are:









How much activity should supplement domestic action should be allowed?
Should CDM be the only mechanism levied to cover the costs of adaptation?
What baseline methodology should be used for assessing emissions reductions and
sustainable development?
Who should measure quantities of emissions reduced and contributions to
sustainable development?
What technologies should not qualify? Large dams? Nuclear plants? Clean coal?
Oil production/refining efficiencies? Sinks?
Will CDM supplement existing Official Development Assistance and Global
Environment Facility grants?
Will CDM find destinations in the least developed countries? Or will a regional
quota be required? If so how will the Private sector respond to this and other rules
that they fear will contribute to overly costly transaction costs?
Will uni-, bi and multilateral modalities be allowed for CDM?
What will be the penalty for meeting emissions reductions obligations under the
protocol?
What is clear is that grid connected renewables are probably one of the safest options
that will satisfy the requirements of CDM. They will reduce emissions and contribute
to sustainable development (at least in terms of employment creation and reducing
local emissions.) and have baselines which are fairly simple to estimate with
accuracy. The CDM has been a beacon of hope for those interested in stemming the
shrinking streams of Official Development Assistance (ODA). The debate has shifted
from one of collaboration with the south in assisting the north, to one of undue haste
required in getting the streams of finance to start flowing to all manner of
infrastructure projects that are primarily focussed on development with climate a
secondary motivator.
Expectations are high on what the CDM will deliver – optimistic estimates put flows
of resources between US$24 and US$37 billion over the next 10 years. Whatever
happens CDM will take further shape in Lyon in September 2000 and Den Haag
November 2000, and beyond that to Rio +10 (2002) by which time, it is hoped, and
the EU are lobbying for this, the Kyoto Protocol and with it the CDM, will be ratified.
CDM projects, however can be credited retrospectively from the beginning of 2000
on despite the protocol having not being ratified.
44
The Subsidiary Body For Scientific And Technological Advice reported (meeting in
Lyon, September 2000) that the Parties were able to reach agreement on the following
key themes: technology needs and needs assessments; technology information;
enabling environments; capacity-building; and mechanisms for technology transfer.
2.4.3. The potential role of the CDM in the promotion of renewables
It is most likely that the international market for carbon will establish the price paid
for CO2. If this assumption proves correct, the price will be exposed to the varieties of
supply (how many and how big the projects) and demand (the interest of credit buyers
and technology transferors and proximity to targets and to the end of commitment
periods). However, in establishing what price will be paid for Greenhouse gases in the
design of renewable energy projects, there are a few pointers that could assist the
project designers:



The Dutch Energy Research Foundation (ECN) estimates, based on 79 AIJ
projects, that suggests that prices between US$4 and US$10/ton CO2 equivalent
are reasonable. The Dutch Government, through their Department of Foreign
Affairs, is offering US$10/ton for carbon through both JI and CDM equivalent
routes.
The World Resources Institute quotes Zhang’s estimates of prices between
US$3.50 and US$12.6/ton of carbon, depending on the policy scenario. He then
quotes the Dutch purchase tender for Emissions Reduction Units (ERUs) (not
Certified Emissions Reductions (CERs)). between EUR 4.54 to 9.08 per ton CO2
(not carbon).
UNFCCC reports talk of abatement costs (not market prices) of between US$4
and US$8(per ton CO2) for AIJ afforestation and deforestation projects.
A quick calculation using say US$10/ton CO2 would in wind project developed in
South Africa (coal powered electricity baseline) results in a subsidy of US$
0.01131/kWh (at SAR 7 per US$ this is equivalent to SAR 0.08/kWh2). Over the life
of the project, this would imply a 20% subsidy of the capital cost of wind turbines.
This constitutes a considerable subsidy to a renewables project. (See calculations
presented in annex 1)
2.4.4. CDM benefits for renewable IPPs
The SA delegation to attend the Lyon 13th Subsidiary Body meeting will be
presenting inputs to the debate on vulnerability and adaptation, contained in articles
4.8 and 4.9 of the UNFCCC and 3.14 of the Kyoto Protocol. The introduction of the
draft SA position reads “South Africa’s vulnerability is not only confined to the
negative impacts of climate change itself, but also to mitigation actions taken by
Annex 1 countries. It is clear that in terms of vulnerability, South Africa meets five of
the seven criteria set out in Article 4.8, in particular sub-paragraphs (e) and (h).”
Under the title Adverse Impacts and Response Measures the text continues as follows:
“The initiation of concrete actions aimed at the diversification and expansion of the
2
This is higher than the short run marginal costs of electricity production in South Africa!
45
economies of non-Annex 1 countries highly dependant on fossil fuels by the use of
inter alia, the financial mechanism under the Convention and the flexibility
mechanisms under the Kyoto Protocol, especially the Clean Development
Mechanism.” These mechanisms can be used to facilitate, in particular, the transfer of
technology. This can be achieved by (amongst others):

Conducting technology needs analyses (through regional or national centres). The
national priorities and needs of countries should dictate technology choices.
Criteria for the acceptability of technologies should be established by individual
countries in order that they meet specific needs and are proven for the particular
application.”
The South African delegation appears determined to argue to the international
community that its use and export of coal not be tampered with. This approach
understandably creates a tension between SA and the spirit of the convention akin to
that of the oil dependent countries.
The extent to which CDM will improve the competitiveness of renewable energy
depends upon the price the renewable energy generated electricity is sold at. If for
example Eskom purchases the electricity at the avoided cost of mining coal and
transporting this to the Mpumalanga power stations, the short-run marginal cost of
electricity generation would be in the order of SAR0.02 per kilowatthour. The
renewable energy producer could argue that replacement cost of the proposed pebble
bed reactors proposed for the western Cape. The costs of production for these
prototype plants are in the region of US$0.0243 and 0.0427 per kilowatt hour (Eskom
and MIT estimates presented in the World Energy Assessment 1999). Income from
sales of electricity is estimated between 10% and 70% of the costs. In both cases a
subsidy of 20% is significant.
Alternative scenarios could include the sale of the electricity to a private purchaser
who is interested in an export market in which renewable energy fuelled production
processes carry addition value. Finally, there exists a possibility of sale of electricity
to municipal electricity distributors. In this last case the principle would undoubtedly
be where the customers would not be penalised by higher prices than that which the
municipality would otherwise pay for the renewable energy generated electricity.
2.4.5. Requirements to policy framework and regulatory framework
Key to government policy implementation would be to remove barriers to the
increased use of renewables and to set achievable goals for the contribution of
renewable energy to the national energy mix. It is hoped that these issues will be
raised in the country and policy studies currently underway in South Africa.
Barrier removal could be in a number of areas, including financial, institutional,
human capacity, and technical. The global environment facility would readily provide
support to undertake barrier removal projects if government was in accord.
The second main policy area is to set goals. The government needs to be convinced
that a move towards renewables is consistent with using South Africa’s international
competitive energy advantages and does not threaten the SA economy. Rather, the use
46
of solar and wind energy puts the country on a path that utilises another of South
Africa’s abundant naturally occurring resource advantages. To convince policy
makers that the future of energy will shift towards renewables as a result of
international governance in the climate and at a national level, the use of non-tariff
barriers as a way of protecting markets and limiting unwanted additions to the carbon
emissions inventory. The incentives in the form of GEF support and the potential to
describe the projects as qualifying for CDM will all add to a sustainable argument.
2.5. Policy barriers and deficits
The post-apartheid economy and correspondingly also the energy white paper are
characterised by a comprehensive set of demands from different sides. These can be
summarised as follows (as outlined in the energy white paper):
1.
2.
3.
4.
5.
Increasing access to affordable energy services
Improving energy governance
Stimulation of economic development
Managing energy-related environmental and health impacts
Securing supply through diversity
Notably, some of the most important issues relevant to Renewable Energy IPPs are
clearly and specifically supported in the EWP:



Government will encourage competition within energy markets (EWP page 12)
Government will provide focused support for the development, demonstration and
implementation of renewable energy sources for both small and large-scale
application (EWP page 91)
Government will support renewable energy technologies for application in
specific markets on the basis of researched priorities (EWP page 91-92)
What the EWP does not address, however, are more proactive and practical issues as
to how the above goals of implementation of renewable energy power production will
be achieved.
Because of the emphasis on economic viability in the short-term, the priorities of the
renewable energy policy are showing a clear focus on the provision of off-grid energy
for rural areas.
In addition, Eskom presently has a substantial over capacity which is partly a result of
poor planning and partly because of the Asian crisis since 1997 which has resulted in
a significant drop in demand and prices for resources (metals and other). Asia, and in
particular Japan, is one of the top export region for resources and since the Japanese
economy is still stagnating, resource prices and production in South Africa have not
yet reached their pre-crisis levels. Because of the energy-intensive nature of the
mining industry, this results in a significantly lower energy demand and thus excess
capacity.
On the other side, Eskom has taken steps to address the electricity planning for the
long term. It has embarked on a project investigating a number of technology options
47
for future electricity generation, of which the nuclear technology was favoured. In the
light that international trends are clearly phasing out this technology for a number of
reasons, it is not clear, whether sufficient foresight and a non-biased decision process
have been employed, when evaluating the options under investigation.
Generally, the EWP and renewable energy policy in South Africa have the following
shortcomings:





There is too much technology focus. The real challenges for South Africa,
however, are embedded in the management of technology and not the technology
itself
There is too much focus on investigating the feasibility of options. Many of the
technologies are mature and could readily be demonstrated in order to be gain
experience and understanding of costs and benefits in the South African context.
There is not sufficient focus on renewable energy overall as a long-term energy
solution.
The EWP sees renewable energy as something the development of which 'must be
monitored'
Although not being very specific about the topic, the EWP does not seem to
include grid-connected renewable energy as a priority technology.
In summary, the EWP is very broad and all-inclusive. There is not sufficiently clear
commitment towards specific strategies and solutions, as the paper tries to
accommodate everything and everyone. It is clear that decisions will have to be made
that require more specific policy support
A last point worth mentioning is the lack of public debate in South Africa.
Internationally, renewable energy implementation, and in particular grid-connected
power schemes, has been driven bottom-up by an informed urban population. Except
for a small minority interested in renewable energy, the issue is not top of the agenda
for a large part of society as it is in many other countries. Together with the facts that
South Africa has excessive surplus generating capacity, little environmental
awareness, and a great deal of economic problems, bulk renewable energy systems are
seen as something that does not address the problems at hand.
References:
1.
2.
3.
4.
Andrei Ileana. Personal communications 2000.
Dutch Energy Research Foundation (ECN). Personal communications 2000.
Eskom 1995. Eskom Statistical Yearbook, 1994.
Fecher R 1999. Financial protocol for South Africa’s climate change mitigation
assessment. Energy & Development Research Centre. University of Cape Town.
5. International Energy Agency 1999.
6. World Energy Assessment 1999. Chapter 8: Advanced Energy Technologies,
UNDP, UNEP and World Energy Council, Second Draft Report. October 1999
7. Zhang. Personal communications 2000.
48
Annex 1:
Windmill substituting coal power
Coal power
Net electricty efficiency
Heating value
Fuel consumption
Specific CO2 emission
- do - do -
%
Eskom
GJ per ton fuel
Eskom
kg coal per kWh electricity
derived Eskom
kg CO2 per GJ Coal
Ref: IEA
kg CO2 per kg fuel
=
0.526 kg C per kg fuel
kg CO2 per kWh electricity
ratio of produced to available electricity
derived Eskom
%
kg CO2 per kWh electricity
1.03464 Fetcher et al 1999
Price of CO2
Subsidy
34.4
20.09
0.521
96.0
1.93
1.00
0.987
10
1.131
0
10
0.01131
Windmill
Capacity
Service life
Capital cost
Operation hours
Generation
Annual subsidy
Total subsidy
in percentage of cap. cost
300
20
600000
1752
525600
5943
118867
19.8
kW
years
USD
hours full load per load
kWh/year
USD/year
USD
% (no inflation)
Transmission losses
CO2 reduction at windmill
USD per ton
USD per kWh electricity
49
3. LEGAL, INSTITUTIONAL AND REGULATORY
SET-UP OF THE POWER SECTOR
3.1. Overview
The regulatory environment in South Africa for the electricity sector is characterised
by a number of loopholes and gaps. Historically, electricity and liquid fuels
regulations are separate, although international trends have sparked a debate that this
separation may not be warranted any longer.
The electricity supply industry is regulated by the National Electricity Regulator
(NER), which was established by the Electricity Act No. 41 of 1987. The NER's
routine regulatory activities include licensing, tariff approval, handling of disputes
and customer complaints, monitoring the quality of supply and service standards and
others.
Although, the development of regulations being a crucial area, the lack of clear
energy legislation has resulted in all stakeholders relying on informal and dynamic
relationships for the development of regulations.
3.1.1. Governance structure
The governance of the electricity sector is shown in Exhibit 1. The Minister of
Minerals and Energy directly heads the Department of Minerals and Energy, whereas
an independent board appointed by the same Minister controls the NER. Eskom is
even more independent as it is governed by a board and by the Electricity Council,
which is appointed by the Minister of Public Enterprises. In effect, the government
has very little control over Eskom and relies solely on energy legislation for providing
direction and regulation.
50
Exhibit 1: Governance of the DME, Eskom and the NER
South African Cabinet
Minster of Minerals and Energy
Minster of Public
Enterprises
appoints
appoints
heads
appoints
NER Board
governs
Department of
Minerals and
Energy
Prepares and suggests energy
policy and legislation to
cabinet for presentation to
parliament
Electricity Council
National Electricity
Regulator
Develops regulatory
frameworks and governs the
electricity sector according to
the legislation and policies
provided
Eskom Board
governs
Eskom
Provides electricity within
the regulatory frameworks
developed by the NER
The DME prepares and suggests energy policy and legislation to Cabinet for
presentation to parliament. At present, there is not sufficient capacity at the DME to
adequately handle the task of translating the policies set out in the EWP into
corresponding legislation. For this reason, the DME to a high extent relies on
consultants to accomplish this task. However, the process of appointing consultants is
complicated and lengthy since there is a number of external stakeholders such as the
state tender board involved, which can reject the candidate of choice for a number of
reasons.
51
Exhibit 2: Process flow for the development and implementation of energy-related
legislation
Department of
Minerals and
Energy
Cabinet
Prepares legislation in form
of bills to cabinet
Draft Energy
Bill
Parliament
Presents bills to parliament
Energy Bill
Votes bills into being
Energy Act
The NER, through its existing mandate to advise the Minister of Minerals and Energy,
can develop regulatory frameworks and governs the electricity sector according to
existing legislation. The Minister then may implement the regulations. The existing
legislation, however, does not adequately address the issues involved in the
development of a free energy market, including renewable energy. Even though the
Electricity Act gives the Minister a broad range of possibilities with regard to
regulation, there is a strong need for direction in form of new energy legislation for
the NER to develop effective regulatory frameworks.
Furthermore, the NER in its present form is only five years old and has spent much of
its energy building human resource capacity. Many of the present managers and
experts have been recruited from Eskom as more or less the only local source of
expertise in the field. In addition, the NER had to devote much of its activities
towards sorting out internal problems in which it got into crossfire for financial
mismanagement.
Exhibit 3: Process flow for the development and implementation of energy-related
regulation
National Electricity
Regulator
Minister
Advises the
Minister on
Creates
Draft Energy
Regulation
Energy
Regulation
52
The National Electricity Regulator (NER)
The NER writes about itself:
The NER is the regulatory authority over the electricity supply industry (ESI) in
South Africa. It is a statutory body, established in terms of the Electricity Act, No.
41 of 1987, as amended by the Electricity Amendment Acts of 1994 and 1995. The
NER was established on 1 April 1995 as the successor to the Electricity Control
Board. The Minister of Minerals and Energy appoints board members but, once
appointed, the NER acts independently and reports to parliament.3.
This means that the Minister of Minerals and Energy has no influence on the day-today operations of the NER. Furthermore, it appears that:
1. The reporting structure and frequency to parliament is not clearly defined.
2. The mandate of the NER is not clearly defined in terms of which areas of the ESI
it covers.
The Electricity Act of 1987 (as amended by subsequent acts4) stipulates that the NER
may be asked by the Minister of Minerals and Energy to furnish the Minister with
information. Furthermore, the NER has the right to advise the Minister, as stipulated
in the act under 4 (4):
The regulator may advise the Minister on any matter relating to the electricity
supply industry and it may for this purpose carry out such investigations as it
or the Minister deems necessary.
The above implies that while the Minister has no direct control over the NER, she can
to some extent ask the NER to carry out investigations regarding the ESI. However,
only the Minister has the powers to produce regulations. The shortcoming of this
structure is a potential deadlock as the Minister might wait for the NER and the NER
for the Minister, to develop and implement regulations. In other words, there is no
clear functional process flow for the development and implementation of electricity
regulations.
It is also noteworthy that the act does not specifically address the issue of licensing
transmission systems, separately from distribution systems. The matter of
transmission is of particular importance to the formation of IPPs.
3.1.3. ESKOM governance
ESKOM itself states about its governance:
"ESKOM is governed by the Electricity Council and a Management Board,
established in terms of the ESKOM Act of 1987. The Council determines
3
Source: NER web site
4
Amended by the Electricity Amendment Act 58 of 1989, the Abolition of the National Energy Council
Act 95 of 1991, the Abolition of Racially Based Land Measures Act 108 of 1991, the Electricity
Amendment Act 46 of 1994, the Electricity Amendment Act 60 of 1995, and the Abolition of Restrictions
on the Jurisdiction of Courts Act 88 of 1996
53
policy and objectives and exercises control. The Board manages the affairs of
ESKOM in accordance with the policy and objectives determined by the
Council. Although ESKOM therefore has a separate supervisory and
management board structure, the Council and Board are fulfilling the role of
directors and have a collective responsibility to provide corporate
governance5
The Minister for Public Enterprises appoints the members of the Council.
Appointments are for a maximum of five years or a shorter period as
determined by the Minister at the time of appointment. With the exception of
the Chief Executive and the Executive Directors of Finance and of Human
Resources, all the members of the Council are non-executive and represent a
wide range of stakeholders. All Council members are actively involved in, and
bring independent judgement to bear on Council deliberations and decisions."
The above speaks for itself. It means that the Department of Minerals and Energy has
very little control of ESKOM.
3.2. The restructuring of the electricity supply industry
The South African government is currently considering implementing great change
into the electricity distribution industry (EDI) and the electricity supply industry
(ESI). The overall objective of reform in the EDI is to consolidate/rationalise a
fragmented industry, while the overall objective of reform initiatives in the ESI is to
create a more efficient, effective industry to supply power.
In this chapter, we review government plans for reforming the South African power
sector. This chapter then describes the implications of these various reforms for the
bulk supply of renewable energy. This is done in the context of where – as is the case
now – there are very limited initiatives (if any) in place to promote bulk renewable
energy generation. The same exercise is done for the context in which various
mechanisms are in place to promote bulk renewable energy generation. Taking these
potential impacts into account, recommendations in Chapter 8 on how to protect bulk
renewable energy generation in new power contexts are presented.
3.2.1. Government’s plans for power sector reform
Introduction
Government is currently considering implementing reform initiatives in both the
Electricity Distribution Industry (EDI) and the Electricity Supply Industry (ESI) of
South Africa. Reform of the EDI is being initiated primarily because the industry is
fragmented, with many distributors not being financially viable. ESI reform follows
international trends whereby competition and greater private sector participation is
being called for. These two processes are likely to proceed simultaneously, thought it
seems reasonable to assume that ESI reform initiatives will take longer to implement
– especially, that is, if all customers are eventually granted choice of power supply.
5
Source: Eskom's web site
54
Rationalisation of the Electricity Distribution Industry
South Africa’s electricity distribution industry is currently unable to achieve its
primary objectives of meeting the aggressive electrification targets, ensuring world
class supply quality, and providing low-cost and equitably-priced electricity to all
consumers. As noted in the White Paper on Energy Policy for the Republic of South
Africa (1998), this is because of the following:






The industry is highly fragmented. Currently more than 120 municipalities have
less than 1 000 customers and more than 90 municipalities have revenue of less
than R1 million per annum;
There are substantial differences in the financial health of municipal distributors.
Four municipalities earn 50 per cent of the total surpluses being earned by all
municipal distributors and an additional 18 municipalities earn another 25 per cent
of the total surpluses. At the other extreme 289 municipalities earn less than 1 per
cent of the total surpluses, and the bottom 25 per cent of municipal distributors
lose money on their electricity sales.
There is a wide disparity in the prices paid by the various customer segments that
cannot be fully explained by the costs associated with serving these segments. For
example, mining customers pay anywhere from 9 to 17 cents per kWh in Gauteng
and anywhere from 23 to 32 cents per kWh in Mpumalanga. Price disparities for
other customer segments are as wide.
Economies of scale, skill and specialisation are not being captured by many of the
small distributors. Average distribution costs (including purchased energy) range
from 23.9 cents per kWh for distributors of less than 1 GWh in annual sales to
only 13.4 cents per kWh for distributors of more than 1000 GWh in annual sales,
a 46 per cent difference in costs.
Electrification needs are not evenly distributed across regions with some of the
poorer regions having the greatest need. Without explicit or transparent funding
mechanisms there is a great risk that in times of tight resources many distributors
will not be able to fund their targets. Moreover, as electrification is a national
objective, cross-regional subsidisation should be considered as an equitable way
to fund the electrification program.
While there are many distributors that are not financially viable today, collectively
the industry is able to fund both the supply of electricity and electrification over
the long-term. However, if the industry is expected to both contribute to funding
other municipal services (as it does currently) and to pay for the electrification
programme over the long-term, the electricity distribution industry will experience
financial bankruptcy without alternative funding and pricing mechanisms, a
reduction in the generation and transmission prices (i.e. the wholesale price of
electricity), or substantial increases in tariffs. Even if the price municipalities pay
for energy is reduced to the price paid for energy by Eskom distribution, the
collective position of the industry will not change. The current Eskom distribution
surplus will just be transferred to municipalities, without changing the overall
cashflow problems for the industry as a whole.
The current structure and funding mechanisms characteristic of the distribution
industry put it at significant risk. It is already not meeting the objective of providing
low-cost and equitably priced electricity to all customers, and financial health
continues to rapidly deteriorate. This is evidenced by an increasing number of
55
municipalities who are unable to pay their bulk accounts to Eskom, as well high
prices, poor quality of supply in many areas and problems with the delivery of
electrification.
The South African Government believes that EDI reform should be undertaken in
order to:
 ensure electrification plans are implemented;
 provide low-cost electricity;
 facilitate better price equality;
 improve the financial health of the industry;
 improve quality of service and supply;
 foster proper co-ordination of operations and investment capital; and
 attract and retain competent employees.
To address these concerns, Government now plans to consolidate the EDI into a
maximum number of financially viable independent regional electricity distributors
(REDs). Government’s appointed technical advisors of this particular initiative,
PriceWaterhouseCoopers, recently released a working paper
(PriceWaterhouseCoopers 2000) detailing views that have emerged following
extensive (yet ongoing) analysis and various stakeholder meetings. A selection of
these views is listed below.
 On RED definition, it is suggested that between five and fifteen REDs should be
established, with six REDs being the most favourable option. Each RED should
contain a major economic centre, and those RED boundaries should be consistent
with the new municipal boundaries and the electrical configuration of the network,
as well as take cognisance of geographical constraints.
 On ownership, it has been provisionally suggested that shares should be used to
compensate existing distribution undertakings for the value that they contribute to
the REDs. On governance and legal status, it is provisionally recommended that
each RED be controlled by its own professional Board of Directors, elected by its
shareholders. Furthermore, the REDs should be established as companies
incorporated in terms of the Companies Act. National government should be
responsible for setting and monitoring implementation of policy for the electricity
sector as well as ensuring, through regulation, that municipalities perform their
functions effectively.
 On commercial arrangements, REDs should purchase generation and transmission
services by means of a regulated Wholesale Pricing System (WEPS). The WEPS
would contain separate generation and transmission components, both of which
would be regulated. Once the wholesale energy market is established (see below),
REDs would be allowed to purchase from this market. The regulatory regime
would provide REDs with an incentive to minimise the cost of energy purchased
on behalf of their customers, and would limit cross ownership between REDs and
generation companies so as to encourage energy purchase to be made on a fully
commercial basis. The NER would continue to regulate the price charged for
access to the transmission network. Under this arrangement, some large industrial
customers would be eligible to choose the company from which they purchase
electricity.
 On regulatory arrangements, the new regulatory regime for the EDI should
provide a role for local government (as envisaged in the Municipal Systems Bill)
56
to complement the role of the NER. Local government would be involved in
micro regulation of the RED in its area to meet its legal and constitutional
obligations, and the NER would be concerned with macro regulation of the whole
EDI with a view to meeting national objectives for the industry. The “end-state”
regulatory regime for REDs would include: (i) separate regulation of (and licences
for) distribution activities, captive market retail activities and contestable market
retail activities; (ii) efficiency incentives for the distribution business and the
captive market retail business of REDs through regulation of the allowed revenue
for each RED; (iii) tight monitoring and performance against quality of supply and
quality of service standards.
The South African Government recognises that in order to implement the end-state
model of independent REDs from the present fragmented EDI, a transitional process
is required. The transitional structure, which is likely to be in existence for two years,
will consist of Eskom Distribution as well as municipal distributors, and will be a
separate company from Eskom Generation and Transmission, including other
municipal services.
Without substantial increases in tariffs, major reductions in distribution costs, or the
curtailing of the electrification programme, it is furthermore recognised that this
rationalisation and restructuring process alone will have limited impact on improving
the overall financial health of the industry. It is for this reason that the White Paper on
Energy Policy states that “the entire industry (generation, transmission and
distribution) must move to cost-reflective tariffs with separate, transparent funding for
electrification and other municipal services.”
Reform of the Electricity Supply Industry
For some years now, the Government of South Africa has been considering
implementing significant change in the electricity supply industry (ESI). As
explained below, proposed changes follow international developments where
competition has been introduced into generation sectors, as well as in the retail
services component of the distribution industry, and where greater private sector
participation in the power sector has been encouraged.
To date, very little change has in fact been implemented. Indeed, there is still a
generation oligopoly, transmission monopoly and the distribution is highly
fragmented. Discussions on how best to design and implement reform measures have,
however been numerous. These are outlined below.
The White Paper on Energy Policy for the Republic of South Africa (1998) notes that,
internationally, benefits have been observed on the introduction of competition. These
include: increased opportunities to exploit cheaper and environmentally benign
generation options; the potential to increase the level of supply security, at a lower
cost, through a regionally integrated and diversified supply base; the potential for
efficiency improvements; and the potential for downward pressure on electricity
prices. The White Paper notes however that in some countries concerns have been
raised about the adverse impacts increased competition has had on equity and
environmental goals, as well as the ability of a competitive market to ensure sustained
investment and security of supply at low prices in the long term.
57
In consequence of these concerns, the Government of South Africa adopted in 1998 a
fairly cautious policy position that it would “support gradual steps towards a
competitive electricity market while investigations on the desired course of action
[were] completed”. Interestingly, though, the White Paper also notes that “… various
developments [in the electricity sector] will have to be considered by government
over time, namely:
 Giving customers the right to choose their electricity supplier;
 Introducing competition into the industry, especially the generation sector;
 Permitting open, non-discriminatory access to the transmission system; and
 Encouraging private sector participation.”
The first bullet point above describes a power sector where there is retail competition.
The second bullet point calls for wholesale competition, and the fourth could entail
privatisation – perhaps of existing assets (strategic partnerships), or perhaps of private
participation in new assets.
Since the publication of the White Paper there has been considerable debate and
analysis on whether and/or how to restructure (or unbundle) Eskom, introduce
competition into the generation sector, and encourage greater private sector
participation in the power sector in general. It was stated in the White Paper that “any
market restructuring is likely to be delayed for a number of years while the
distribution sector is restructured and the bulk of the electrification programme is
undertaken”. However, it seems now that ESI restructuring may even occur in parallel
with these two processes.
With a pressing need6 to make further progress in the area of ESI reform, the DME
recently commissioned a paper on “A Competitive Electricity Market for South
Africa.” The overall argument of this paper was that because of current
inefficiencies, the electricity industry should be reformed, and that the new structure
should be based on a competitive market system. Furthermore, restructuring should
occur prior to substantial privatisation. The paper concludes with the following steps
for initial restructuring:
 The corporatisation of Eskom;
 The separation of Transmission into a state-owned company and the establishment
of a power exchange and a system operator within this framework;
 The separation of Eskom’s power stations into a sufficiently large number of
independent competing generating companies directly owned by the State.
In August 2000, the Ministry of Public Enterprises unveiled its Accelerated Agenda
for the Restructuring of State-owned Enterprises. Actions by Government vis-à-vis
Eskom include the following:
 Eskom will be corporatised, with Transmission, Distribution and Generation each
forming a separate corporate entity;
6
Pressures to make further progress came from various sources including recent statements by
the Ministry of Public Enterprises indicating Governments wish to proceed with the restructuring of the
four largest state-owned enterprises, one of them being Eskom. Pressures also came from the fact that
some progress had been made in the rationalisation of the EDI, as well as a need for follow
through/clarification on the various far reaching policy statements contained within the White Paper on
Energy Policy (1998).
58



A full evaluation of the different models for restructuring Eskom is currently
being undertaken by the Department of Public Enterprises, based on a review of
the electricity supply industry undertaken by the Department of Minerals and
Energy
Different generating companies will be formed to promote internal competition
prior to the introduction of private sector participation in generation, in
conjunction with new power requirements;
Strategic equity partners will be introduced into different Eskom Enterprises
business units.
The Ministry of Public Enterprises notes the following:
 The separation of Eskom into separate Generation, Transmission and Distribution
companies will result in more transparency and accountability in the electricity
supply industry.
 Different generation companies will ensure that there is competition in generation,
which should result in enhanced efficiency and therefore effectiveness in this
sector;
 Government is aware of the social services offered by Eskom in terms of the
provision of electricity to the poor in both urban and rural areas. The restructuring
plans will ensure that the rollout of electricity to these sections of the population
continues.
Probable reform path for the Electricity Supply Industry
It must be emphasised that few decisions have been made on the appropriate model
for ESI reform and indeed that the way forward for ESI reform remains open-ended.
However, it seems currently likely that ESI reform will follow the logical steps as
illustrated in the generic models illustrated by Figures I, II and III.
Industry models
Figure 1 below illustrates the Purchasing Agency model whereby Eskom continues to
dominate the electricity industry, controlling Generation, Transmission and the
unregulated Eskom Enterprises. Essentially, this model is representative of a nearterm situation since Eskom is currently being corporatised, and the distribution
industry is soon to be rationalised into a small number of financially viable REDs
(Eskom Distribution will be transferred to the EDI Holdings Company and then into
the REDs).
59
Eskom Holdings
Eskom Generation
Internal
Pool
Eskom Transmission
Eskom Enterprises
IPP
RED 1
RED 2
RED 3
RED 4
RED 5
RED 6
Large
customers
Customers
Figure 1: Purchasing Agency Model
Source: Adapted from Hunt & Shuttleworth (1996)
Under the Purchasing Agency Model, any new generator entering the market would
sell power to Eskom. Government would find it difficult to attract new investments
into the industry, as investors would be concerned about the inherent conflict of
interest in Eskom, as the owner of Transmission and owner of various generation
plants. Open, non-discriminatory access to the system would not be guaranteed. At a
minimum, new Independent Power Producers (IPPs) would demand long-term Power
Purchase Agreements (PPAs) which could result in consumers being tied to noncompetitive prices for years to come. It is broadly accepted that Purchasing Agency
Model cannot last indefinitely.
According to the Generation Oligopoly model, Eskom will continue to control
Generation and Eskom Enterprises. Eskom Generation units are grouped into different
clusters, or operating divisions, under the control of Eskom Holdings. These different
operating divisions would however, bid separately to sell power into the pool.
Transmission is established as a separate state-owned company. It seems likely that
this will occur in the near future. An external, transparent power exchange is also
established.
60
Eskom Holdings
Generation 1
Generation 2
Generation 3
Eskom Enterprises
Power
Pool
IPP
State-owned independent transmission company
RED 1
RED 2
RED 3
RED 4
RED 5
RED 6
Large
customers
Customers
Figure II: Generation Oligopoly Model
Source: Adapted from Hunt & Shuttleworth (1996)
In the Generation Oligopoly Model, there is general concern that Eskom Holdings
would be able to exert excessive market power through its subsidiaries. Without
regulatory support, investments in large independent generation plants would
therefore still be unlikely.
According to the Wholesale Competition Model illustrated in Figure III below,
Eskom would be left with a highly diluted portfolio of generation assets (in addition
to Eskom Enterprises). The remainder of generation would be separated into
competitive independent companies. These could be privatised through, for example,
black economic empowerment provisions, an initial public offering or a private equity
offering.
Eskom Holdings
Generation 1
Generation 2
Generation 3
Eskom Generation
Eskom Enterprises
Power
Pool
Internal
State-owned independent transmission company
RED 1
RED 2
RED 3
RED 4
RED 5
RED 6
Large
customers
Customers
Figure III: Wholesale Competition Model
Source: Adapted from Hunt & Shuttleworth (1996)
Retail competition could be introduced at this stage (or perhaps even earlier). This
process would entail separating out the natural monopoly ‘wires’ business from retail
services at distribution level. It is unlikely that this will occur in the next decade.
61
Reform processes
For clarity sakes, the reform processes outlined above can be broken down into
‘unbundling’, ‘corporatisation/commercialisation’, ‘competition’ and ‘privatisation’
initiatives. These are outlined below, and will be utilised in the explanation of
possible impacts of power sector reform on bulk-generated renewable energy
resources.
*
Unbundling. In a pure sense, unbundling (or restructuring) electric services is
accomplished by breaking out the components of traditional bundled services, assigning
existing costs to the various service components, and developing prices based on these
costs.
As noted, in the short- to medium-term, Eskom will be unbundled into separate
Transmission, Distribution and Generation companies (see Figures I, and II
above). This will occur as a natural consequence of the EDI rationalisation
initiatives, as well as the drive to introduce fair competition into the wholesale
power market. In other words, Eskom as a vertically integrated natural monopoly
will cease to exist. In preparation for this, financial and operational structures of
Eskom Transmission, Eskom Generation and Eskom Distribution have been
ringfenced.
*
Commercialisation and corporatisation. When government decides to
commercialise a state-owned enterprise, it essentially relinquishes detailed
control, in favour of autonomy for the enterprise and a focus on profitability.
Under commercialisation, government maintains ownership of electric utilities but
removes subsidies and preferential fiscal policies and requires full recovery of capital,
operations, and maintenance costs. Corporatisation entails the formal and legal
move from direct government control to a legal corporation with separate
management.
Eskom will be corporatised this year; with Transmission, Distribution and
Generation each forming a separate corporate entity. Thereafter, Eskom will be
liable for the payment of taxes and dividends.
*
Competition. While the “wires” portion of the electricity sector (transmission and
distribution services) is still considered a natural monopoly, competition may be
introduced into the system for selling power to the grid (wholesale competition)
and providing electricity to end-use customers (retail competition). Wholesale
competition may take the forms of independent power producers bidding for long
term contracts with power purchases, or of the creation of spot or short-term
markets for wholesale power. Retail competition can be introduced through
different methods. In one, multiple power generators have direct access to the
transmission and distribution networks allowing them to compete to supply final
customers regardless of who owns the wires. In another, independent retail
service providers (which do not own generation facilities) buy power from
generators, contract for use of transmission and distribution facilities, and sell the
power to final customers (Kozloff, 1998).
*
It seems likely that South Africa will adopt a multi-pronged approach towards
introducing wholesale competition into the South African power sector. These
62
steps are illustrated in the section below. In summary these include: (i)
commercialisation and corporatisation of Eskom; (ii) creation of independent
competing Eskom Generation companies to promote internal competition as well
as non discriminatory access to transmission and distribution networks; (iii)
creation of a spot market and the introduction of private sector participation,
either through a new IPP licence, strategic equity partners, an initial public
offering, and/or a private equity offering. As noted in the White Paper, retail
competition (aside from selected large industrial customers being allowed a
choice of supplier) is not seen as an option for some time to come.
*
Privatisation. Privatisation transfers existing power sector assets to private
ownership and allows private development of some, or all, new power sector
infrastructure. Introducing greater private sector participation into the power
sector can involve the privatisation of assets, or it can involve the emergence of
private sector involvement in the development of new power sector
infrastructure.
It is argued that privatisation of Eskom without first creating a competitive
market would be detrimental for end-use customers since it would likely mean a
guaranteed private monopoly income for Eskom’s new (probably foreign)
owners. It would be extremely difficult to force diversity at a later date in order to
create competition (Eberhard 1999). The entrance of a foreign strategic equity
partner for Eskom would also complicate moves to full competition at a later
stage. Given this, it is likely that government will concentrate on moves towards
introducing competition prior to any initiatives involving privatisation or greater
public sector participation. In all likelihood, though, an IPP will be introduced
prior to the establishment of a competitive wholesale market. This will be
important in order to ensure adequate installed capacity. The new IPP would
likely then sell power to Eskom under the conditions of a long-term power
purchase agreement (See Figures I and II above).
As noted above, it is government policy to introduce strategic equity partners into
different non-regulated Eskom Enterprises business units. Private sector
participation will be introduced specifically into the generation and transmission
entities, either through strategic equity partners, through initial public offerings or
private equity offerings, or as noted above, through granting a licence to an
emerging independent power producer.
Interestingly, the Minister of Minerals and Energy has expressed concern about
privatising components of the power sector. She argues that important public
benefits such as programmes promoting black economic empowerment,
affirmative action, rural electrification etc. will be threatened, and that this would
go against the thrust of national development objectives.
3.2.2. Possible impacts of EDI reform on bulk renewable energy generation
Rationalisation of the Electricity Distribution Industry (EDI) will not in itself impact
considerably on the fate of bulk renewable energy generation in South Africa. It has,
however, been important to note this process primarily because ESI reform initiatives
63
assume a maximum number of financially viable REDs operating in a more
competitive environment, and one in which there is ultimately more private sector
participation.
As will be shown in the section to follow and Chapter 9 on recommendations, REDs
will naturally become the main clients of generators producing power from renewable
energy sources. Indeed, without the undertaking of this rationalisation process,
recommendations put forward in section 9.2.2 would likely be irrelevant. This is
because the current financial (and human capacity) status of most distributors of
power would not realistically be able to support the framework suggested.
3.2.3. Possible impacts of ESI reform on bulk renewable energy generation
International experience indicates that as reform initiatives have been introduced into
power sectors, bulk-generated renewable energy has declined (or has not grown in
line with the expectations linked to expansion of clean energy generation). This is
broadly because very few incentives have been available to independent power
producers to undertake bulk renewable energy investments. As the South African
power industry lies on the verge of significant reform (see above), it is important for
decision-makers to understand what the possible effects power sector reform could
have on investment in bulk renewable energy investments. This understanding would
then contribute significantly to the learning how these investments could be sustained,
and even developed in these new and future contexts.
In this section, possible impacts of ESI reforms on the bulk generation of renewable
energy are outlined. Impacts are discussed in terms of the categories of reform
defined in the section above i.e. unbundling, commercialisation and corporatisation,
competition and privatisation. In each section, general international trends are briefly
outlined. Thereafter, possible implications for South Africa are identified. In Chapter
9, recommendations on how to ensure investment in bulk renewable energy
generation are presented.
Unbundling
International experience indicates the conditions and tariffs which independent power
producers can gain access to the transmission system and use to “wheel” power for
sale directly to electricity users fundamentally affects the independent power
producers’ choice of technologies in grid-connected applications. Transmission access
(including fair cost structures enabling access) has the potential to stimulate
development of new renewable power generation. Because renewable resources are
location-specific, developers of renewable power generation depend on access to
transmission lines to sell power to the grid. Moreover, transmission access gives
renewable power producers the ability to sell power to locations where, and at times
when, it is more highly valued than by the local utility (Kozloff 1998).
Despite legal and physical access to transmission lines, renewable power producers
may not have equal access to transmission capacity because of unfavourable terms of
contract. Producers of intermittent generation may be charged more per kilowatt-hour
to transmit power than their dispatchable competitors. Transmission access charges
64
may be based on a generators maximum rated capacity or what it actually generates
during peak periods. Moreover, the site-specific nature of renewables may be a
drawback under some transmission pricing schemes. Tariffs may be based on
distance or contract paths regardless of actual transmission costs or the flow of
electrons (Kozloff 1998).
In South Africa, unbundling initiatives could have significant impact on bulk
generation of renewable energy. Unbundling would be complete in the model
characterised by Figure II presented above. According to the Generation Oligopoly
model, Transmission is no longer controlled by Eskom (in other words, the monopoly
status enjoyed by Eskom in transmission has been removed) to the extent that ‘fair’
access by independent power producers to the transmission network could now be
assumed. This represents a significant step toward reducing the prevailing barriers
inhibiting investment in bulk renewable energy generation.
As indicated above, transmission access is a necessary but not a sufficient condition
for uninhibited investment in bulk renewable energy generation. This is because the
terms of contract and tariff structures are also key determinants of whether
independent power producers will invest in this area. In Figure II’s Generation
Oligopoly model (where as noted unbundling activities are complete), Eskom
Holdings may still be able to exert undue market power through its subsidiaries and
therefore manipulate tariff levels. If this turns out to be the case, it is unlikely that
IPPs focusing on bulk renewable generation will be attracted to the market.
Of course, the impact of unbundling on investment in bulk renewable energy
generation will depend on the nature of the prevailing regulatory regime (see below.
At present there are no regulations supporting investment in this area. As power sector
reforms proceed, however, this may change. For example, regulatory interventions
which allow for (and insist on) the granting of specialist Power Purchase Agreements,
or requirements that the distribution industry distribute a specified percentage of
power generated from renewable energy sources could significantly alter the
prognosis for investment in this context.
Commercialisation and corporatisation
International experience indicates that commercialising public utilities has negligible
effect on investment in renewables in bulk power markets. Still, the ability to adopt
new technologies may be improved. Renewables may be considered more seriously to
the extent that improved management, cost accounting, and cost recovery increase the
utility’s interest in choosing the least-cost approach to expanding service on a lifecycle basis (Kozloff, 1998).
Figure I illustrates the Purchasing Agency Model in which commercialisation and
corporatisation initiatives have already been completed. Once fully commercialised
and formally corporatised, Eskom Holdings will become increasingly cautious about
what projects to invest in. Without appropriate regulatory frameworks in place, it is
unlikely that Eskom would choose to invest in a bulk renewable energy generation
plant.
65
As Eskom moves towards more cost-reflective tariffs, investment in bulk renewable
energy generation is likely to become increasingly achievable by independent power
producers. The prevailing regulatory regime would, however, be a key determinant of
whether this investment actually occurs. As noted previously, without adequate
regulation, it is unlikely that independent power producers would consider investment
in new bulk renewable energy generation resource financially feasible. Certainly this
would be the case within the context of the models denoted by Figure I and probably
Figure II, the basis of which reflect commercialised and corporatised operating
environments.
Competition
International experience indicates that wholesale competition is not likely to favour
renewables in bulk power markets. Compared with long-term bilateral power
purchase agreements, short-term or spot markets make it more difficult to finance and
develop renewable generation options. For one thing, renewable projects bidding into
spot markets are harder to finance than generation projects with low capital costs.
Lenders are reluctant to provide debt capital for renewable energy merchant plant
projects, especially in countries where spot markets have yet to establish a track
record. Since lenders require that power projects demonstrate steady, predictable cash
flows to meet debt service requirements over several years, the revenue risk created
by unpredictable spot markets effectively precludes financing (Blair 1995, Kozloff
1998)
Spot markets are particularly unfriendly to the development of “intermittent”
renewable resources. Prices may be high for a limited number of hours in a year and
not necessarily when these intermittent renewable resources are available. The
inability to generate power on demand is a drawback in spot markets, which places a
premium on generators that could assure power availability during peak periods.
Because these resources cannot be dispatched on demand, the rules governing
dispatch and payment in competitive wholesale markets are particularly important in
determining their value. In contrast, developers of thermal plants could secure
financing because they have greater control over when they sell to the spot market and
because their lower debt load gives them less exposure to a prolonged drop in market
prices (Kozloff 1998).
Retail competition is also likely to affect the ability of renewables to compete in bulk
power markets. The incentive to retain and attract customers that is created by retail
competition makes electricity suppliers seek opportunities to minimise rates and to
differentiate themselves from competitors. In the United States and parts of Europe,
some retail suppliers are trying to differentiate themselves by marketing “green”
(environmentally friendly) electricity generation. This market niche is smaller in
developing countries because environmental consciousness is generally lower and
electricity costs tend to look larger in the household or business budgets.
In South Africa, meaningful competition is first introduced into the power sector in
the Generation Oligopoly model illustrated by Figure II. This model involves the
establishment of an independent power exchange with hopefully, independent, trading
arrangements. In the Wholesale Competition Model (illustrated in Figure III), Eskom
controls a minority share of generation assets, and the remainder rests under the
66
control of independent power producers, strategic equity partners, or shareholders of
IPPs and/or private equity offerings. Assuming limited regulatory intervention, these
competitive models are not likely to bode well for investments in bulk renewable
energy generation. The primary reason for this is that independent power producers
would likely be unable to meaningfully compete on the spot market with other
generators of power. Independent power producers would not likely be costcompetitive for the reasons stated above (i.e. difficulties associated with raising debt
capital and the unpredictability of returns).
As will be discussed below, this poor prognosis assumes almost negligible regulatory
intervention. Indeed, with a regulatory regime that is supportive of investment in bulk
renewable energy generation, this need not be the case. For instance, by regulatory
decree, bulk renewable energy generators need not compete on the spot market –
these generators could be awarded preferential status, transacting directly with the
REDs (see Chapter 9 on recommendations).
When, and if retail competition is introduced into the power sector in South Africa,
investment in bulk renewable energy generation is even less likely to be sustained.
This would be primarily because generators and REDs will be increasingly conscious
about retaining customers, and the primary determinant of this is likely to be related
to the tariff level (and perhaps service) offered. In order to avoid competitive
exposure, REDs would seek to minimise fixed costs, and avoid capital intensive
investments. REDs, on the other hand, might choose to market green power as a way
of differentiating their product, and in this way demand for bulk generated renewable
energy could be sustained. It is unlikely, however, that this demand would be
sufficient to justify the entrance of more than a few bulk renewable energy generators.
Again, regulatory intervention would be necessary.
Privatisation
International experience indicates that privatisation initiatives are unlikely by
themselves to increase the market share of bulk generated renewable energy
generation. Technology preferences for investments in new generation result partly
from differences in project financing available to public utilities, private utilities, and
independent power developers. When new generation is privatised and unbundled,
independent power producers must usually finance projects on the basis of the
expected returns from the specific project and the need to recover investment over the
loan repayment period. Independent power developers face a higher cost of capital
and a shorter repayment period than the vertically integrated utilities. They must
recover their investment over the period of their loan repayment. All things being
equal, the cost of energy from a capital-intensive renewable project to either a private
utility or an independent power producer is generally higher than to a public utility
(Kozloff 1998).
Because of these financial considerations, independent power producers prefer
generation options that have relatively low capital costs per megawatt, a short
construction time in order to yield revenue quickly, high efficiency, and the ability to
be operated most of the time. Based on recent trends, independent power producers
generally appear to favour natural gas generation due to its cost structure and short
construction time. Generation options that are not favoured are coal, nuclear, hydro
and renewables (Blair 1995, Kozloff 1998).
67
Power purchase agreements can also affect the financing for renewables, depending
on the extent to which provisions in these agreements are geared to the characteristics
of renewable generation options. Since most independent power projects have been
thermal to date, the terms of standard power purchase agreements (PPAs) are often
geared to such projects. Payment schedules and other terms in PPAs may create
incentives for independent power producers to choose relatively low capital-cost-per
megawatt generation technologies over options with comparable life-cycle costs but
higher capital costs. PPAs often generate fixed price payments to developers over a
limited period of time. Adequate payment schedules are particularly critical for
capital-intensive power generation options, a characteristic of geothermal, wind,
hydro, solar and thermal options. Independent power producers must attract private
debt financing on the strength of the PPAs. They must often recover their capital
investments over the fixed price contract period (generally less than the facility’s life
span). This is harder to do for IPPs of capital-intensive generation options, putting
them at a competitive-disadvantage relative to developers of fuel-cost-intensive
options (Kozloff 1998).
Renewables face other barriers in obtaining long-term power contracts. Transaction
costs incurred to participate in the bidding process may favour certain technologies.
Per megawatt, the costs of preparing a bid for a thermal project are less than for a
renewable project. Thermal projects can be readily determined and are not
particularly site-specific, allowing bids to be prepared more quickly and cheaply.
Producers of power from renewable energy resources may find the transaction costs
of negotiating PPAs prohibitive.
Generation units are only likely to be privatised in South Africa once the structure of
the industry has been transformed (i.e. only once competition in generation has be
established). However, this does not necessarily mean that greater private sector
participation will not occur prior to this. Indeed, it is possible (and likely) that in the
next year, a license will be granted to an Independent Power Producer to build new
(and needed) power sector infrastructure. Whether a bulk renewable energy producer
will be able to meaningfully compete for this license will depend primarily on the
prevailing regulatory regime, and cost of capital. As more competition is introduced
into the wholesale market, the likelihood of this occurring is much reduced. This is
particularly likely to be the case as the natural gas industry in southern Africa
develops.
Changing regulatory frameworks
Power sector dynamics discussed so far include commercialisation and
corporatisation initiatives, unbundling (or restructuring), introduction of competition
and privatisation. As has been shown the prognosis for sustained investment in bulk
renewable energy generation as these various power sector reform initiatives proceed
is generally poor. It has been mentioned though that the impact of these initiatives
does substantially depend on the nature of the prevailing regulatory regime during
these various stages. If regulatory incentives are in place, there is no reason why the
future for bulk generated renewable energy should be so bleak.
The National Electricity Regulator has recently emerged from a ‘bumpy’ start. As
plans for power sector reform take place, it is likely that the NER will become
68
increasingly capacitated to engage more with the power sector. Indeed, it is likely
that the NER will play a more hands-on role in the regulation of the power sector in
the future. Within this context, it seems fair to assume that the prevailing regulatory
regime will evolve, and therefore that regulation in South Africa should also be
regarded as a dynamic worth taking note of.
3.3. Stakeholders
There is a wide range of stakeholders with interests in the South African energy
sector. The stakeholders in the South African energy and power supply sectors can be
broadly categorised into the following groups:







Government (national, provincial, and local)
State-owned companies and municipalities
Commercial companies and industry associations
Regulatory bodies and related organisations (CEF, NER, etc.)
NGOs and research organisations (energy policy, social equality, and
environment)
Unions
Consumers
The Southern African Development Community (SADC) represents regional
interests. Because of the envisaged regional integration and the trading of energy
across borders (gas and electricity), SADC is expected to play an increasingly
important role.
In addition, a number of commercial consultants provide dedicated services in the
area of energy and power supply. In addition, international management consulting
companies have recently become increasingly involved in the South African energy
sector.
3.3.1. Government
Historically, government's interests in the energy sector was largely focused on
autonomy and security of supply. Because of the resulting close alignment of interests
between government and business during the Apartheid years, there was no clear
separation between roles and responsibilities between government and energy supply
industry. This was reinforced by the authoritarian regime that prevailed during the
70's and 80's.
With the opening up of the country during the 90's, there has been a significant
broadening of the interests and stakeholder representation that government facilitates.
A range of national government departments exists that in one way or another are
involved in the energy sector. These are:
 The Department of Minerals and Energy (DME)
 The Department of Public Enterprises
 The Department for Environmental Affairs and Tourism (DEAT)
 The Department of Finance
69


Department of Trade and Industry
Department of Provincial and Local Government
These government departments represent a number of interests including equal access
to services by previously disadvantaged individuals and groups, environmental
interests, and other issues as set out in the EWP.
In addition, provincial and local governments have a stake in the energy supply sector
mainly though the ownership of distribution networks and access to end-user markets.
3.3.2. State-owned and companies and municipalities
South Africa has a vast heritage of state-owned companies that are in the process of
being re-regulated and privatised. The energy supply industry is no exception. Stateowned companies in the energy supply sector include Eskom, SASOL, MOSSGAS,
and a range of companies operating under the umbrella of the Central Energy Fund.
ESKOM7 is the national electricity supplier of South Africa. Albeit not being a private
company, the organisation was restructured in 1999 into a private, non-regulated part
called Eskom Enterprises, and a regulated part.
A number of municipalities exist that distribute electricity to end-users. Most of these
municipalities buy electricity in bulk from ESKOM and take care of the distribution
and billing while making a substantial profit by charging a mark-up on the electricity
price. These municipalities are represented by the Amalgamated Municipal Electricity
Undertakings (AMEU), as well as the South African Local Government Association
(SALGA).
3.3.3. Commercial Companies
Commercial companies can be broadly categorised into the large multi-national
petroleum companies and an emerging new kind of energy service companies backed
with international NGO support (for example RAPS). So far, legislation and the
regulatory environment in South Africa have not been supportive to grid-connected
energy service companies. Thus, this industry does not have any strong representation
at any level.
The South African Petroleum Industry Association (SAPIA) represents the interests of
the South African Petroleum industry in South Africa. Multinational petroleum
companies are increasingly becoming involved in the investment in non-petroleum
energy services all over the world. The most progressive examples of such companies
are Shell and Enron. While Shell's renewable energy strategy is to a large extent based
on solar energy, biomass and forestry, Enron has committed itself to investments in
the wind energy sector through the purchase of two of the biggest wind energy
companies in the world. Coming from a traditional gas-supply background, Enron has
become the leading global player in energy trading. Understandably, Enron has so far
mainly focused on de-regulated countries and territories. At least partially for this
7
ESKOM was an acronym for Electricity Supply Commission. The acronym is today used as the
company name itself.
70
reason Enron has not been very active in South Africa yet, apart from its regional
involvement in oil and gas exploration.
Shell has committed itself to major investments internationally in the area of
renewable energy. In South Africa, the company is involved in a joint venture with
ESKOM in the provision of Solar Home Systems.
In addition, a new breed of smaller companies has also emerged that is active in the
provision of energy services, grid as well as off-grid. Most of these companies focus
on the production and of solar energy devices for household end use. Examples of
such companies are RAPS and DARLIPP, with the fundamental difference between
the two that DARLIPP concentrates on grid-connected wind energy and RAPS on
decentralised, off-grid systems of various energy sources.
3.3.4. Regulatory bodies
The NER is the regulatory authority over the electricity supply industry (ESI) in
South Africa. It is a statutory body; established in terms of the Electricity Act, No. 41
of 1987, as amended by the Electricity Amendment Acts of 1994 and 1995. The NER
is effectively only five years old.
3.3.5. NGOs and research organisations
Presently a number of NGOs and research organisations represent a wide spectrum of
interests ranging from advocating the needs and rights of the poor up to the advocacy
of environmental issues.
CSIR
The former state-aligned research organisation, which underwent
substantial restructuring and is now undertaking an effort to re-position
itself to undertake research in a more liberalised marketplace.
EDRC
Based at the University of Cape Town, the Energy and Development
Research Centre is the leading energy policy research organisation in
southern Africa.
ERI
Based at UCT, and focuses on largely technical and forecasting/planning
issues.
IFR
The Institute of Future Research is based at the University of Stellenbosch.
MEPC
Founded in 1994 with the main mission to fill the vacuum in policy
development capacity.
GEM
Group for environmental monitoring, based in Johannesburg, primarily
concerned with aligning labour and environmental interests, also involved
in research
Earthlife
Africa
Activist group based in Johannesburg
EMG
Environmental Monitoring Group, based in Cape Town
EJNF
The Environmental Justice Network Forum is a network of
environmentally minded researchers and interested parties
71
SESSA
SAWEA
The Solar Energy Society of Southern Africa is a non-profit organisation
dedicated to promoting and increasing the use of renewable energy.
The South African Wind Energy Association is a non-profit organisation
established to further the use of wind energy in South Africa.
3.3.6. Unions
Historically, the relationship between the unions, companies and the state was heavily
politicised. With the beginning of a new era in the 1990's, union leadership has
increasingly been co-opted through the formation of bodies such as NEDLAC
(National Economic Development and Labour Council). The latest union positions
reveal that the struggle is now focusing more on wage issues and job creation than on
political power.
Nonetheless, the unions are still very critical and cautious towards liberalisation,
privatisation, or re-regulation. The Labour Relations Act (LRA) gives workers the
right to embark on protest action to promote and protect their social and economic
interests, if they follow certain procedures. The largest unions are:



COSATU
FEDUSA
NACTU
Of these, the COSATU is the one most actively involved in the debates around
restructuring of state-owned enterprises. COSATU has clearly expressed its
opposition towards privatisation of state enterprises. COSATU holds the view that the
state ownership of enterprises such as ESKOM is the most effective way to ensure
service delivery to as many as possible people, thus providing an effective mechanism
for cross-subsidisation. COSATU has indicated several times that it will take protest
action against the privatisation of ESKOM and other enterprises owned by the state.
3.4. Present legal and regulatory deficits
Since the industry is effectively operating with area monopolies, it is virtually
impossible for new market entrants to gain access to a customer base, or even
building one. This issue is partially addressed as a policy objective in the EWP:
Government will encourage competition within energy markets (EWP page 12).
However, the EWP neither gives any attention to the need for facilitating the
development of markets nor any indication as to how to accomplish the goal of
developing the markets.
On page 62 the EWP states: "The entry of multiple players into the generation market
will be encouraged. Initially this policy will be implemented by obliging the national
transmission system to publish National Electricity Regulator approved tariffs for the
purchase of co-generated and independently generated electricity on the basis of full
avoided costs."
At present, "avoided costs" effectively means fuel plus O&M costs, due to the
substantial excess capacity. However, energy generation costs are predominately
72
made up of capital costs and only to a lesser extent of fuel costs. This is particularly
so in coal-fired generation which make the bulk of South Africa's generating capacity,
as well as in nuclear power plants. For this reason, many new market entrants (which
are supposedly "encouraged") are effectively blocked from entering the market
because they have to recover their investment costs as well as their operating costs. In
other words, only a player who happens to already have written off the capital cost of
a power plant can theoretically compete in this game.
The location and scope of legal and regulatory deficits strongly depends on the route
that the restructuring of the industry will take. There are two basic strategies for
restructuring. First, a vertical disaggregation of the electric utility industry can take
place, which essentially entails breaking up Eskom into separate companies
responsible for the generation, transmission and distribution. The transmission
network will take over the role of an independent power exchange, effectively
facilitating an open market for electricity. The second option is allowing for open
access to the existing grid infrastructure for all players, leaving the existing industry
intact. It seems clear that while the first option for deregulation is a very ambitious
goal in terms of the restructuring tasks, it is also a lesser problem as far as the
regulation required is concerned. The second option requires more effective and
complex regulation and also a much more stringent enforcement of this regulation in
order to work.
More specifically, there are five main areas of relevance that are not adequately
addressed in the present legal and regulatory frameworks, with varying priorities, as
indicated in Exhibit 4.
Exhibit 4: Main regulatory areas of relevance to be addressed
Vertical
disaggregation
Open access
Regulation of access to electricity markets and
customers
Major
Major
Regulation of access to the existing grid
infrastructure
Minor
Major
Establishment of electricity wheeling rules and
tariffs
Minor
Major
Control of ownership issues by the competition
board
Major
Minor
Renewable energy power purchase agreements
Major
Major
(Key: Major/Minor: This is a major/minor issue.)
These five areas are briefly addressed in more detail in the sections below.
3.4.1. Regulation of access to electricity markets and customers
Legislation needs to be developed that caters for the separation of the operation of the
distribution network infrastructure and the provision of electricity service. No such
legislation presently exists. In order to make the industry more competitive, at least
bulk customers need to be able to decide from which electricity producer they like to
73
purchase their electricity. This can only be accomplished by separating the service of
connection from the electricity provision.
3.4.2. Guidelines for access to grid
The existing players in the field, i.e. Eskom and the larger municipalities, and to some
extent also some large private producers and consumers of electricity, have directly
negotiated contracts with each other regarding access to the grid and the purchase of
power. Regulation needs to be developed that allows for all market entrants to connect
to the electric grid, subject to technical connection criteria such as synchronisation,
voltage/frequency regulation, and fluctuations. It should be emphasised that these
technical requirements should be developed in a way that takes into account the
nature of renewable energy power.
3.4.3. Establishment and enforcement of wheeling rules and tariffs
This issue is of particular concern under the "open access" scenario because of the
non-separation of ownership interests of established players. Even more important is
that the development of electricity wheeling tariffs is the enforcement of such a
framework.
In case of the vertical disaggregation option, the issue of wheeling is of a lesser
concern since it assumes that an independent body will operate the transmission
infrastructure, facilitating a market place for electricity.
At present, Eskom who owns and operates the transmission grid infrastructure has its
own accounting system for electricity transport costing. Under the "open access
scenario" this function needs to be taken out of Eskom and placed into a separate
department at the NER.
3.4.4. Control of ownership issues by the competition board
Under the "vertical disaggregation" scenario, the state competition board must
proactively address and monitor the independence of the different players to ensure
that all players can enjoy equal market conditions.
3.4.5. Renewable energy Power Purchase Agreements
Since renewable energy is still somewhat less competitive in the absence of
appropriate incentives, a market for renewable energy is difficult to establish. This
can be done in several ways (cf. Chapter 7). One of the most important is to guarantee
purchase agreements by all distributors of a limited amount of renewable energy
power.
74
References
1. Blair, S 1995. The true cost of renewables. http://www.rapmaine.org.room.htm
2. Clark, A 1999. Demand-side management in restructured electricity industries: An
international review. Research report. Energy and Development Research Centre,
University of Cape Town.
3. Clark A & Mavhungu, J 2000. Promoting public benefit energy-efficiency
investment in new power contexts in South Africa. Research report. Energy and
Development Research Centre, University of Cape Town.
4. Ministry of Public Enterprises 2000. Accelerated agenda for the restructuring of
state-owned enterprises. Government printers: Pretoria.
5. Department of Minerals and Energy 1998. White paper on energy policy for the
Republic of South Africa. Government Printer: Pretoria.
6. Eberhard, A 1999. Competitive jolt good for customers. Business day. 11
November.
7. EU Commission n.d. Towards a single market for electricity from renewable
energy sources. Working paper, extracts. http://www.windenergie.de/englisch/euc_w_paper.html
8. Hunt, S & Shuttleworth, G 1996. Competition and choice in electricity. New
York: John Wiley and Sons.
9. Kozloff, K 1998. Electricity sector reform in developing countries: Implications
for renewable energy. Washington D.C: Renewable Energy Power Project.
10. Miller, A & Serchuk, A n.d Renewable energy in competitive electricity markets.
http://repp.org/articles/millser.htm
11. Ministry of Public Enterprises 2000. An accelerated agenda towards the
restructuring of state owned enterprises. Government Printer: Pretoria.
12. PriceWaterhouseCoopers, 2000. Electricity distribution industry restructuring
project: Working paper 7: Consolidated emerging views. http://www.dme.gov.za
13. Rader, N & Norgaard, B 1996. Efficiency and sustainability in restructured
electricity markets: The renewables portfolio standard. The electricity journal.
July.
14. Steyn, G 2000a. Draft policy and strategy on electricity supply industry reform for
the Republic of South Africa. Draft document prepared for the Department of
Minerals and Energy.
15. Steyn, G 2000b. A competitive electricity market for South Africa: The need for
change and a strategy for restructuring South Africa’s electricity supply industry.
Document prepared for the Department of Minerals and Energy.
16. Swanson, S 1997. The fate of renewables under utility restructuring in the United
States. http://www.ttcorp/com/upvg/record/rc197fat.htm
17. World Bank 1999. Fuel for thought: An environmental strategy for the energy
sector: Washington DC: World Bank.
75
4. RENEWABLE ENERGY RESOURCES
4.1. Renewable energy technologies suitable for independent power
producers
4.1.1. Introduction
This chapter provides a brief overview and comparison of renewable energy
technologies and the suitability for use in grid connected power plants operated as
independent power producers. The term IPP is generally used in referring to a nonutility owned producer of electrical energy who generates and sells its power in
competition with other generators. The IPP concept has also associated with it the
element of project finance in that the construction of the power plant is financed on a
limited or non-recourse basis. The project is therefore financed based on the projected
revenue stream of the plant and does not include recourse to other assets of the
project’s sponsors (Terblance 2000).
As a rough guideline, RET IPPs develop sufficient economy of scale with installed
capacity of 8-10MW and up This scale of plant that is considered suitable for
establishment of a grid connected IPP is dictated more by the project finance criteria
than technology. Smaller size IPP are possible and viable if the project finance route
is not required and alternative or recourse financing is provided. The renewable
energy power generation technologies that are compared below are those that meet
this criterion of scale. The RETs listed below are all mature technologies, which have
been successfully and commercially implemented in South Africa or elsewhere. The
RETs listed under future potential are technologies which are still under development,
but which stand a good chance of being viable in South Africa as a mature
technology.
4.1.2. Wind
Wind energy is probably the widest spread and fastest growing sector of large-scale
(MW range) grid connected renewable energy power plants. The technology is well
established and mature. Europe and the USA have led the world in the development
of grid connected wind farms. With the growing awareness of the global nature of the
energy sector’s environmental impact, particularly on greenhouse gas emissions the
developing world has increased its share of the global market. Numerous wind farms
have been put up internationally, notably in India, North Africa and Island states in
the Caribbean
The technology is based on wind turbines varying in size from 0.5kW to 1.5MW+ per
unit. These turbines are combined in wind farms with installed capacities ranging
from 10 MW to 100 MW and beyond. In the past many wind farms were below 10
MW, but for the future, wind farms should preferably be above 5-10 MW. Due to the
intermittent nature of the wind resource a wind farm typically operates on a capacity
factor of around 20-30%. This means in practise that a nominal 100 MW wind farm is
only producing 20-30 MW of power on an annual average basis. Experience in the
countries that have operated wind farms over the last decade or so has shown that
despite the intermittent nature of wind, the power production of a wind farm is fairly
predictable in terms of the amount and time availability of the power produced.
76
Like most renewable energy resources wind power is very capital intensive with low
running costs. The capital cost of installed wind power is in the order of US$1 million
/MW and the cost of electricity produced is now approaching US$0.04/kWh and is
expected to drop to US$0.03/kWh over the next 2-3 years.
Limitations to uptake of wind are the low cost of grid electricity, the need to develop
local manufacturing capacity to reduce capital costs, and the lack of Government
support or incentives.
4.1.3. Biomass
The main sources of biomass that are viable for large-scale power production in the
South African context are bagasse from the sugar industry and wood wastes in the
wood and paper industries.
Both these industries require a significant amount of process heat as well as power for
their operations. The availability of a fuel source in the from of process wastes have
prompted the sugar, wood and paper industries to generate at least some of their
energy needs on site. In general steam is generated for process heat and in some case
direct motive power. The availability of high-pressure steam also makes possible the
generation of electricity though steam turbines. The amount of electricity generated
depends mostly on the pressure at which steam is produced. Higher pressure means
more electricity. The use of combined cycle (heat and power) combustion
technologies can enable generation efficiencies, which are, double that of
conventional steam turbines. Biomass combustion technologies range in size. In the
South African context power plants range in size from 5 to 50 MW.
In the sugar industry it is common that sugar mills are also exporters of power. In
Mauritius some 60% of the national electricity demand is bought from sugar mills
during the harvesting season. This dramatically reduces the island’s dependence on
imported fossil fuels.
4.1.4. Hydro
Pumped storage
This application of hydropower utilises low-cost electricity at of peak periods to pump
water to a reservoir from which it is released during peak demand periods to generate
peak power. The technology is used extensively in South Africa for peak lopping
purposes. Eskom operates 1 400MW worth of pumped storage plants and a local
Authority (Cape Town) owns and operates an 180MW plant. Although pumped
storage plants utilises hydro turbines for power generation the pumping of water
during off peak periods is done utilising power from the national generation pool,
which is overwhelmingly coal based. In this sense pumped storage cannot be
considered a renewable energy technology.
Storage
This is the most suitable type of hydro power plant for South African conditions. The
use of storage capacity (a dam) helps ensure that the plant can run on a continuous
77
basis as water is stored during high flow periods and released during low flow periods
to even flow and therefore power production. Due to the negative environmental and
social impact of large dams due to the immersion of large tracts of land under storage
dams and the displacement of people, hydropower plants are in some instances (e.g.
by the European Union) only considered renewable at capacities up to 10-15MW.
Capital costs are in the order of US$0.8 – 1million/MW. The cost of electricity
produced is in the range of US$0.2/kWh although this can be further reduced to the
long operational life (up to 30-40 years) of a small hydro plant
Run of river
In the light of the highly variable annual flow patterns of most South African rivers
and the frequency of droughts, run of the river hydro systems are not likely to be
developed in South Africa
Suitability for Micro hydro production in South Africa
Eskom conducted a study in 1998 to supply non-grid electricity from micro hydro
facilities. The cost of this technology was also compared with the cost of grid supply
via a Single Wire Earth Return (SWER) system. The cost obtained for the micro
hydro option was based on an actual (run of river) site identified in the Eastern Cape,
which has a potential capacity of 25kW at a 95% assurance level.
The study concluded that, although there may be a number of suitable sites available
in South Africa for micro hydro, it would only be economically viable when the
demand area is located further than 26km from the existing distribution network. For
shorter distances, the SWER line option would be more economical. This study
further concluded that the remaining areas beyond the 26km distance are either not
technically feasible to sustain a micro hydro scheme or lack the demand.
4.1.5. Solar
The dominant solar technologies internationally are photovoltaic systems (PV) and
solar water heaters. For purposes of large-scale grid connected power however, solar
thermal electric technologies are more suitable. PV is a very well established
technology and is increasingly used in grid-connected applications, but at present the
technology is not suitable for IPP type applications.
Solar thermal electric systems offer considerable potential for large-scale (10MW+)
electricity generation. A number of different technologies for solar thermal power
generation have been developed. The basis for electricity generation is that of
focussing or concentrating solar radiation to achieve high temperatures to drive steam
or external combustion cycle generator. Most of the technologies are still immature
and require further development to achieve commercialisation. Solar thermal electric
plant are either coupled in a hybrid configuration with a fuel such as natural gas or
used in combination with advanced energy storage technologies such as molten salts
to provide 24-hour production capacity. The main conversion systems are:
 Parabolic trough
 Central receiver
 Dish-Stirling systems
78
Capital costs are in the order of US$1.4million/MW for the current range of parabolic
through systems being piloted internationally.
4.2. Comparison of renewable energy technologies for suitability as IPPs
The table below lists and compares the available RETs for suitability as grid
connected power plants. Coal is included for comparative purposes.
Table 1 Comparison of power plant types
Type
Physical
characteristics
Coal
Flexible with
good frequency
response
Economic
characteristics
(all descriptions
are relative)
Medium capital
costs, medium to
high running costs
Hydro
(pumped
storage)
Hydro
(+storage)
Hydro (run of
river)
Wind
Extremely
flexible
High capital costs,
high marginal costs
Flexible
High capital costs,
low running costs
High capital costs,
low running costs
High capital costs,
low running costs
Energy crops
and biomass
residues
Flexible
High capital costs,
low running costs
Municipal
waste
Flexible
High capital costs,
low running costs.
Running regime
dictated by need to
deal with waste
stream
Landfill gas
Limited flexibility
Inflexible
intermittent
Inflexible
intermittent
Solar thermal Flexible
intermittent
dependent on
back up fuel or
storage
High capital costs,
medium running
costs
79
Typical running regime or
role within system
“Capacity following” and
frequency response
provision. Capacity factors
from 20-70% Can easily be
higher; it is more the
demand side than the
generation units that
determines the total
generation
Rapid response (in either
direction) and peak lopping
Base load and capacity
following
Base load intermittent
generator
Base load intermittent
generator. Capacity factors
25-40%
Base load steady output.
Capacity factor around 80%
(not for bagasse, usually no
more than 5 months per
year)
Base load steady output
Capacity factor around 80%
Base load. Capacity factor
90%
Base load intermittent
Based on Hartnell, 2000, p62.
From a comparison of the characteristics of the various RETs the following
technologies are identified as viable for potential IPPs in the South African context in
the period under consideration.
 Wind
 Biomass including bagasse, wood and pulp.
 Hydro
Technologies, which could be viable in the longer term, include:
 Solar thermal
 Landfill gas
 Municipal waste incineration
4.3. Renewable energy resource assessment
4.3.1. Background
The mere availability of a resource does not mean that that resource can readily be
used as a fuel for a commercially operated electricity generator. To utilise the
resource several factors need to be considered: the conversion system, quality of the
fuel, conversion cost, transport cost as well as the size and location of the demand
(CSIR 1999). This section will provide an overview of the renewable energy
resources of South Africa, but will focus on those identified in the section above as
viable in the short and medium term.
A number of resource assessments have been completed for the various renewable
energy resources. Notable has been the South African Solar Radiation Handbook, the
Wind Atlas of South Africa, and a PhD thesis entitled ’Towards a Renewable Energy
Strategy for South Africa’ (G Stassen). Furthermore, the South African Renewable
Energy Resource Database that is currently under development by the CSIR, Eskom
and the Department of Minerals and Energy. The latter report contains assessments
for solar, hydro and biomass resources and is in the process of completing the wind
energy resource assessment. The database was developed using a GIS based
methodology which enable more sophisticated assessments that with the previous
reports.
The CSIR report (1999) is based on the analysis of a comprehensive data set, which
covers the whole of South Africa. The figure provided below shows the average and
total amounts. National level data is useful in identifying potential resource types and
localised densities or areas of highest probability. To move from such broad resources
assessments to the identification of potential large-scale electricity generation requires
a lot more detailed and localised analysis. The CSIR database can be accessed for
such focussed and detailed analysis of specific areas.
80
4.3.2. Wind
Estimates of wind power potential for South Africa were done by Diab (1995: 3-9)
who generally concluded that:



Wind power potential is generally good along the entire coast with localised
areas, such as the coastal promontories, where potential is very good, i.e.,
mean annual speeds are above 6 m/s and power exceeds 200 W/m2;
Moderate wind power potential areas include the Eastern Highveld Plateau,
Bushmanland, the Drakensberg foothills in the Eastern Cape and KwaZuluNatal; and
Areas with low wind power potential include the folded mountain belt (vast
region of very complex and diverse terrain), the Western and Southern
Highveld Plateau, the Bushveld basin, the Lowveld, the Northern Plateau, the
Limpopo basin, Kalahari basin, the Cape Middleveld and the KwaZulu-Natal
interior.
(Stassen, 1996)
Figure 1 depicts those locations throughout South Africa experiencing mean annual
wind speeds in excess of 4 m/s. A new GIS wind map will soon be available from
Department of Mines and Energy.
Figure 1: Generalised map of wind power potential in South Africa (Diab, 1995:36)
81
Historically wind energy has had few applications in South Africa, and the country
only has a total installed capacity of about 200 kW of wind power made up from
small (<5kW) units. Stassen (1996) estimates the potential contribution of wind
energy as about 1 717 GWh/annum, or some 1.1% of annual South African energy
consumption. This estimation was based on the conversion of the total potential wind
resource at a 10% conversion factor.
4.3.3. Biomass
Background
The use of biomass as a fuel source for sustainable energy systems is growing
internationally. Biomass resources are extensively used for energy production in
countries such as Mauritius, which are dependent on imported fuels for power
production. Electricity generated from bagasse contributes some 60% of Mauritius’
electricity needs during the 9-month harvesting season.
Fuel wood is the primary energy source of some 12 million people in both rural and
urban areas of South Africa, and some 8 million tonnes of fuel wood are consumed
annually. This use of biomass although significant in terms of overall energy balance
and rural energy use is not relevant to IPP applications.
One of the most important criteria that determine the suitability of a biomass resource
for energy generation is transport. If the raw material has to be transported far to bring
sufficiently large amounts to a single point for processing, the costs involved may
render a project unviable. This is often the case for non-cultivated biomass, which is
distributed over a large geographical area or for certain agricultural residues, which is
normally available and processed in too small an amount to justify commercial power
generation. In the case of sugar mills or wood and paper processing plants, the
processing point is situated very close or within the plantation and the amount of
biomass residues from processing on site or ‘inside the fence’ is sufficient for
powering sizeable power plants.
The assessments below will focus therefore on these resources, which are suitable for
power production within the present context of processing. The resource availability
of other sources of biomass is mentioned more briefly. Stassen (1996) provides a very
comprehensive overview of a wide range of biomass resources in South Africa. The
data below is mostly drawn from the 1999 CSIR report.
In Figure 2 below the total potential biomass energy in South Africa is represented as
modelled by the CSIR. The national representation is of little value when considering
potential electricity grantors as it includes biomass resources such as grass. It is
relevant to note the high energy densities found around the sugar, wood and pulp
mills as indicated in the insert. It is at these mills where the potential lies for IPPs.
82
Figure 2: Total biomass energy potential for South Africa (CSIR 1999)
Bagasse
Bagasse is the residue that remains after sugar cane has been processed in mills for
sugar production. The principal sugar cane growing areas are the KwaZulu-Natal
coastlands and the Mpumalanga lowveld. In 1998 there were 400 000 ha under cane
with an average yield of 52.5 tons/ha. Therefore some 21 million tons of sugar cane
was delivered to the various sugar mills, which produced some 7 million tons of
bagasse with a net calorific value of 6.8 GJ/ton and a total energy of 47,6 million GJ
(Wienesse 1999).
With the sugar mills currently generating significant amount of power for own use
and even limited export, bagasse offers some of the best potential for IPP in South
Africa using renewable or non-renewable resources. Wienese (1999) estimates that
the current production of energy of some 30kWh/ton can be increased by up to
120kWh/ton using conventional steam plants running at higher pressures. Using
integrated combined cycle combustion technologies the yield per ton bagasse can be
increased up to 200kWh/ton. Without further expansion in production but through
increased efficiency and new technologies the potential of this resource can be
increased from the current 210 GWh to 1 400GWh.
83
Apart from power generation the bagasse is also sold for use in other products. By
increasing the efficiency of power production it would not be necessary to use more
bagasse that is presently available for power generation if excess bagasse can be sold
profitably over the fence.
Wood
The CSIR (1999) identified the following wood biomass resources:
 Commercial plantations
 Indigenous woodlands
 Alien vegetation
 Deciduous tree off cuts from pruning of fruit trees
 Sawmills (primary processing) mostly woodchips, sawdust and bark
 Pulp mills: boiler ash, sludge, sawdust and black liquor
The viability of wood as an energy source suitable for electricity generation lies
within the wood, pulp and paper industries. In these industries there is already some
heat and power generation taking place and there is potential for upgrading and
expansion. The sector consists of two main components: the production of timber and
the production of wood pulp for paper and board manufacturing.
A GIS-based map showing the availability of wood and pulp resources in South
Africa will soon be available from Eskom TSI (Dr L. van Heerden, tel 11-6295526) or
from CSIR (Mr J. Muller, tel 12-8413992). Table 2 below give the result of the CSIRs
modelling of the wood and pulp industries energy potential based on availability and
energy content of fuels.
Table 2: Annual Wood and Pulp Energy Potential (CSIR 1999)
Type
Tonnage (T/Year)
Sawmills
Pulp mills
1.57 million
1 million
Energy potential
(GJ/year)
27.5 million
16.3 million
Agricultural residues
Agricultural residues from the major annual and biennial crops are:
 Maize husks, stalks and leaves
 Wheat
 Sunflowers heads, stalks and leaves
 Sugarcane leaves and topping (excluding bagasse)
 Sorgum heads, stalks and leaves
These crops constitute more than 98% of annual production in SA (CSIR 1999). The
CSIR’s modelling of the energy potential of these crops was based on expected yield
per area cultivated and the energy range of the crop residues. The residue amounts per
area vary between 0.2 –10 ton/hectare/year with an annual total of 24.4 million
tonnes/year. Energy values varied between 2 – 140 GJ/ha/year with sugarcane
recording the highest values. Total annual energy production is estimated at
341GJ/year.
84
A GIS-based map showing the magnitude and distribution of the energy potential
from agricultural residues in South Africa will soon be available from Eskom TSI (Dr
L. van Heerden, tel 11-6295526) or from CSIR (Mr J. Muller, tel 12-8413992).
Grass
The potential energy from grass reached 84 GJ/ha/year in the most favourable areas
along the low-lying areas of KwaZulu Natal, Mpumalanga and the Eastern Cape
(CSIR 1999). By comparison in the savannah regions the yield was as low as 0
GJ/ha/year.
Manure and Litter
The potential exists to utilise the manure and litter from livestock to generate methane
gas through anaerobic fermentation in biogas plants. Stassen (1996) estimated the
potential energy production from the mayor livestock. Most Cattle farms in South
Africa are free range. The poultry and pig farms do have large amounts of manure
available on site. It needs to be assessed if the litter and manure from these farms can
be used in biogas generators or burned in incinerators on a scale that would warrant
classification as an IPP. It is unlikely that sufficient amount of manure would be
available at a single point to warrant commercial electricity production.
In Table 3 below only the manure and litter available at a single point such as for
feedlot cattle of chicken broilers were included
Table 3: Potential energy from livestock manure and litter (Stassen 1996)
Type
Cattle
Pigs
Poultry
Energy Production
14 PJ/annum
1.1PJ/annum
5.1PJ/annum
4.3.4. Hydro
South Africa has an average rainfall of 500mm, which is low by world standards.
This combined with the seasonal flow of the country’s rivers and frequent droughts or
floods limit opportunities for hydropower. The country’s potential for hydropower is
concentrated in a few areas along the eastern escarpment where there are 6000 to
8000 potential sites.
Stasen (1996) estimates the hydro potential of South Africa as follows:
‘The average annual rainfall of South Africa as a whole is 500mm, compared to a
world average of 860mm. The humid subtropical conditions in the east and the dry
desert conditions in the west result in an uneven distribution of rain across the
country. Surface run-off is the main water source in the country, notwithstanding the
fact that on average only about 9% of the total rainfall reaches the rivers. The average
annual run-off of South Africa’s rivers is estimated at 53 500 million m3. Because of
the variability and evaporation losses, only abut 62% or 33 000 million m3 of the
mean annual run-off can be exploited economically with present methods. Only one
quarter of South Africa has perennial rivers. These are mainly in the Southern and
South Western Cape and on the Eastern escarpment slopes.
85
The estimated maximum theoretical hydro potential of South Africa is about 8 360
MW or 73 230 GWh (300 PJ) per annum. It has been estimated that the maximum
theoretical potential for the Eastern Cape alone is some 14 000 GWh per annum.
Owing to the high run-off variability from year to year, limited reservoir storage sites,
losses by spillage during floods, the uneconomical scale of some sites, etc., a more
conservative estimate of the realisable hydro potential would be nearer to 15% of the
maximum theoretical potential; that is approximately 11 000 GWh or 40 PJ per
annum (Stasen 1996).
The figures below provide a graphical representation of the areas with macro and
micro hydro potential in South Africa.
Figure 3: Suitability macro hydro power in South Africa (CSIR 1999)
86
Figure 4: Suitability for Micro hydro production in South Africa (CSIR 1999)
4.3.5. Summary of resource assessment
Table 4: Summary of renewable energy resource potential
Resource
Wind 1
Bagasse 2
Wood 1
Hydro 3
4
5
6
Total theoretical energy
contribution/annum
(PJ/year)
6.2
47
44
40
Based on total theoretical potential of total resource
Based on total energy value of current harvest
Harvestable potential
Table 4 provides a summary of renewable energy resource availability. It is evident
that South Africa is endowed with abundance in renewable energy resources most
notably solar, biomass and wind. Exploitation of these resources for energy
generation purposes has the potential to contribute up to 20% of national electricity
production by 2020 (SESSA 2000).
87
4.4. Resources with potential for the future
4.4.1. Solar
The average daily solar radiation in South Africa varies between 4,5 and 6,5 kWh/m2
(16 and 23 MJ/m2) (Stassen 1996). Figure 5 below (CSIR 1999) provide a graphic
representation of the solar radiation as well as cloud cover for the best and worst
months of the year. Cloud cover is important for estimating the potential for solar
thermal electric power plants, which relies on direct and diffuse radiation for power
production. From the figures it is clear that there considerable resource potential both
in terms of radiation and unclouded weather in the North West and Northern Cape
provinces. Such a resource is well suitable for solar thermal power generation.
Figure 5: Annual direct and diffuse solar radiation
More detailed maps on solar radiation, cloud cover etc. will soon be available from
Eskom TSI (Dr L. van Heerden, tel 11-6295526) or from CSIR (Mr J. Muller, tel 128413992).
88
4.4.2. Wave Energy
Wave potential along the Cape coastline is estimated as significant, but no
exploitation is taking place to date. A mean annual power level of about 40 kW/m
wave crest is typical offshore at the Cape Peninsula. An estimated total average power
of 56,800 MW is available along the entire coast however it is doubtful whether any
of this potential energy could be realised on a large scale.
4.4.3. Energy from Waste
South Africa disposes of almost all of its refuse to landfill sites. The energy content
of the total domestic and industrial refuse disposed of in 1990 amounted to 40,5 PJ
per annum. The most feasible area for incineration of refuse from large municipalities
would be the Reef area of Gauteng where it is calculated that approximately 17 PJ
could be produced annually.
The net realisable energy available from sewage-derived methane in South Africa
would be in the order of 36 MWh (1,13 PJ) per annum for electricity generation and
96 MWh (3,0 PJ) for heating purposes.
Options for energy production from municipal waste are in the process of being
examined including biogas projects as well as methane gas from landfills.
References
1. Hartnell, G 2000 ‘Wind on the system. Grid integration of wind power’
Renewable Energy World, March April 2000. James & James. London
2. Stassen G (1996): Towards a renewable energy strategy for South Africa. PhD
thesis. University of Pretoria
3. Diab R (1995): Wind Atlas of South Africa. Department of Minerals and Energy.
Pretoria, South Africa
4. CSIR (1999): South African Renewable Energy Resource Database. Council for
Scientific and Industrial Research. Pretoria, South Africa
5. Wienesse A. (1999): Co-generation in the South African Sugar Industry. Sugar
milling Research Institute, University of Natal, Durban. Durban, South Africa.
6. Terblanche V (2000): Common themes in independent power projects in Southern
Africa. Traders, Issue 3 July October 2000. Traders Publications, Johannesburg,
South Africa.
89
5. NON UTILITY EXPERIENCES IN SOUTH
AFRICA
5.1. Background
In the context of this project the term ‘non-utility generation’ refers to non-Eskom
electricity generation. Within the South African context electricity generation policy
is in the process of being liberalised. Independent Power Producers (IPPs) will have
an improved position relative to the national electricity generation giant ESKOM. The
implementation of the proposals as set out by the National Energy Regulator (NER)
underline this fact making development of IPP projects, and specifically sustainable
energy projects, an attractive proposition for new energy players. The proposed
restructuring of the Electrical Distribution Industry in South Africa is a direct result of
this new policy.
The present national Energy Policy of the Department of Minerals and Energy (DME)
strongly supports the implementation of sustainable energy projects especially if these
are to the benefit of the underprivileged rural population. In this regard too, the
constitution of South Africa obligates the Local Authorities to provide electricity
services to their (rural) electorate and to do this as cost effectively as possible. It is
within the scope of the Local Authorities to look at alternative means of securing its
power resources and to pass on any economic benefits to its electorate. Any local
power generation possibilities, which are cheaper than conventional methods and are
renewable, is an ideal means for the Local Authorities to meet it’s constitutional
obligation, pass on economic benefits to it’s electorate and to play a role in improving
the local environment.
There exists in South Africa a number of electricity generators apart from Eskom
which may potentially be structured as IPPs. These generators can be divided into
three groups:
 Existing and licensed generators,
 Existing but unlicensed generators and
 Potential generators.
The National Electricity Regulator (NER) has licensed most existing generating plants
as electricity generators according to the Electricity Act of 1987. The Act specifies
that plants that generate more than 5 GWh/annum for resale as well as all municipal
generators require a NER license. In 1995 the NER approached all the known cogenerators of electricity and the self-generating municipalities as well as Eskom as
part of the licensing process. Private generating capacity was also identified in the
process. A license is provided for a generating plant and not for an operator. Eskom
therefore has been licensed for each of its power stations. The breakdown of the 50
currently licensed power stations is
 Eskom
24 plants
 Municipal
18 plants
 Private
8 plants
Non-utility generation contributes 4.9% (2 114 MW) of South African electricity
generation capacity. Eskom provides the remainder (41 027MW). Of interest to this
90
study are the 26 non-Eskom operated licensed plants, other existing plants which have
the potential to be developed as IPPs (so called brownfield projects) as well as a
number of new or ‘greenfield’ projects.
5.2. Existing non-utility generators
There is no formal distinction made in South Africa between renewable and nonrenewable energy powered electricity generators in terms of generation licensing.
Generators are listed and grouped according to fuel use such as coal, hydro or gas and
utility or non-utility. It is however possible to separate out those generators that use a
renewable energy fuel source such as biomass or small-scale hydropower. The NER
has licensed 8 renewable energy based non-Eskom operated power plants. Of these, 4
are bagasse burning sugar mills, 3 are municipal owned hydro power plants and one is
a privately owned small hydro power station.
5.2.1. Small hydropower
Friedenheim hydro
Friedenheim hydro can be viewed as the only existing IPP in South Africa. It is
privately owned, sells the bulk of the generated electricity through a Power Purchase
Agreement (PPA) and is a profitable operation. The plant is operated as a
commercially profitable and sustainable business venture. It was financed through
equity provided by investors (Friedenheim Irrigation Board - FIB). The project was
developed by a consulting engineering firm (MBB), which also has a maintenance
and operation contract with the plant owners.
The small hydro power plant is situated next to the town of Nelspruit in the
Mpumalanga province. It is owned by the members of Friedenheim Irrigation Board
and operated by MBB an engineering firm. The plant provides power for water
pumping to FIB, but 93% of the power generated is sold to the Nelspruit local
authority through a PPA that sets the tariff at 12% below the price at which Nelspruit
buys power from Eskom (its bulk electricity provider).
The water supply to the turbines is by means of two penstocks feeding from an
irrigation channel. The outlet of the turbines is into the Crocodile River. This set-up is
suitable for constant and base load power supply, as there is no capacity to store water
for peak power generation.
After some initial difficulties with the water inlet system and the dedicated power line
connecting the plant to the Nelspruit distribution system the plant has proved to
require very low levels of maintenance. Maintenance and operation costs are in the
order of R 200 000/annum, which is mainly routine maintenance and labour.
91
Overview
Name
Licensed
Capacity
Maximu
m power
produced
Net
Private
energy consumption
sent
out
Load
factor
MW
3
MW
2
MWh
14 434
%
73.7
Friedenhei
m
* Used for water pumping by FIB
MWh
1 041*
The Friedenheim Hydro scheme has proved a profitable and viable investment. Its
successful track record has gone along way towards dispelling the myths common in
the electricity supply industry that it is not possible to compete with Eskom,
especially not with small and renewable energy producers selling energy wholesale.
The motivation for the PPA with the Neslpruit Local Authority was based on the cost
savings involved in buying electricity at a rate below that of Eskom and to a lesser
extent the increased security of supply offered through this diversification in
suppliers.
92
Summary - Friedenheim Hydro
Friedenheim hydro can be viewed as the only existing IPP in South Africa. It is
privately owned, sells the bulk of the generated electricity through a Power Purchase
Agreement (PPA) and is a profitable operation. The plant is operated as a
commercially profitable and sustainable business venture. It was financed through
equity provided by investors (FIB). The project was developed by a consulting
engineering firm (MBB), which also has a maintenance and operation contract with
the plants owners. The Friendeheim Hydro scheme has proved a profitable and
viable investment. Its successful track record has gone along way towards dispelling
the myths common in the electricity supply industry that it is not possible to compete
with Eskom, especially not with small and renewable energy producers selling
energy wholesale.
The small hydro power plant is situated next to the town of Nelspruit in the
Mpumalanga province. It is owned by the members of Friedenheim Irrigation Board
and operated by MBB an engineering firm. The plant provides power for water
pumping to the Friedenheim Irrigation Board (FIB), but 93% of the power generated
is sold to the Nelspruit local authority through a PPA that sets the tariff at 12%
below the price at which Nelspruit buys power from Eskom (its bulk electricity
provider).
The water supply to the turbines is by means of two penstocks feeding from an
irrigation channel. The outlet of the turbines is into the Crocodile river. This set-up is
suitable fro constant and base load power supply as there is no capacity to store
water for peak power generation.
After some initial difficulties with the water inlet system and the dedicated power
line connecting the plant to the Nelspruit distribution system the plant has proved to
require very low levels of maintenance. Maintenance and operation costs are in the
order of R 200 000/annum, which is mainly routine maintenance and labour.
Maximum
power
produced
MW
2.4
Nett energy
sent out
MWh
Private
consumptio
n
MWh
1 041*
14 434
Load
factor
%
73.7
The motivation for the PPA with the Neslpruit Local Authority was based on the
cost savings involved in buying electricity at a rate below that of Eskom and to a
lesser extent the increased security of supply offered through this diversification in
suppliers.
93
Municipal owned hydro power stations
Three small municipalities are currently licensed to operate small hydro power
stations. These stations date from the 1930’s, and although these plants can be
expected to operate for many more years operating efficiencies are decreasing. This is
evident from the low load factors, which are at best half that experienced at the more
modern Friedenheim plant. This implies that the plants were in full-scale operation for
only some 50% of the year. A 1998 overview of the plants is provided in Table 1.
Table 1: Municipal small hydro power plants
Name
Lydenburg
Ceres
Piet Retief
Licensed
Capacity
Maximu
m power
produced
MW
MW
2
1
1
2
1
1
Net
energy
sent
out
MWh
6 000
413
2 900
Private
consumption
Load
factor
MWh
%
0
0
0
34.2
8.6
33.1
Lydenburg
The hydro station in Lydenburg, which dates from the 1930’s, has been out of
operation since 1998. This was due to the need to repair components of the power
plants as well as the connector to the town’s distribution system. The Town council
therefore decided to subcontract the operation and maintenance of the plant to the
private sector. The intention is that the plant would be leased to a private operator
who would do the necessary rehabilitation and sell the electricity to the town. This
would in effect make Lydenburg Hydro an IPP. Some five companies responded to
the invitation to tender. At the time of writing the result of the tender has not yet been
announced.
Ceres
The Ceres hydro station has a nominal capacity of 1MW. The maximum demand
from Ceres varies between a minimum of 6000kVA and 14000kVA. Electricity is
generated between a minimum of 50kVA and 900kVA or between 0.35% and 15% of
the total usage by Ceres. The amount of electricity generated is determined
by the amount of water available in the dam. The generation of the power
from the station represents an annual saving of 2.5% on the electricity
account at current Eskom tariffs.
Piet Retief
The Bakenkop hydro power plant was commissioned in 1950 to supply the town of
Piet Retief with electricity before it was connected to the national transmission
system. After 50 years it is still providing power to the town. The installed capacity is
0.8 MW. The system operates intermittently depending on the availability of water.
The annual operational cost is R 290 760. There is no foreseen upgrading or
decommissioning of the plant. At present it provides electricity at an average cost of
R 0.09/kWh which is about half the rate the town pays to Eskom for its power. The
1998 load factor of 33% will result in revenues of R 210 000, which are some R 90
94
000 less than the operational costs, and the plant is therefore running at a loss. The
power station is clearly very maintenance intense.
Cape Town Pumped Storage
The City of Cape Town owns and operates the 180 MW Steenbras pumped storage
power station for peak power production. This is however not a renewable energy
generator as the plant uses electricity purchased from the national transmission system
(i.e. coal based electricity) to pump the water during off peak times.
Other small hydro
Eskom inherited four small hydro power plants in the present Eastern Cape Province
from the Trankei government when the homeland governments were dissolved and
integrated into the South African government in 1994. These hydro power plants,
described below in Table 2 are connected to the national transmission network and are
providing base load to the Eskom system.
A request was submitted to Eskom Generation for information on these plants on 21
July 2000 and a formal reply from Eskom to the project co-ordinator at the DME was
sent on 25 August 2000.
Table 2: Eskom small hydro plants
Name
Collywobbles
First Falls
Second Falls
Ncora
Gariep
Vanderkloff
Licensed
Capacity
Maximu
m power
produced
MW
MW
42
6
11
2
42
6
11
2
Net
energy
sent
out
MWh
257 544
36 792
67 452
12 264
Private
consumption
Load
factor
MWh
%
0
0
0
0
70
70
70
70
5.2.2. The sugar industry
The sugar industry is the biggest and best-established example of renewable energy
fuelled non-utility generators in South Africa. There are 15 sugar mills in South
Africa of which five has been licensed as electricity generators by the NER. All the
plants however generate steam and power from bagasse. The licensed plants are those
who are in a position to export power as listed below in Table 3. The unlicensed
plants are therefore not exporting any power.
95
Table 3: Sugar mills licensed by the NER
Name
TH Amatikulu
TH Darnall
TH Felixton
TH
Maidstone*
Transvaal
Suiker**
Licensed
Capacity
Maximum
power
produced
MW
MW
Net
energy
sent
out
12
13
32
29
10
7
22
20
MWh
43 775
27 388
79 935
79 582
20
-
-
Private
consumption
Load
factor
MWh
%
43 775
27 388
79 935
44 917
51
44.7
41.5
45.4
-
-
* The Tongaat Hulett Maidstone is a combined bagasse/coal plant
**Transvaal Suiker was awarded a generation license in June 1998 and no data is
available at present
From total bagasse available some 5,5 million GJ of electrical energy can be
generated in a typical conventional boiler and turbine alternator configuration as used
in the South African sugar industry. This equates to 262 MJ/tc or 73 kWh/tc.
Typically this means a boiler operating at 75% efficiency to produce steam at a
pressure of 3000 kPa(abs) and a temperature of 400°C which is exhausted in steam
turbines at 70% efficiency to a back pressure of 200 kPa(abs) (Winesse 1999). The
power generation potential for the sugar industry through improved combustion
technologies is listed in Table 4.
It is possible to increase electricity production from the present 30kWh/ton to
120kWh using the present steam based technology and to reach up to 460kWh/ton
through advanced combined cycle gasification processes.
Table 4: Electricity Generation Potential (Wienese 1999)
Cycle
Technology
Electricity generating fuel
kWh/ton
Steam
Steam
Steam
Combined
Combined
old
old
new
new
new
part bagasse (present)
total bagasse
total bagasse
total bagasse
total bagasse, tops and trash
30
73
120
200
460
5.2.3. The wood and pulp industries
The industry consists of two sectors, the production of timber and the production of
wood pulp for paper and board manufacture. A large proportion of the output of
softwood mills in South Africa is in the form of kiln-dried timber resulting in a great
demand for thermal energy. Almost all of these mills use their wood wastes as boiler
fuel for steam generation while some also practice cogeneration (Stassen 1996).
Most of the wood mills only utilise the steam generated and still buy their electricity
needs from the local distributor usually Eskom. Cochane(1998) report only three of
the South African mills generating their own electricity.
96
A reason, why only steam is produced and not power as well, is that kiln heating
steam is required round the clock but electricity is only required for the 1012hours/day of the sawmills’ operation. For the sawmills to generate power it must
be possible to sell this surplus power when the mill is not operating. According the a
recent study (Cochrane 1998) the electricity generation potential through cogeneration technology is about two to three times the mill’s own demand.
Steam is produced in the sawmills by the combustion of the wood wastes that result
from the timber production process. Saw mill waste makes up about 34% of the tree
as harvested (Cochrane 1998).
In all three cases, where South African saw mills are producing electricity, the
electricity is generated though the use of steam condensing turbines. These turbines
were invariably purchased second hand from small municipal power stations.
Cochrane (1998) reports that the saw milling industry is well aware of the potential
for co-generation power production. This potential is not realised due to the
competitive tariffs offered by Eskom and the high cost of installing new power
generation equipment.
The pulp and paper mills generate some power for their internal needs. This is mostly
due to the high need for reliability in electricity supply during production. A dip in
power supply can have serious effects on production (Anderson 1994). Power is
derived from burning waste wood bark in combination with coal and the distillate
from wood chips (black liquor). The energy recovery from black liquor and bark is
typically a third of that which is found in similar plants in Scandinavia. There is only
one recorded case of a South African mill burning bark for power generation.
There is therefore potential for upgrading of these plants to provide more heat and
power. The availability of the resource cannot be seen as the constraint rather the
financial viability of converting the plants into power exporters and selling electricity
into the available market. Table 5 below lists the wood and paper mills in South
Africa that process wood for paper production. There are a number of other mills in
South Africa that produce paper but these do not process wood as pulp source and
therefore doe not have power generating capacity.
Table 5: Pulp and paper mills in South Africa
Name
Mondi Group
Sappi Group
Number of mills
6
7
A 1994 study (Anderson) found that the generation of power in the paper and pulp
industries combined was some 279 MW, while total system demand was some
590MW. The shortfall of 335MW was purchased from Eskom. In only one instance
did a mill produce excess power that could be exported. The fact that none of the
wood or paper mills are licensed by the NER is an indication that no power is
currently exported from these mills compared to the licensed bagasse plants. The
mills are opting to buy power from Eskom and to utilise their own generation capacity
for increased security of supply is an indication of the perception within the industry
97
of the economic value of own power production. At present bulk electricity prices the
mills do not see themselves competing with Eskom. The mills will have to more than
double their energy production in order to meet own demand and have power
available for export.
5.2.4. Non-renewable generators
The NER has currently licensed 17 non-Eskom and non-renewable energy based
power generators. Of these 11 are municipal owned coal fired power stations, 5 are
municipal owned gas turbines used for peaking power and 2 are private (SASOL)
owned coal fired power stations. Table 6 lists and describes all licensed municipal
power generators. Of these power stations two (Pretoria West and Kelvin) have
applied to the NER to be refurbished as IPPs. The involvement of the Johannesburg
and Pretoria Local Authorities with their significant political clout will carry a lot of
weight at petitioning government for IPPs to be approved. These initiatives may prise
open the door for other IPPs to follow and benefit from.
Table 6: Municipal owned power stations
Name
Licensed
Capacity
Maximum
power
produced
Net
energy
sent out
Private
consumption
Load
factor
MW
MW
MWh
MWh
%
Coal
Athlone
Kroonstad
Swartkops*
Bloemfontein
Kelvin A
Kelvin B
180
30
240
102
180
420
92
0
15
119
218
0
0
0
0
0
17.9
0
32.2
57.7
63
Orlando
Rooiwal
300
300
62
180
0
0
13.6
64.5
Pretoria
West
Gas
turbines
Roggebaai
Athlone
Port
Elizabeth
Johannesbur
g
Pretoria
Pumped
storage
Steenbras
180
116
144 286
0
42 322
601 145
1 203
916
73 945
1 016
719
298 100
0
29.3
40
40
40
37
12
0
144
47
0
0
0
0
0.4
0
0
176
78
5 134
0
0.8
24
24
30
0
0
180
179
- 94 264
0
18.4
* Decomissioned in 1998
98
5.3. Renewable energy IPPs under development
At the time of writing the NER has received licence applications or pre application
project descriptions from three potential renewable energy IPPs. Of these, DARLIPP
(wind) and Bethlehem Hydro are at the feasibility phase of development and could be
implemented within the next 1-2 years. The other project is Green Energy (wave),
which is still in a pre-feasibility phase.
Apart from the renewable energy IPPs under development a number of non-renewable
energy based power projects have been submitted to the NER for licensing or as preapplication descriptions of potential IPPs. These projects are in various stages of
development and include:
Proposed Cape Town Natural Gas power plant
1000MW
Refurbished Pretoria West Power Station (coal/gas)
180 MW
Refurbished Johannesburg Kelvin Power station (coal/gas)
300 MW
Eskom Pebble Bed Modular Reactor (nuclear)
100 MW+
Richardsbay (fluidised bed coal plant)
210 MW
Solid Waste Technologies (municipal waste)
60 MW
It is clear that the proposed renewable energy IPPs are of a smaller scale than the nonrenewable energy power plants. This fact that small IPPs tend to be based on
renewable energy technologies (RET) is due to the relatively small economies of scale
that can be achieved by RETs. This small scale is also an advantage as it enables a
closer correlation between electricity demand and supply by adding smaller steps of
generation capacity than would be possible with fossil fuel technologies. The
lumpiness of fossil fuel generation is evident from South Africa’s past practice of
adding a 3.6GW coal fired power station at a time and Cape Town’s proposed 1000
MW gas fired power station.
5.3.1. Darling Independent Power Producer (DARLIPP)
Wind power has a substantial potential in South Africa. Today there are about
300,000 windpumps for livestock and community water pumping, but less than 1 MW
of electricity generating wind turbines. Especially on the West Coast, the wind
potential seems good.
In 1996 a private company the Oelsner Group identified a promising site for a wind
farm in Darling, North of Cape Town. The Oelsner Group has then founded a
company, Darling IPP (DARLIPP) for the purpose of electricity generation and sale
using wind energy technology. Darling IPP has conducted a pre-feasibility study in
1997/1998 for a 5 MW wind farm. Preliminary wind measurements were carried out
and results show an excellent wind regime with a potential in access of 7 m/s average
wind speed
In 1997 the Oelsner group involved the wind turbine manufacturers AN Windenergie
GmbH of Germany and Bonus Energy A/S of Denmark to provide input to
developing the wind farm in the Darling area.
99
The Moedmaag Hill on the Slangkop Farm outside Darling was originally identified
as the site. CSIR (a national technology centre) became involved to undertake the site
wind measurements. The Environmental Evaluation Unit (EEU) of University of
Cape Town (UCT) was contracted to conduct the Scoping Process required by the
Environment Conservation Act, requested as a consequence of the necessary
application submitted to Cape Nature Conservation. A lease agreement for land has
been entered with the landowner owning part of the hill and the West Coast District
Council has been approached in order to obtain the departure or rights to special uses
in terms of the Ordinance on Land Use Planning.
The 12th of June 2000 the Minister for Minerals and Energy approved the following
Ministerial Submission Recommendations:
The Minister of Minerals and Energy support[s] the declaration of the Darling Wind
Farm as a National Demonstration Project as per... [(a) and (b) below] in a bid to
develop strategies for wind energy generation in South Africa.
(a)
As a National Wind Farm demonstration Project, the Darling Wind Farm will
through its implementation of the policies of the White Paper on Energy, test and or
inform decisions around replicable new and or novel approaches to recognised
energy and environmental problems and will act as a platform for replication by the
public.
(b)
According to DME Guidelines for Energy Policy Projects 1994/95:
Demonstration Projects of products, processes and technologies may be supported if
the project meets the above criteria and their primary focus is to produce one or more
of the following outputs.:
Economically viable solution to an identified energy issue;
Formulated or implemented national energy policy;
Demonstrated operation on site under actual conditions;
Reduced barriers to market entry;
Publicised results of demonstration.
The Minister also supports the request for international assistance from the Global
Environmental Facility (GEF) and the Danish Co-operation for Environment and
Development (DANCED) in the designing of a National Legal and Regulatory
Framework in partnership with the Department of Minerals and Energy. The latter
will come up with guidelines on how to assess and process Independent Power
Producers (IPPs) and power purchase agreements (PPAs) using the Darling Wind
Farm Demonstration Project as a case study.
In case of the Darling National Wind Farm, the Department of Minerals and Energy’s
definition of Demonstration Project is as follows:
“As a National Wind Farm demonstration Project, the Darling Wind Farm
will through its implementation of the policies of the White Paper on Energy,
test and or inform decisions around replicable new and or novel approaches
to recognised energy and environmental problems and will act as a platform
for replication by the public.
100
Darling National Wind Farm Demonstration Project: Rationale and
objectives:
TECHNICAL:
The project aims to adapt, develop and apply existing technology to local
conditions and needs and to act as a pilot project for Eskom and the public, to
resolve technical and structural issues relating to assisting Independent Power
Producers (who may be or may be not foreign financed) participate in meeting
South Africa’s electricity generation and environmental conservation needs.
ENVIRONMENTAL:
To contribute to the restoring of the global environment in accordance with
recommendations of UNCED (Agenda 21) by identifying barriers for possible
replication and provide suggestions on how those barriers could be removed.
The project will contribute and activate replication of similar projects and
together it will make a real improvement to air quality, reduce carbon dioxide
emissions and therefore global warming as well as other gases (sulphur
dioxide and nitric oxide) that contribute to acid rain.
To be a showcase and example of the Government’s commitment to the
Framework Convention on Climate Change through emission - free
generation of electricity and working towards an investor- friendly climate in
the energy sector.
SOCIAL:
To promote the benefits and use of wind energy as a commercially viable way
of generating electricity by running an Education Centre and contributing to
Governments information dissemination efforts around energy matters and
environmental impact.
It will demonstrate and provide a planning framework for the Government
how to approach an equitable balance between priorities for developing
(RDP) and environmental conservation.
To demonstrate how a South African wind energy industry could contribute to
the creation and retention of jobs and skills.
To participate in the social up-lifting of the Darling and surrounding areas by
bringing jobs to, and sharing wealth (e.g. equity share holding) with, the local
community.
To include and provide capacity to previously disadvantaged persons
(economic empowerment) as equity shareholders and be appointed to the
board of directors for decision making and capacity building processes.
FINANCIAL & ECONOMIC:
It provides an ideal case study and opportunity for South African banking and
investment sector e.g. Development Bank of South Africa (DBSA) and a
platform for international funders (e.g. Global Environmental Facility (GEF)
and the Danish Cooperation for Environment and Development (DANCED)
for promotion, facilitating and testing of innovative renewable energy
financing options.
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MARKET:
To demonstrate the generation of electricity from wind energy, and its
potential to contribute positively to the infrastructure development of South
Africa within a successful and sustainable national growth and development
strategy.
POLICY:
Capacity building in the implementation of the Energy White Paper renewable
energy in policy, legislation and aim of achieving energy security in electricity
supply and environmental restoration through diversity of supply sources.
To act as pilot project for legislators to identify and resolve critical issues
such as transparency in the generation sector, availability of information, and
non-discriminatory open access to uncommitted capacity on the national
transmission network.
INSTITUTIONAL:
The project provides an opportunity for interested parties e.g. NER, DBSA,
DEAT, DME, Darling Municipality, DARLIPP etc. to share the risk in the
development process which otherwise would not have been possible to be
carried alone.
The Darling Demonstration Project adheres to the DME Energy Guidelines
for demonstration projects and presents an ideal case study as a
demonstration project with national spin-offs to the country.
As this is a demonstration project and no similar activity has been undertaken
in South Africa to learn from, considerable cost (approximately R5 mil project
value) and time has been contributed by stakeholders and investors and is
going into the development process.
This investment in Darling IPP is a so-called Ethical Investment and all
investors are participating and taking risks “for the better”. The financial
model allows only for a very low return in order to be able to sustain itself.
The development process is open, transparent and the outcomes are available
to form a basis for others to learn from how to replicate similar activities cost
and time efficiently in South Africa.”
Following the Minister’s declaration of the Darling Wind Farm as a National
Demonstration Project, the Danish Co-operation for Environment and Development
(DANCED) and the UNDP/GEF developed project documents for possible assistance
to the preparation of the project. According to these plans, the generation of all
necessary information will be completed by November 2001, and the establishment of
the wind farm will be initiated in May 2002.
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Summary - Darling Independent Power Producer (DARLIPP)
In 1996 a private company the Oelsner Group identified a promising site for a wind farm in
Darling, North of Cape Town. The Oelsner Group has then founded a company, Darling
IPP (DARLIPP) for the purpose of electricity generation and sale using wind energy
technology. Darling IPP has conducted a pre-feasibility study in 1997/1998 for a 5 MW
wind farm. Preliminary wind measurements were carried out and results show an excellent
wind regime with a potential in access of 7 m/s average wind speed.,
The Minister of Minerals and Energy support the declaration of the Darling Wind Farm as
a National Demonstration Project. The Darling Demonstration Project adheres to the DME
Energy Guidelines for demonstration projects and presents an ideal case study as a
demonstration project with national spin-offs to the country.
As this is a demonstration project and no similar activity has been undertaken in South
Africa to learn from, considerable cost (approximately R5 mil project value) and time has
been contributed by stakeholders and investors and is going into the development process.
This investment in Darling IPP is a so-called Ethical Investment and all investors are
participating and taking risks “for the better”. The financial model allows only for a very
low return in order to be able to sustain itself.
The development process is open, transparent and the outcomes are available to form a
basis for others to learn from how to replicate similar activities cost and time efficiently in
South Africa.
Following the Minister’s declaration of the Darling Wind Farm as a National
Demonstration Project, the Danish Co-operation for Environment and Development
(DANCED) and the UNDP/GEF developed project documents for possible assistance to
the preparation of the project. According to these plans, the generation of all necessary
information will be completed by November 2001, and the establishment of the wind farm
will be initiated in May 2002.
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5.3.2. Bethlehem Hydro
Project Description
In the middle of 1997 a mini hydro project was identified in South Africa by a
landowner and a civil engineering consulting firm. What makes this relatively unique
is the fact that South Africa does not have many rivers with a constant yearly flow.
Generally the rivers are dry in the winter period (May to October) and have a high
flow during the summer months (November to April). The Axle River, where the
project was identified, however has an average (guaranteed) flow, which is artificially
regulated, from the Lesotho Highlands. This water flows via the Axle River over a
distance of approximately 300 km to Johannesburg where it is used for drinking water
purposes. The South African and Lesotho Governments have entered into an
agreement guaranteeing the yearly flow in the river. Furthermore in the past, the
generation of electricity was strictly regulated in South Africa and fell solely within
the mandate of the national electricity utility Eskom. The new energy policy stance of
the post-apartheid government allowing electricity generation by the private sector
and the constant water flow in the selected rivers led to the project proposal being
formulated
The project was subjected to a pre-feasibility study by the project initiators. This prefeasibility study showed that the project was broadly feasible. In terms of size the
project was relatively small (approximately US$ 4,5 million). However the sunken
costs for a project (detailed feasibility and development costs) are typically
independent of its size. Small projects therefore have a relatively high sunken cost
percentage in relation to the total investment. This problem, which is universally
encountered, prevented the project from going forward.
The project initiators therefore approached a Dutch consultant with the request to
investigate the possibility of some form of concessionary finance to cover the sunken
costs. The project parameters made the project an ideal candidate for the AIJprogramme of the Netherlands Government. The project is in the renewable energy
sector, mitigates large amounts of CO2, has a developmental function and is
commercially sustainable. SA is also a signatory of the Kyoto Protocol.
To make the project an even more attractive object for (international) investors it was
decided to include another project Krokodilpoort, which had been identified in 1989
but was never implemented due to financial constraints of the initiators. A further
benefit would be that the concessionary finance per ton CO2 mitigated would be
further reduced if this project were included.
In a rural area of South Africa close to the major town of Bethlehem in the Province
of the Free State, a town with a large black rural community, two sites have been
identified which are ideally suited for the construction of mini hydro generation
plants. The first site is situated at the Saulspoort Dam Wall. The town of Bethlehem
uses this reservoir for drinking water. The effective head at this site is about 10 – 12
m. The dam wall offers a unique opportunity to construct a mini hydro plant without
having to execute large civil works. The flow in the river is 24 m3/s. However, due to
a plan to extract water 35 km upstream for the city of Johannesburg, this flow will be
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most likely reduced to 12 m3/s in 2012. The installed capacity for this site amounts to
1050 kW.
The site is close to the water pumping station of the Bethlehem Council, their existing
transformers and other electrical infrastructure, hence major electrical and/or civil
works are not to be expected. The latter is of importance as experience has shown that
the civil works are major cost factors in hydro projects and can be classed as “killer”
aspects for mini hydro schemes if they tend to be extensive.
The other site will be along the banks of the Axle River, between 20 and 35 km
upstream from Bethlehem. The Department of Water Affairs (DWAF) will be
erecting in total 14 weirs in the years 2000 to 2001 in order to reduce the unexpected
high erosion in the river since the increased water flow as a result of the delivery of
water from Lesotho. In the present scenario it is proposed to construct a 3.5 km
pipeline from one of the weirs belonging to DWAF to a point 40 m lower. This head
in combination with the 12 m3/s flow allows a capacity of 3700 kW to be installed.
The generated electricity from this plant will be evacuated to Bethlehem who will also
be the base client for this plant.
It should be noted however that the exact location of the River Site has not been
established. This will require detailed topographical and hydrographical analyses to
be made and these results to be co-ordinated with the weir building activities of
DWAF. It is not unlikely that this exercise will lead to a more optimal location and
solution to be found. From Clarens, the river source, to Bethlehem, which is a
distance of about 40 km, the river, drops in total 80 m. According to the engineers
who have been consulted the required head is therefore not a problem. The detailed
feasibility will have as one of its main tasks therefore to identify the most optimal site
from a cost, technical and construction point of view. At the advice of the engineering
consultants the economic modelling in this proposal looks at the most expensive
option, i.e. a 3.5 km pipeline resulting in a 40 m drop.
The Axle River flows into the Saulspoort dam and is fed from the Lesotho Highlands
Water Scheme. As said, the inflow from the Lesotho Highlands Scheme takes place at
Clarence (see photo) and the water flow is guaranteed from this scheme on a yearly
basis (Ave. 24 m³/s).
As is common in S.A., the town of Bethlehem purchases electricity from the national
generator Eskom and is dependent on ESKOM’s price structure in determining the
tariff structure being passed on to consumers. The average cost price of the electricity
purchased by Bethlehem in 1997/1998 amounted to R 0,1462/kWh. This price reflects
a combination of base and peak load tariffs. The economic model used an Eskom –
10% tariff. Therefore the buyers will be assured of a 10% reduction in energy costs
when purchasing from the hydro stations.
Project structure
It is proposed to develop the project as a BOO (Build, Own, Operate). A number of
project participants have been identified, who will supply technical support, operate
the plant and provide financing. In this regard a dedicated IPP has being registered in
South Africa. This company named Bethlehem Hydro, will develop, implement and
operate the mini-power stations.
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The shareholders in the company will be the equity partners which have indicated
their interest to invest in the project pending due diligence (detailed feasibility). At
this stage Cinergy Global Power Ltd (UK), who have a local office in Johannesburg
have indicated their interest, as has Electricité de France (EDF) who also has an office
in SA. The Dutch Utility NUON has indicated interest in the past. However without a
more detailed feasibility study NUON at this stage cannot commit itself yet. The
development process has been taken over by the Dutch project management company
Planet and a local energy consulting firm e3 Energy & Environmental Management.
Bethlehem Hydro has applied for an IPP license from the National Energy Regulator
and has also applied for the necessary licence to use the water resources in the river
for generation purposes. The Department of Water Affairs conducts the latter
licensing procedure.
At this stage a number of local businessmen have indicated their interest in the project
and in becoming shareholders in the project. Next to equity Bethlehem Hydro will
attract (foreign loan) capital and as this project meets the requirements regarding CO2
emission reductions and is in the renewable energy sector, donor funding will be
sourced to assist in covering the non-commercial sunken costs such as the
development costs.
Extensive talks with the Bethlehem Transitional Local Council have indicated a
strong interest in the project. The Local Council has indicated that it supports the
project and has written a Letter of Intent to purchase the generated capacity
conditional to certain requirements
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Summary – Bethelehem Hydro:
Mini Hydro Power project of 9,81 MW. (1.05 MW, 3.7 MW and 5,06 MW).
All the plants within an acceptable range of a major rural town. The town(s) will be the
major base client(s) for the plant(s).
Two plants to be constructed on the Axle River close to the town of Bethlehem.
Of these plants one at an existing dam wall with a head of 10 - 12 m, the other at a drop in
the Axle River of approximately 40 m. The long-term water resource in the Axle River
amounts to some 12 m³/s.
Economics:
Total cost estimate R 65 million complete.
Approx. 8-10 year payback at 13 c/kWh and interest rate of 16%.
Present average yearly electricity price for town is 14,6 c/kWh.
Estimated rate of return on equity after taxes is +20 % based on pre-feasibility
Avoided CO2 emissions approx. 64.000 tons/CO2/year.
Cost per ton CO2 mitigated (based on AIJ-finance) is approximately US$8/ ton CO2
(depreciated in 1 year) or US$0.43/ ton CO2 (depreciated over lifetime)
Project
Status
Project identification and pre-feasibility completed.
Project development team secured. Intent to purchase obtained from base client.
Discussions ongoing with Town Council re. Power Purchase.
Detailed feasibility study required.
Pending feasibility study outcome, project development to be completed.
Project participants identified, IPP Company established. Commitments from stakeholders
secured.
Concession to generate power applied for from National Government. In principle
approval obtained
Tentative permit to utilise water resource applied for and received.
Financing for feasibility study to be secured.
Pending study outcome bulk financing, equity partners and investors to be finalised.
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5.3.3. Krokodilpoort hydro
The Krokodilpoort site is situated in the Mpumalanga Province at a distance of about
25 km from the provincial capital of Nelspruit. Nelspruit is already being serviced by
a 2 MW mini hydro at Friendenheim. This plant has been in operation since 1988 and
has proved to be a commercial success. The Return on Equity is in excess of 20% and
the plant had paid back the investment after 3 years. The Friedenheim is located
nearby on the Crocodile River. The Krokodilpoort site is also situated on the
Crocodile River and shares a number of project parameters with Friedenheim.
Initially in 1989 MBB Consulting Engineers for the Malelane Irrigation Board
prepared a pre-feasibility study for the Krokodilpoort site. This pre-feasibility showed
that the proposal was highly feasible. However due to financial constraints and
political uncertainty at the time, the proposers decided not to take the project further.
The site is situated at a weir where a 70-m fall is encountered over a distance of 3 –
3.5 km. This delivers an effective head of 62 m and allows a generating capacity of
5060 kW consisting of four 1265 kW units to be installed. The flow in the river is a
stable 10 m3/s average per year. The site is close to two major black towns
Kanyamazane and Matsulu. These towns are at present purchasing their power from
Eskom and have indicated their willingness to purchase the power from the hydro
stations if the price is competitive. The project pre-feasibility has been obtained by
assuming a purchase price by these towns of Eskom – 10%.
The project shows an Internal Rate of return of 16,6% with a Return on Equity of
17,2%. These figures are based on a very rough escalation of the 1989 figures and are
therefore merely an indication. It is proposed to develop the project as a BOO (Build,
Own, Operate).
5.3.4. Other
Green Energy
The NER has been approached by ‘Green Energy’ that is proposing to develop a wave
powered power plant with a present maximum capacity of 30 MW in the Western
Cape area. The Saldana area is seen as having a favorable wave energy regime for
power production. The technology is based on an Israeli concept developed by SDE
Energy. The system uses wave follower - hydraulic actuators to generate electricity.
A Performance Bond from Israeli Government is awaited
Green Energy has entered into negotiations with the West Coast Peninsula
Transitional Council as a potential purchaser for its power. Current estimations put
the cost of electricity produced at 10.2 SA cents/kWh which is likely to be an
attractive price for a bulk purchaser of electricity.
Operational costs are estimated at the order of 1.72 SA cents/kWh over a life cycle of
20 years. And the project development time is around 24 months.
The developer, Green Energy has identified the following aspects as institutional
barriers:
 Absence of policy details regarding IPPs
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Uncertainty and delays in the issue of IPP license
Appropriate & realistic sharing of existing transmission infrastructure
Solid waste recycling and electricity generation
Although waste incineration is not a ‘true’ renewable energy technology it can well be
grouped under the heading of sustainable energy. The project is of interest as it shares
a lot of factors common to IPP development and is illustrative of the type of project
that may be developed in SA. The project is being developed by Solid Waste
Technologies Gauteng (Pty) Ltd.
Proposal objective
To develop a solid waste recycling and electrical generating facility by implementing
the Thermoselect technology in South Africa.
Description
Landfill sites are currently used as the primary method of waste disposal in South
Africa. Thermoselect is a waste processing facility specifically designed to eliminate
landfills and incineration plants. The technology requires no expensive front-end
waste pre-sorting and is processed as it is received. The waste is mechanically
compacted into a tenth of its original volume under 1,000 tons of pressure and
compacted into 1 x 1,5sqm gas type plugs. These plugs are loaded into a highpressure furnace, and converted into carbon. During this time, all liquids are
vaporised.
The glass and metals in the waste stream are left embedded in the carbon. As the plug
moves out of the heated tunnel into the chamber, oxygen is introduced into the
furnace. The high temperature destroys all complex organic chemicals and the glass
and metals are melted down and separated by a sharp cooling process in the system.
The recovered energy-rich gas is used as a fuel to continue the process. The surplus
gas is used to generate electricity and sold to local municipalities.
Project Proposal
Solid Waste Technologies of South Africa together with Interstate Waste
Technologies of Pennsylvania - U.S.A. offer the facilities to the Provincial
Government. Furthermore the facility will be erected at no cost, and will be under
the management of a professional management team at a provincial government
allocated site. The plant will be constructed on the land provided over an 18month period with a labour force of approximately 1,000 people. This will result
in a lucrative job creation opportunity. Furthermore employment for
approximately 200 people will be created for the operating of the facility.
 For the distribution of the by-products approximately an additional 1,000 people
may be employed on average for each by-product e.g. a facility built with four
waste streams should create employment opportunities direct and indirectly for
4,000 people. Likewise 10 waste streams will create opportunity for 10,000
people.
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Economic benefits
 One million ton per year facility will export 68 MW of electric power for sale to
the local authority.
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Over 300 facilities have already been built in Europe and Asia and have proven
the technology to be a success both economically and is an environmental sound
solution
A one million-ton per year Facility will export 68 MW of electric power for sale
to the local utilities, thereby avoiding importing 33,000,000 gallons of foreign oil
each year of its operating life.
The modular design allows construction of a complete facility in about 18 months
as compared to 30 months for a mass bum incinerator. Adding additional modules
for waste disposal and electric generation can easily expand the Facility.
Requirements
The capital to erect and operate the plant will be supplied by the Solid Waste
Technologies. In order to facilitate this the project will require the following
commitments from the provincial government. All local authorities to deliver all
waste to the facilities 7 days per week - 365 days per year. Local authorities to
commit to purchase electricity and gas produced by the plant at a lower cost than the
current rates of the electricity supplier.
Proposed service agreement between Solid Waste Technology Gauteng and
Provincial Government
A. Facility Design, Construction and operation
 SWT will finance, build, own and operate a solid waste gasification facility
using the Thermoselect technology.
 The facility will be comprised of 10 Thermoselect processing lines, each with
a nameplate capacity of 300 metric tons per day. The facility will be capable
of processing 1,000,000 metric tons of waste per year,
 Electricity surplus to the internal requirements of the facility will be sold to the
local electrification utility.
B. Solid Waste Technologies Obligations
 Pay all costs of financing, construction, operation, and maintenance.
C. Provincial Government Obligations
 Provide reasonable documentation, testimonial and other support for permits
and approvals required by SWT for the facility.
 Cooperate with SWT in informing the public regarding the benefits of the
facility.
 Identify a suitable site for the Facility having access to a road or rail network,
adequate water supply and electrical supply.
 The provincial government shall designate the facility as the sole legal site for
the disposal of solid waste and shall deliver the agreed quantity of solid waste
to the facility
 Purchase 67 MW of export electric power generated from the Facility for the
term of the agreement,
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5.4. Barriers and other factors influencing IPP development in South
Africa
5.4.1. Conflicting messages
A major barrier to IPP development in South Africa is the conflicting messages
emerging from the Government. On the one hand the Energy White Paper gushes
forth about encouraging ‘the development of renewable an environmentally sound
electricity generation technologies’ and to ‘encourage more players to enter the
generation industry in order to develop a competitive power market’. On the other
hand the Electricity Act was written to protect Eskom’s monopoly interests. The
NER Board (appointed by the government) has not approved of any additional
generation licences after the initial licensing round that followed the NER’s creation.
This in effect is restricting the creation of the conditions necessary to increase and
encourage competition by for example prohibiting long-term power purchase
agreements (see below Section 0). This situation results in a sit back and wait attitude
from potential investors and IPP developers.
5.4.2. Tariffs
The main factor that is keeping new private generation development at bay is the low
cost of Eskom’s electricity. The incremental operational expenditure cost of new
generation ranging from hydro to coal and gas is estimated in the range of R 0.140.18/kWh. Compared with Eskom’s current average tariff of R0.16, this leaves little
scope for recovering capital costs.
Looking at the medium term, especially at when Eskom generation surplus is
expected to end (2005-2010) it is inevitable that electricity tariffs will
increaseDevelopers of the Johannesburg Kelvin and Pretoria West IPPs estimated the
increased tariff at about R 0.25-0.4/kwh by 2010. This paints a completely different
picture. A whole range of generation technologies and IPP will be competitive at this
range of tariffs.
An IPP, which is in the feasibility phase at present, such as Darling, Bethlehem,
Pretoria West and others can be brought online in say 2003 – 2005. With a typical
lifecycle of 20 years one must now consider the tariff structure that will be relevant in
the period 2003 – 2023. Clearly these tariffs will be vastly different from the present
set.
The exact tariff range volatility is largely dependent on the future structure of the
electricity supply industry and the amount of competition in the market. These factors
are under consideration by the DME and the NER at present through a number of
research projects. Transparency and consultation in the policy development process is
essential to establish confidence and attract more investors to the SA generation
market.
Another consideration is the need to wheel power from the IPP through the
transmission network to a customer. Eskom controls the transmission network, which
is at liberty to raise a wheeling charge. To circumvent this stranglehold, generators
such as Friedenheim have prompted to build their own power lines to link to their
customer. This is off course an additional cost to the IPP. The NER that is also
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responsible for regulating transmission in SA has mentioned that it would see a
transmission charge of about R 0.01/kWh appropriate. The transmission charge will
need to vary with the transmission distance and other technical criteria.
5.4.3. Project developer profile
IPP development is a commercial and profit driven profession. The development of an
IPP is a business venture and should therefore be driven from the commercial and
business sectors. In South Africa there is at present little interest or involvement of
the commercial sector in the development of IPPs. The reason for this is that under
present circumstances IPPs are not a viable business venture. The country lacks the
appropriate legal and regulatory framework, the electricity sector is in a state of flux
due to imminent restructuring and there is no significant bulk demand for power.
Trying to develop an IPP under these conditions incurs long and costly project lead
times with no immediate returns.
It is however exactly these factors and high risks which present opportunities for
those organisations and individuals who believe that a market for power and IPP is
imminent and those who are in first stand to benefit. Looking at the applications to
the NER for generation licences an interesting profile emerges. Four of the
applications are from existing power producers, the municipalities and Eskom, two
are for renewable energy IPPs, one is from the coal sector and only one is from
outside the South African energy sector (Solid Waste Technologies). There are no
applications from the biomass (bagasse and wood) sector, which are probably the
renewable energy generators in the best position to convert to IPPs.
The present entrepreneurial nature of renewable energy IPP development in SA is
attracting a specific kind of developer. These developers often lack the specific skills
required for energy project development. For both Darling and Bethlehem these are
the first project attempted by the developers. These project are also developed at the
developers own risk and using own resources. This lack of experience inevitably
lengthens the projects development time. It is only by accessing the appropriate IPP
development skills and expertise that these projects can be turned into potential flyers.
Both projects have however now succeeded in doing this by attracting concessionary
financing which will provide the working capital required for business plan
development.
It is unlikely that until the IPP market in SA is better established and a competitive
regulatory framework is secured that the development process will be any easier or
faster. Budding IPPs will however benefit immensely from a bit of ‘hand holding’
during the development phase. This support should include at least project
development and business skills with some technical and financial backup.
5.4.4. Demand for generation capacity
The strongest incentive to bring new generation capacity online is that of a present or
foreseen power shortage. IPPs thrive in situations of power shortage. That situation
does not exist in South Africa at the moment. In fact South Africa currently has an
excess of electricity potential to the order of 8 000 MW. Looking into the future it is
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expected that South Africa will require new base load power between 2005 and 2010
and peak power possibly earlier.
Where there is no shortage of supply or generation capacity in a market the next best
bet for an IPP is to produce power at a competitive cost with the current tariffs. With
Eskom being one of the cheapest producers of electricity in the world, South African
electricity is particularly cheap. Undercutting Eskom by selling electricity into the
wholesale market in South Africa (i.e. to Eskom) is near impossible. The way around
this is to undercut Eskom at the point of supply to a bulk customer such as a
municipality, which buys both cheap off peak as well as expensive peak power from
Eskom. The result of this mix is that the average cost at the gate is more than double
the rate at which one could sell to Eskom. Average electricity sale price is R
0.16/kWh, (NER 1999). The large number of non Eskom generation plants in South
Africa shown that it is quite possible to undercut Eskom in supplying to a specific
customer without compromising commercial returns.
5.4.5. Stranded Assets
The potential treat that undercutting Eskom poses is that of stranded assets. If more
and more capacity is brought online selling power at a rate below that of Eskom
eventually demand to Eskom will decrease to such an extent that it will have to reduce
its generation levels and even shut down a power station. This fully or partially shut
down power station becomes a stranded asset. The plant can still produce power but
it cannot compete against the lower cost producers. The investment in the power
station is therefore not bringing in any returns. In the case of Eskom where the public
utility was financed from public coffers it will result in a loss to the state and the
public. Government is therefore loath to support initiatives that carry the potential
threat of stranded assets.
In reality there is quite a bit of scope for bringing new capacity on line without
stranding any Eskom assets. As long as the increment at which new power is added
remains small to Eskom total generating capacity the stranding impact is negligible.
Adding a 5-10 MW to the system of close to 40 000Mwis unlikely to attract much
notice. Eskom can actually benefit from the addition of distributed small scale
generation capacity as is provides stability to the large transmission system which
connects the clustered coal fired power stations over long distances to its customers.
Bulk buyers of electricity, particularly municipalities have learned through the years
of being stuck with a singe electricity supplier that having your own generating
capacity (allowed under the Electricity Act) puts you in a lot stronger bargaining
position with Eskom. More often than not Eskom will supply power at such a tariff
that it is not worthwhile for the municipality to run its own power station.
Experiences such as with Friedenheim or Bethelehm Hydro have shown that
municipalities are willing to move away from sole dependency on Eskom to a more
diversified and lower cost mix of supply.
5.4.6. Power purchase agreements
Critical to the successful development of an IPP in an electricity market such as South
Africa is securing a power purchase agreement. A PPA is a contractual commitment
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by organisation to buy the power produced by the IPP on certain conditions. The
value of a PPA is such that its existence is usually enough to guarantee the
development of the project.
The ideal PPA is based on the purchase of all the power produced by a power plant
over its lifetime. In order to achieve this the selling price of electricity will usually be
specified in the PPA as being lower than in this case Eskom’s tariffs and to retain this
margin by varying over time. This moves the risk of tariff volatility away from the
buyer of the electricity to the IPP. In addition a long term PPA is critical to provide
comfort for commercial debt providers.
The Electricity Act of 1987 provides for the National Electricity Regulator (NER) to
licence all electricity generators above the threshold generation of 5GWh/year. The
stance of the NER on PPAs, is stated in the covering letter to the generation licence
application. The NER will
‘Advise such applicants that the NER, in the exercise of its mandate to protect the
interests of electricity consumers in South Africa, will not approve the entering into of
long term power purchase agreements (PPA’s) between generators and distributors.’
This position on PPAs is relevant to large power projects that should be able to
compete in the future electricity market. The concern of the NER Board is not to
compromise present 'captured' customers, who in future may have a choice of
supplier. The NER Board also realises that the practicality of enabling small
renewable generation, embedded in distribution networks, would require a different
approach.
5.4.7. Financing: Equity
The electricity market in the developed world, most notably in Europe, has been
segmentation into sustainable or green power and non-sustainable power usually
fossil fuelled. This segmentation combined with targets for the renewable energy
portion of electricity production had created a generation shortage in the grid
connected renewable energy market in the EU. Utilities and IPPs are rushing to
provide power into this market.
Global warming as one of the drivers behind the rise of sustainable energy has
brought a new dimension to the South African energy market. Although there is no
local distinction between sustainable and non-sustainable energy, international
utilities with green energy targets or quotas are keen to invest in commercially viable
sustainable energy projects. The money is there; we just need to get the right projects.
5.4.8. Financing: Debt
South Africa has a well functioning and very competitive banking sector. Most of the
larger banks have project finance divisions, which specialise in the financing of
projects such as IPPs. These banks will be more than willing to provide finance to
IPP projects provided security and comfort can be provided for around issues such as:
 The commercial viability of the project
 Scale of the project and the loan component
 Long term PPA or equivalent
114



The payment for the PPA is secured through the appropriate credit rating of the
purchaser or other mechanisms
Stable regulatory and policy environment
Risk is shared with equity holder
The terms of the financing will vary with the perceived risks of the project. In South
Africa IPPs are seen as ‘entrepreneurial projects’ which carry an according high risk.
The financing terms provided will therefore only allow the most secure and most
profitable projects to be financed. Projects, which are marginal in terms of returns on
investment and debt coverage, will not make the grade.
An important criterion is that of project size. The project finance products available
from the commercial banking sector are only viable when applied to project with a
debt component of around R 30 million and over. Below this level it is not interesting
for banks to consider financing. A debt component of R 30 million usually implies a
project with total capital cost of around R60 - 100 million (debt equity ratios of 50/50
or 30/70). Taking the rule of thumb of US$1 million/MW this gives a minimum debt
financed project size as 9-15 MW.
This minimum size may rule out a swath of potential renewable energy IPPs that lie
below this level in capacity.
5.4.9. Concessionary and venture finance
An alternative to conventional project finance is to ‘subsidise’ the project through
concessionary financing. Fortunately there is a growing concessionary and venture
financing market available for sustainable energy projects. This can range from
Global Environmental Facility (GEF) funds to bilateral climate change programmes
such as AIJ/CCM and from development banks such as the DBSA to venture funds
such as the Renewable Energy and Efficiency Fund (REEF) and E&Co.
Concessionary financing can cover an incremental component of the project GEF) to
bring the costs in line with conventional power costs in a market. This mechanism is
being used by the Darling IPP project. Alternatively the concessionary financing can
cover the development and high risks costs of a project (AIJ/CDM) such as feasibility
studies and business plan development. Bethlehem Hydro is utilising this source.
Concessionary financing motivated from a climate change perspective usually has the
function of removing some of the risk and financing barriers faced by sustainable
energy projects as compared to conventional or fossil fuel projects.
Development Banks such as the Southern African DBSA or the Dutch Triodos Bank
have specific objectives regarding environmental and developmental sustainability
governing their activities. These banks are sometimes willing to provide financing
where the commercial sector would not be or on better terms.
Venture funds such as the USA based E&Co will come into a project as first stage
investor in order to take a share of the risks and provide a higher level of comfort for
other financiers or second stage investors.
115
To develop a renewable energy IPP in present electricity market in South Africa takes
a considerable amount of ingenuity and perseverance to come up with the right
structure for a project and to identify those sources of debt and equity.
References
1. Cochrane,E.D.D (1998) The use of biomass for electric power generation in the
South African and Zimbabwean Saw Milling Industry. EDD Cochrane &
Associates Consulting Engineers. Cape Town South Africa
2. NER (1999). 1998 Electricity Supply Statistics for South Africa. National
Electricity Regulator. Johannesburg, South Africa
3. Anderson RB (1994) Synthesis report on cogeneration and independent power
production in South Africa. Department of Minerals and Energy Affairs. Pretoria,
South Africa.
116
6. FINANCIAL AND ECONOMIC EVALUATION
OF RENEWABLE ENERGY
6.1. Introduction
The ”White Paper on Energy Policy for the Republic of South Africa” (1998) stated
the Government’s expectations on electricity pricing (page 39): “Price signals should
result in economically optimal investments in electricity infrastructure and
consumption of electrical energy. Government is of the view that this will generally
be achieved through the use of cost-based electricity tariffs which include capital
replacement costs (long-run marginal costs).” It was further emphasised (page 40) that
“cost-reflective tariffs will be applied at electricity distributor supply points in due
course”.
On this background, the aim of the present chapter is to determine the Long Run
Marginal Cost (LRMC) for traditional coal-fired generation and compare this with the
LRMC of renewable energy independent power producers (REIPPs).
A renewable energy generator could argue that the avoided cost be determined by the
cost of the pebble bed nuclear reactors proposed for the Western Cape. However, as
more than 90% of the existing capacity is coal-fired, this technology is still the trendsetting technology, and the study has therefore chosen coal-fired generation to be the
alternative to renewable energy. The marginal cost is not the embedded cost of current
generation resources, nor is it the average or peak cost of electricity. It is the
anticipated cost of a new power plant in future years.
The last few years there has been a slow growth in electricity demand (below previous
predictions), which has resulted in excess capacity. The present peak load is 27,800
MW while the available capacity is 40,000 MW8. At the same time the South African
Rand (ZAR) has devalued considerably. Together, this has resulted in an unclear
picture of the capital costs measured in ZAR. For this reason, the present study has
found that international data on investment costs provide a more realistic estimate of
the LRMC than historical data from South Africa.
6.2. Financial aspects
The annual inflation in South Africa has for some years been 7- 7½ % but is now
declining. According to the Financial Times’ Annual country report (FT October 6
2000) the inflation (annual % change in CPI) was 5.2 % in 1999 and is forecasted to
become 6.2 % in 2000.
The calculations in the present report have been based on a constant inflation rate of
7% per year.
Interest rates in South Africa are high. Interest rates for large, long term, bankable
projects with firm power purchase agreements are typically between 14.5% and 16%
8
Eskom, Annual Report 1999
117
per year, equivalent to a real interest rate of about 8-10%. Nominal interest rates for
other energy projects can go as high as 30%
For comparison it should be mentioned that the US and most EU countries have real
interest rates for long term financing of about 3-5% or half of the SA figures. This
situation has a negative impact on the financing cost, in particular for projects for with
high initial costs, such as many renewable energy technologies.
The high interest rates in South Africa are not always reflected in how the capital cost
or return on capital is calculated. In Eskom’s latest Annual Report (1999) the real
(inflation adjusted) return on total assets is as low as 0.90%. This is far below the SA
market rates.
From 1990 to 1999 Eskom has had return on total assets between 7 and 12% real. In
1998 it was 9.69% and in 1999 7.37% (Eskom’s Annual Report 1999).
In this report, a nominal interest rate of 16%, equivalent to a real interest rate of 8.4%
per year, has been applied.
6.3. Real cost of coal-fired power generation
In South Africa electricity generation has traditionally been based on coal. Presently
about 90% of all generated electricity is from coal-fired power plants. The remainder
comes mainly from nuclear and hydro. The present study looks into the issue of
utilising other sources for electricity generation.
The long run marginal costs (LMRC) shall be based on the costs of new power plants.
For this reason, international data on investment costs provide a more realistic
estimate of the LRMC than historical data from South Africa.
6.3.1. Direct costs
Investment costs
In the 1980’es Eskom was building for a 10% annual growth in electricity demand.
The down-turn of the economy has therefore resulted in a considerable surplus
capacity.
During the time when most of Eskom’s current capacity was established Eskom made
use of forward cover to protect against exchange rate changes. This policy paid off
well, because the Rand has devalued from about R2 to a pound sterling to R10 to a
pound since the power station construction peaked in the early 1980’s.
Today, Eskom therefore has no need to establish new coal-fired plants, and the capital
costs of the existing capacity does not reflect the real cost of establishing new plants.
On this background, the estimation of capital cost in the present analysis has been
based on a survey conducted by the International Energy Agency (EIA). IEA
conducts surveys of generation cost from time to time. The most updated report is
118
from 1998 and is based on data from 1996. The survey provides a picture of
construction cost directly and indirectly, O&M cost and fuel cost.
All costs are in USD. To compensate for price increases from 1996 to 2000, 10% has
been added.
The investment costs include base construction cost, contingency, interest during
construction and major refurbishment, if predicted. .
The investment cost of 1 kW of coal-fired generation capacity varies between the
most costly countries Japan 2800 USD and Portugal 2200 USD to the lower end with
costs of about half. The table below shows data for the cheapest segment of the
surveyed countries.
1000 USD per MWe
price level 2000 = 1996
+10%
Finland
Canada
USA
Turkey
India without desulphurisation
China
Base
construction
cost including
contingency
1022
967
1192
1152
1059
1043
Interest during
construction
Total costs
60
103
113
98
43
140
1082
1070
1305
1250
1102
1183
In view of the above it is found that a likely level of investment cost for a new coalfired power plant in South Africa would be in the range between 800 USD/kW (5520
ZAR/kW) and 1200 USD/kW (8280 ZAR/kW). This depends on whether installation
of desulphurisation and NOx reduction equipment is included.
The global tendency is moving towards cleaner technologies. It is hence likely that in
the future desulphurisation and NOx reduction equipment will be installed in new
power plants in South Africa. The cost of these facilities should hence be included in
the LRMC.
The 800 USD in investment cost result in an average capital cost per kWh of 8.6
ZARcents and for 1200 USD of 12.9 ZARcents per kWh.
The assumptions are a nominal rate of interest of 16% and depreciation over 25 years.
Production per kWe capacity is 6000 kWh per year. For a new plant the production
may be higher, approx. 7000 kWh per year (baseload). However, during the service
life of a power plant, it is usually de-rated from base-load to medium-load and finally
to peak-load. The assumption of 6000 kWh/year is the average production during the
entire service life.
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Fuel costs
South Africa has most likely the lowest fuel cost in the world. The abundance of coal
combined with easy access contributes to this. Eskom utilises cheap secondary quality
of coal. First quality is exported at much higher prices.
The 1999 average cost of coal consumed by Eskom was 42.8 ZAR per ton. Each ton
has an energy value of 20.09 GJ9. With an average overall thermal efficiency of
34.4%, this makes a fuel cost of 2.23 ZARcents per kWh electricity.
This is far below many other countries. The country in the IEA survey with the lowest
fuel cost is USA. It has a fuel cost of 0.9 UScents per kWh = 6.2 ZARcents per kWh.
Canada and Finland have 1.5 UScents = 10.3 ZARcents.
South African coal is gradually becoming scarcer, and increasing environmental costs
are likely to be imposed on the mining and handling of coal. For these reasons the
present study assumes that the LRMC of coal is 15% higher than the present cost, i.e.
2.6 ZARcents per kWh electricity.
O&M cost
The IEA survey shows that great variation exists with regards to O&M costs. In table 6.2
below the figures for some of the countries are shown. The figures have been converted to
year 2000 and ZAR for easy comparison.
Table 6.2. O&M cost per kWh in ZAR cent
O & M costs in ZAR cents per kWh
Canada
3.1 c
Denmark
5.1 c
Turkey
6.8 c
US
3.8 c
Brazil
2.5 c
Source IEA: Projected cost of generation of electricity, 1998 table 15. Amounts
converted to year 2000 by adding 10% and converted to ZAR on the basis of an
exchange rate of 1 USD= 6.9 ZAR
On the basis of the above table and assuming that South Africa is likely to be in the
cheaper segment, a figure of 2.8 cents per kWh, which is the average of the two
cheapest countries in the survey, is found reasonable for South Africa.
Total generation costs
On the basis of the figures presented above the direct generation costs can be
estimated. The component and cost picture is showed in table 6.3 below.
9
Eskom Annual Report, 1999.
120
Table 6.3 Total direct generation cost in ZARcents per kWh
LMRC of coal-fired
electricity generation in
South Africa
Capital cost
O&M
Fuel
Total cost
Without
desulphurisation and
NOx equipment
8.6
2.8
2.6
14.0
With desulphurisation
and NOx reduction
equipment
12.9
3.8
2.6
19.3
The cost of the nuclear reactors proposed for the Western Cape are in the region of
US$ 0.0243 to 0.0427 per kWh corresponding to 17 - 29 ZARcents (Eskom and MIT
estimates presented in the World Energy Assessment, 1999).
According to the latest annual report from Eskom (1999), Eskom’s financial
performance in 1999 was as follows:
A. Total external sales
B. External revenue
C. Internal revenue
D. Total Revenue
E. Operating expenditures
F. Interest income
G. Interest expenditure
H. Net profit
I. Average total cost of electricity
based on external sales; (B – H) / A
173113 GWh
21523 Rm
43 Rm
21568 Rm
- 17027 Rm
1261 Rm
- 3634 Rm
2168 Rm
0.112 c/kWh
According to the 1998 Electricity Supply Statistics of NER Eskom’s average total
costs of 11 cents/kWh can be accounted for as follows: 7 cents for generation, 1 cent
for transmission and 4 cents for distribution.
It has already been explained why the LRMC is higher than the present costs. Indeed,
it would be quite questionable were it not higher than present costs.
The short run marginal cost (SRMC) is quite different, as it only covers fuel cost and
O&M costs. With fuel costs at 2.5 cents and O&M of 2.8 cents, a total of 5-6 cents
seems likely as SRMC.
However, due to the nature of Eskom’s long-term coal contracts with collieries
(owned by private mining companies), the SRMC of the coal is about 20% of the
average cost of coal, resulting in an even lower SRMC. Eskom pays on a cost plus
profit basis for coal hence Eskom’s price is similar to an 80% fixed (take or pay) and
a 20% variable cost. The profit element is low as Eskom made capital for colliery
development available when building the power station.
As peaking capacity Eskom has about 1400 MW pumped storage plant in service.
With a cycle efficiency of 70%, the SRMC cost of peaking power is 1.4 times the
SRMC of coal fired generation.
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In a period with considerable excess generating capacity it can be argued that the real
cost of electricity is equal to the SRMC, as there is no immediate need to invest in
new capacity.
Transmission costs and losses
From international experience it is assumed that servicing the loans and the operation
and maintenance of the transmission system amounts to 1 ZARcents/kWh.
According to Eskom’s Annual Report 1999 the energy balance in 1999 was as
follows:
Total input to transmission: 184968 GWh
Total sold:
173423 GWh
Losses:
11545 GWh
The total energy losses therefore amount to 6.2%. It is assumed that the energy losses
from the transmission system itself (defined as all grid components above 132 kV) are
3 %, corresponding to 0.5 ZARcents/kWh.
From the above considerations it is assumed that the total transmission costs (capital
costs, O&M and losses) amount to approximately 1.5 ZARcents/kWh.
The remaining losses are the losses from the distribution systems (defined as all grid
components below 132 kV) plus some theft, i.e. 6% - 3% = 3%.
According to the 1998 Electricity Supply Statistics of the NER Eskom’s total average
costs for distribution are 4 cents/kWh (without losses). This cost is high due to the
low energy usage of newly electrified customers. At present Eskom connects 300,000
new domestic customers per year (1000 per day).
Other costs
Previously Eskom has not paid corporate tax and dividends. In the future Eskom will
be corporatised and will then pay tax and dividends. Municipal generators will still
not pay tax or dividends.
An electrification levy is presently been prepared, probably around 1 cent/kWh. The
electrification cost of about 1 c/kWh is presently contained in the 4 c/kWh
distribution cost. When the levy is to be paid, electrification will be funded from the
levy. Hence it is not intended to be an extra cost, but will make the cost of
electrification transparent
6.3.2. Electricity tariffs
It has been Eskom’s practice to develop a price that earns an inflation-adjusted return
of about 3.5 % on assets used. This has been considered sufficient to finance
replacement (after 35 years).
122
Eskom currently applies a cost differential of 1 to 3 % depending on the distance from
the centre of power generation when in fact the costs differ much more (NER, May
2000).
The proposed WEPS gives figures for transmission network related charges. These
include an annual charge for transmission capacity and an energy loss rate to account
for real electrical energy losses. The proposed transmission capacity charge could
have significant implication for independent power producers. In the areas far
removed from the main coal-based electricity generation areas of the country, the
proposed capacity charge (R/KW p.a.) are negative. This implies that a generator
may be paid a rate per installed kW per annum. This arises because the generator in
question is beneficial to the transmission system by reducing the requirement for
investment in transmission capacity (NER, May 2000). The capacity charge provides
long term siting signals to transmission customers. The highest proposed negative
capacity charge is for the Port Rex power station of –R79.36 per kW per annum. For a
1 MW generator producing 3 GWh of electricity per year this would effectively
represent a reduction of 2.6 c/kWh on the price required for viability.
There is no tariff policy for IPPs and none is being planned.
The new Regional Electricity Distributors (REDs) will likely operate with 3 different
licenses:
 Network licenses
 Retail licenses, captured customers
 Retail licenses, residential customers
The present tariff for a municipal distribution company far from the centre of
generation (e.g. Darling, Western Cape) is 18-19 c/kWh.
6.3.3. Subsidies and cross-subsidies
In many countries elements of cross-subsidisation exist. To supply more remote areas
is often more costly than is reflected in the selling price. An often quoted Eskom
statement is that the average true cost of supply to low consumption consumers (50250 kWh/year) is about 75 cents/kWh, much higher than the average charge of 26
cents/kWh.
Eskom is not allowed to sell energy below the short run marginal cost, as it would not
be in the interest of the general body of South African electricity consumers.
Commodity linked pricing deals could however temporarily under recover the full
marginal cost during low cycles. The degree of under and over recovery is monitored.
Nuclear energy in South Africa is being subsidised. According to the Clive van Horen
report from 1996 (“Counting the social costs”), the nuclear energy received a fiscal
subsidy of about 8 cents per kWh of electricity generated by the Koeberg power plant.
The PBMR research has been ongoing since 1993. The research costs have largely
been borne by Eskom internally (the IDC holds a 25 % equity share in the project).
British Nuclear Fuel (BNFL) has also recently taken a share in the project. S. Daly
and F. Moti estimate that the research expenditure to date on this project has been of
123
the order of R120 million (Business report, 12 April 2000, “Eskom gets the nod for
Pebble Bed”). Estimates for this figure go as high as R350 million with a further
R150million having been budgeted over the next few years. It is interesting to note
that the PBMR project is no longer included as a strategic research project but is
considered to have entered the implementation phase of the project.
The fiscal subsidy to the Nuclear Energy Corporation of South Africa (NECSA) now
represents 44% of the budget of the DME. This amounted to R12million in 1999. 1%
of the DME budget goes to the council for nuclear safety. By contrast, the subsidy
from the fiscus to the MLIS program of the former AEC amounted to R40 million
between 1995 and 1998. NECSA is still involved in the PBMR only in research into
the fuel fabrication process.
6.4. Externalities
For non-utility electricity generation the ”White Paper on Energy Policy for the
Republic of South Africa” (1998) stated (page 42) that the tariffs shall be approved
“on the basis of full avoided costs”. “By including environmental costs into the
pricing structure for further development of renewable and environmentally benign
generation technologies such as hydro, wind, solar thermal, and waste incineration
will also be encouraged”.
Possible social and environmental benefits from distributed energy may be
internalised in the economy of the power sector. This is either done through an energy
tax on the less wanted fuels and fuel cycles or through power purchase agreements
favouring more desirable fuel cycles - or it may be recompensed through tax funded
subsidy schemes of various kinds. Which type of internalisation preferred is first of all
a political issue. Some major concerns would be:



market perfection: in order to make the market respond to the policies outlined the
power prices should reflect the “true” costs including external costs, or the
distributed generators should be proposed conditions to compensate for the
relative benefits.
distribution of the costs within the society. If all costs were internalised in
electricity prices the financial burden would be distributed according to the
distribution of power consumption. This would affect first of all energy intensive
industries and thereby their competitiveness could be adversely affected if no
complementary actions be taken.
long run market response to the pricing signals: One of the advantages of internalising
externalities through connection and buy back conditions might be that they have no
direct impact on the state finances as is the case for tax rebate and subsidy schemes.
Therefore, buy back rates could be less sensitive to the changes in political priorities
although even tariffs are not insensitive to political changes or changes in the power
development plans as has been seen in for example USA.
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6.4.1. Direct accountable externalities
Hohmeyer of Germany conducted a major study of the externalities in 1988. The
result was that the externalities were almost of the same magnitude as the generation
cost of electricity.
Van Horen published a comprehensive survey of the impacts from coal mining in
South Africa in 199610. The externalities covered:
 Injury and deaths in connection with mining the coal
 Health risks from coal dust
 Emission of sulphur and NOx
 Impact on other aspects of human body and productive activities
 The sulphur is contaminating the fields and hence results in reduced agricultural
yield Pollution of water from mining activities
The fatality rate has been estimated at 0.31 persons per million tons mined and the
number of injured at 1.68 injured for one million tons.
The electricity sector is a major consumer of water. The present price paid for water
by the sector does not reflect the actual cost, and in particular not the long run
marginal cost. Water is a scarce resource in South Africa.
The aspect of low level pollution in townships due to poor quality coal being used for
cooking and heating should also be included in an externality evaluation. This is
particularly a problem in winter months (houses poorly insulated due to short but
severe winters). The official ‘wisdom’ is to keep electricity costs affordable to those
communities and burning the coal in power stations, but this has still not resulted in a
switch from coal to electric heating and cooking.
Different schools exist with regard how to handle the issue of externalities. It could
either be made on the basis of a damage function, or the basis of the surrounding
people’s willingness to pay for avoiding the damages or nuisance.
The gap between theory and how people perceive the risk and benefits often
complicates the method of willingness to pay.
Such measures will add to the cost of coal-based power generation.
Of the above-mentioned externalities the following could be included (all amounts in
ZARcents):
Cost of desulphurisation and NOx reduction
Cost of death and injured
Lost production costs
Water
Health, morbidity and mortality from emissions
Total
10
5-6 cents per kWh
0.02 cent
0.001 cent
0.13 cent
0.543 cents
5-6 cents per kWh
Clive van Horen: Counting the social costs. Electricity and externalities in South Africa, 1996
125
6.4.2. Indirect and global externalities
The global perspective - CO2.
As a part of the Koyoto protocol several countries have agreed to limit CO2
emissions. South Africa has also signed the protocol. In order to demonstrate the
willingness to reduce CO2 emissions several countries have put a levy on CO2. In
Denmark it is about 25 USD per ton while a more international figure is
approximately 10 USD per ton.
Such a levy has two effects: First it contributes to create an awareness of global
problems with CO2 emissions, and secondly, it improves the economic framework for
energy sources, which do not produce CO2, like hydro power and wind turbines.
Generation of 1 kWh produces approximately 1 kg of CO2. With a levy of levy of 10
USD per ton it corresponds to 1 UScents per kWh or 7 ZARcents (cf. paragraph 2.4).
A more recent study for the WWF (1999) reports on “Macro economic reforms and
sustainable development in Southern Africa”. Report No. 5, “Electricity production”,
summarises the external costs of electricity generation as in the table below. The
methodology followed was to assess the damage costs of externalities together with
the associated impact pathway. The impact pathway relates changes in environmental
quality to the direct emission or resource impact. This study also included the
positive externalities of electrification. The strategy followed here was to relate
external costs to household fuel use and then determine the impact of electrification
on the change in those fuel use patterns.
Subsidies to the nuclear industry were not included in the WWF study subject to
further discussion with government and analysts regarding the allocation of the
current subsidy to NECSA (Nuclear Energy Council of South Africa formerly the
Atomic Energy Corporation). The subsidy to the nuclear industry has been reduced
from the order of 70% of the DME budget in the 80s to 45% of the current minerals
and energy budget. Eskom’s research on the PBMRs is funded internally.
126
Activity
Estimated externality (c/kWh)
Low
Medium
High
Coal fuel cycle excluding
GHGs
0.70
0.98
1.24
Coal GHG damage estimate
2.53
11.06
16.58
Total Coal fuel cycle
3.23
12.04
17.82
Nuclear: fiscal subsidy
4.74
5.01
16.14
Weighted average external
cost (Van Horen)
3.28
11.59
17.72
WWF study coal without
electrification
0.55
0.80
0.93
Electrification benefit
-0.02
-0.13
-0.31
Climate change estimate
1.32
4.00
9.35
Total WWF Coal
externality
1.88
4.67
10.02
Sources: WWF (1999) “Macro economic reforms and sustainable development in
Southern Africa”, Table 2.11, and Van Horen (1996) table 5.10. All values in 2000
c/kWh converted from 1997 and 1994 values respectively using annual CPI increases.
6.4.3. Total production costs of coal based energy
In the paragraph above is described and quantified the costs of externalities related to
electricity generation in coal-fired plants. It is evident that an environmentally
friendly policy would incorporate this cost and not only aim at reaching the lowest
production costs.
It appears from the above that many of the negative health impact have no significant
impact on the production costs. Even if the cost being adjusted upwards with inflation
and higher income. Whereas the impact and cost of mitigating the sulphurisation
might add a considerable amounts to the existing generation costs.
On top of that the issue of global warming from CO2 emissions could be given
attention. A further 7 cents levy is of a considerable size compared to the present
production costs.
6.4.4. Total production costs without subsidies and with externalities.
The previous paragraph has described and quantified the direct generation costs, the
externalities on the local environment and the global externalities. By not making the
polluter responsible, the society is indirectly supporting the low cost of electricity by
giving a hidden subsidy. This is parallel to a real subsidy and should be viewed in the
same way.
To cover the cost of externalities it requires a levy on electricity of about 5-6 cents to
cover for the direct local externalities, while a responsibility towards the global
127
problem would add additional 7 cents on top of that. Resulting in an electricity LRMC
of about 26 cents per kWh in a global perspective and 19 cents in a local perspective.
6.5. Real costs of REIPPs
Below follows a cost comparison of different kinds of electricity generation. The
figures are based on production costs of minor entities in an attempt to reflect the cost
of an IPP.
The evaluation has been made on common grounds with regard to financing etc. The
analysis has set the tariffs in Rand per kWh as the parameters to minimum tariffs for
achieving Financial Rate of Return on equity of 12%.
The common assumptions for a fair evaluation are:








Economic analysis covers a 20 years period
Debt financing of 70% of the investment
30% funded as equity
Interests rate of 16% ( see below)
Payback period of loan of 15 years
Inflation in South Africa = 6-7% p.a. declining to 5½-6%
Tariffs to be adjusted by 5% p.a. of the average consumer tariff paid
Exemption from corporate taxes during the first 12 years
Main output parameters are:
 Tariff to be paid to achieve a Rate on return on equity of 12%.
 Financial Internal Rate of Return FIRR (overall)
 Return on equity
There are signs that the macro economic situation in South Africa is about to improve.
Important parameters such as growth has increased from about 1% per year to over
3% and inflation is declining from a level of 6½-to 7% per year to 5- 5½%. There are
indications that the devaluation of the Rand will be much less than during the last
years.
There are signs that the high interest rates are going to be reduced11.
6.5.1. Mini hydro systems
Several options for small hydro power stations exist. Installation of small hydro plant
can in many cases supply the local community at a low cost.
It is important that rivers have a year-round flow of water. Some rivers have even a
good downward slope so construction of dams can be avoided.
11
Economist Intelligent Unit ( EIU) Country Report, June 2000
128
The present study has investigated the Bethlehem project where small hydro-turbines
of a total capacity of 9.81 MW are going to be installed. See Chapter 5 for further
details.
Project: Bethlehem
Capacity
Investment cost per kW
Initial investment
Energy produced per year
O&M costs per year
Tariff
Overall FIRR
9.81 MW
6630 ZAR
65 million ZAR
60155 MWh
600,000 ZAR
0.16 ZAR/kWh
15.9%
Conclusion: It appears as an environmentally friendly solution at low cost.
6.5.2. Industrial bagasse
The consultant has selected information from similar projects in Thailand. There are
also projects in South Africa, but one of the major ones are supplying Durban Metro
with electricity and for business reasons has decided not to disclose information.
Information and data from Thailand:
Capacity
39 MW
Investment cost per kW
6900 ZAR
Initial investment
269 million ZAR
Electricity efficiency
27%
Fraction of fuel converted to
41.7%
process steam
Electricity produced per year
140400 MWh
Average load factor
41%
O&M costs
5% of investment per year
Fuel costs
28 ZAR/ton = 3.5 ZAR/GJ
Required electricity tariff
0.36 ZAR/kWh
Overall FIRR
13.7%
The reference for the above calculation is a new bagasse-fired boiler, generating the
same amount of process steam. Investment cost 690 ZAR per kW(th), thermal
efficiency 75%, and O&M equal to 5% of investment cost per year.
It should be noted that the estimated cost of bagasse (the avoided disposal cost)
probably is too high. It is based on experiences from Thailand. For South Africa the
cost of 3.5 ZAR/GJ should be compared with the cost of coal. In 1999 Eskom was
paying an average price of 2.1 ZAR/GJ, so it may be cheaper for a sugar industry to
use coal rather than bagasse as fuel.
129
For South Africa, the maximum cost of generation for the bagasse generator in
Maidstone (cf. paragraph 5.2.1.4) can be deduced by considering the Megaflex tariff
structure (shown in the table below) applicable to the distributor purchasing the
electricity.
Peak
Standard
Off-Peak
High demand tariff (c/kWh)
(April - September)
25.16
14.12
8.09
Low demand (c/kWh)
(October - March)
19.87
11.11
6.39
The 1999 sales data (in the table below) by the bagasse generator are used and it is
assumed that the sale and production of electricity is evenly distributed over the 8
month harvest season from April to the end of November. Then the weighted average
upper limit to the cost (assuming that the generation plant runs at a profit) for viable
production and sale is 12.44 c/kWh. The electricity is, in fact, purchased at a price
slightly below the Megaflex tariff. It should be emphasised that this figure is largely
an artefact of the development of the sugar mill and the surrounding village some 40
years ago. Furthermore, there is effectively no fuel cost. A better reflection of
LRMC could be obtained by using the international capex and technical figures and
local fuel costs. This generator will start operating in cogeneration mode in 2000.
The given price details, which represent the previous island (non-grid connected)
mode of generation, will still be applicable.
Electricity category
(Time of Use)
Electricity purchased kWh
Peak Energy
Standard Energy
Off-Peak Energy
Total Energy
2 445 360
5 945 420
7 003 460
15 394 240
A key issue for biomass cogeneration is risk minimisation, in particular fuel supply
related risk. Fuel supply is affected by seasonal conditions (this is particular the case
for bagasse), by structural changes and global trends affecting the agro- and forest
industries. Based on information on existing and potential crops in the region, the
probabilities of possible incidents shall be thoroughly assessed.
6.5.3. Wind power
The Darling Demonstration Wind Farm project is described in Chapter 5.
Other parties have carried out the financial evaluation of the Darling wind farm:
 The private consultant, Hugh Ashby, elaborated a financial evaluation in January
1999.
 Eskom published a report on the issue: L.Y. Kok: Darling demonstration wind
farm proposal. Presentation to Eskom management board. June 1999.
These two evaluations only differ on minor details. The figures below are quoted from
the Eskom report:
130
Capacity
Investment cost per kW
Initial investment
Energy produced per year
Load factor
O&M costs 1.5 %
Tariff
Overall FIRR
5 MW
5300 ZAR
26. million ZAR
13500 MWh
30%
395,000 ZAR
0.33 ZAR/kWh
17.0%
The calculated generation cost of 0.33 ZAR/kWh appears high compared with
international experiences, cf. the figure below:
1.20
ZAR/kWh
1.00
0.80
0.60
0.40
0.20
0.00
1980
1985
1990
1995
2000
Estimated real costs of wind generated electricity. Based on 20 years depreciation, 5%
interest rate and siting in roughness class 1 (average wind speed 4.4 metres/sec at 10
metre height). Price level: 1999 (exchange rate 1 ZAR = 1.20 DKK). Reference:
“Wind Power in Denmark”, Danish Energy Agency, 1999.
One reason for the higher cost of wind generated electricity in South Africa than in
Denmark is the higher interest rate. For illustration, if the real interest is lowered from
the 8.4 % per year, as used in the present report, to the 5 % per year, which was used
for Danish figures shown in the table, the cost of generating electricity would
decrease by almost 5 Randcents per kWh.
There are two explanations for the rapid decrease in generation costs shown in the
figure above: 1) Technology development of a fairly young technology, and 2)
increasing turbine capacities. Both developments are illustrated on the next figure:
131
ZAR/kWh/year
2.50
2.25
225 kW
500 kW
600 kW
2.00
1.75
1990
'750 kW
1992
1994
1996
1998
2000
Development of specific investment costs defined as ex-works turbine price divided
by annual generation in roughness class 1 (average wind speed 4.4 metres/sec at 10
metre height). Price level: 1999 (exchange rate 1 ZAR = 1.20 DKK). Reference:
“Wind Power in Denmark”, Danish Energy Agency, 1999.
Please note that the figure does not contain information on windmills larger than 750
kW. The latest generation of wind farms that has been commissioned in Denmark is
using 2 MW turbines.
6.6. Comparison of costs
The financial evaluations of the previous sections (6.3 and 6.5) are compared in the
figure below:
132
Generation costs in ZARcents/kWh
40.0
30.0
20.0
10.0
Capital cost
O&M
Fuel
Environ
CO2
Total costs
h
N
uc
l
ea
rH
ig
rL
ow
ea
N
uc
l
Ba
ga
s
se
d
W
in
H
C
oa
l
yd
ro
0.0
Losses
Total generation costs of various technologies. For each technology the column shows
the total costs to the right. For some, the cost components are shown to the left.
6.7. Power purchase regulation for distributed generators
Since the late 1970’es a large range of countries around the world have developed
specific regulation regarding interconnection and pricing of power from small and
distributed generators. The main purpose has been to promote independent and
distributed generators by determining rates and conditions related to connection and
power exchange by protecting the interests of distributed generators as the weaker
part in the business of selling power to a monopoly.
133
Most regulations for power purchase from distributed generators explicitly refer to the
principle of avoided costs as the basis for rate setting. This principle states that the
rates provided by the power utility should reflect all the costs and benefits which the
power utility observes when purchasing power from a distributed generator.
However, a consistent application of the avoided costs principle is very complicated
and requires a large amount of information about the generation, transmission
distribution and consumption characteristics of the entire power utility.
Some concerns of major importance to the resulting rates are:
 is the capacity value of distributed generators evaluated on an individual level, or
is any account taken to the collective guaranteed capacity they might provide,
even if they are individually less reliable?
 are the local benefits of the generators in terms of avoided energy losses and saved
transmission and distribution costs taken into account?
While new efficient renewable energy technologies are seen as promising future
alternatives to conventional power generation, they have not been - and still mostly
are not - competitive in an unregulated market. Consequently policies have been set to
secure fair prices of electricity generated and to support the technologies through
various kinds of government financial support.
When it comes to the determination of fair prices, it has almost invariably been the
case that conflicts have arisen between power utilities on the one hand and distributed
power producers on the other, with the government agencies somewhere in between.
The distributed generators on their side claim that the power they provide represents a
value in terms of avoided costs to the power system, which they should be accounted
for. First of all the power replaces power otherwise being produced at a centrally
dispatched plant thereby reducing the fuel costs and operation and maintenance costs
of this plant. Secondly, the distributed generator provides capacity to the system that
reduces the need for future investment in power production and transmission capacity.
The power utilities on their side tend to look upon distributed generators as a very
uncertain business for a variety of reasons. It fundamentally competes with them in
what many still wish or perceive as their domain. Often their objections take the form
of technical arguments such as:
 the impacts on the local electricity grid are less predictable, which incurs a risk
of excessive costs in power quality equipment
 unlike conventional power generation the reliability of the technologies is far
less well known to the power utilities
 the future availability of the generators depends on a variety of factors like the
financial viability of the owner, the prospects of the industrial business (in
case of industrial co-generation), future availability of the fuels used etc. factors which are unfamiliar to the power utilities.
Taken these risks into consideration most power utilities value the power output far
less than the producers using a normal avoided costs calculation. In fact, many
utilities would prefer not to depend on distributed power generation at all.
134
The impacts of distributed generators connected to the electricity system.
Avoided energy costs
Whenever a distributed generator produces power to the grid this power would
replace electricity production at a centrally dispatched power plant and thus lead to
reduced energy and operation/maintenance costs (normally referred to as energy
costs) at that site.
Avoided generation capacity costs
In a situation when the power demand is growing or when the reserve capacity is not
sufficient - or even when outdated power production capacity must be replaced by
new capacity - a distributed generator may offset a need for investment in new
production capacity.
The calculation of the possible fraction of marginal capacity costs being avoided from
a distributed generator is probably the most difficult and questionable process of
establishing a coherent and consistent pricing system. The discount widely depends
not only on a variety of parameters regarding the delivery of power but also on the
context in which the distributed generator is being seen.
Starting with the latter, traditionally a distributed generator is being seen as one single
individual generator relative to the dispatched power system. From that viewpoint any
lack of guaranteed delivery of power would result in the requirement for back up
capacity, and the capacity value of the generator would be reduced accordingly.
But to a certain extent it could be fair to regard distributed generators not as
individual generators but as a total of generators providing more or less back up for
each other. This might be the case for the diurnal and annual variations in output from
each generator as well as for the long run commissioning and de-commissioning of
distributed generators.
Capacity provided beyond the guaranteed capacity may have some value due to the
reduced loss of load probability, but the value would in general be much less than that
of the guaranteed capacity. As an example simulations of the Dutch power system has
shown that wind turbines represent a total value of 14-16% of installed capacity
although they have no guaranteed availability at any particular moment.
In a situation when power demand increases beyond the forecasts distributed
generators may provide a short run value because of the shorter lead-time (period
from contract signing to plant commissioning) by which it may alleviate any shortterm lack of capacity.
When a group of distributed generators are considered as one generation unit the
avoided costs evaluation may come out very different both when it comes to long run
guaranteed capacity delivery and when it comes to guaranteed diurnal and annual
capacity provision.
The US Power Utility Regulatory Policies Act (PURPA) passed in 1978 is among the
first government regulations establishing detailed rules for connection and power
135
delivery from distributed generators to a power utility. This regulation has been trend
setting for similar regulations in many other countries. PURPA has some interesting
features, when it comes to grouping of distributed generators:
 Avoided capacity costs should take into account the individual and aggregate
availability of the qualified facility. This implies for small facilities less than 100
kW that if they can provide evidence that on an aggregate level an effective
amount of capacity is provided even if the output of each individual generator is
stochastic, they should be recovered accordingly.
 Generators larger than 100 kW are allowed to enter into operating agreements by
which they may be able to increase the assured availability of capacity to the
utility by co-ordinating scheduled maintenance and providing mutual back-up
service.
Connection costs
There is an immediate capital cost of the between the generation plant and the
electricity system as it existed prior to the connection of the plant. This includes
among others meter, security system and power line.
Fault level
The distributed generator could affect the level of power supply faults in the local area
due to fluctuations in power quality. This might incur extra investment costs in
control equipment like power breakers in the local system. These costs could also be
accounted for as part of the connection costs calculation.
System reinforcement
The distributed generator will affect the upstream load of the system. This could
impose a cost as well as avoided costs to the distribution system - and in principle also
to the transmission system.
Use-of-system-costs
If distributed power is being transmitted through the electricity transmission system to
be sold directly to a remote consumer (wheeling) rather than to the power utility it is
most often seen that a use-of-system charge is being imposed.
Energy losses
The new generator will change the flow of electricity in the grid thereby affecting the
energy losses. In case the generator is situated closely to the demand absorbing the
generated power energy losses would be reduced. On the other hand, if a large
generator is situated at a remote location the distance to the corresponding demand
could be long and increased losses could be the result.
Distribution and/or transmission constraints
If the generator is situated in a zone with a much higher power demand than
generation capacity and with limited transmission capacity (import constraint) this
zone might face constraints in purchasing the electricity at the lowest price due to the
transmission constraints. In this case, the increased local capacity resulting from the
new generator would reduce the constraint.
136
On the other hand, when the generator is situated in a zone with much excess
generation capacity and limited transmission capacity (import constraint) the new
generator would increase the electricity export constraint.
6.8. Employment aspects
The issue of employment is found important in many countries. Although no
calculations have been made specific to South Africa, the following table summarises
studies done elsewhere and shows the potential job creation benefits of a renewable
energy strategy, when compared to either coal or nuclear power stations.
Information Source
Resource
Coal fired power plant
Photovoltaics
Solar thermal electricity
Wind-generated
electricity
Biomass-derived
electricity
Hydro-derived electricity
Danish Studya
New York Stateb
AWEAc
World Watch
Instituted
[man-years, same
amount of energy]
[jobs per mil. US$
invest.]
[jobs per mil. US$
invest.]
[jobs per TWh]
6,200
13.1
7.4
13
116
14,200
10.0
14
248
542
17.0-22.6
4.0
8
a Source: l. Munksgaard, J Rahbæk Pedersen. T. Jensen Societal benefits of wind turbines, part 3 Employment
and balance of payment. (in Danish, AKF 1995)
b Source: 1994 New York State Energy Plan, Volume III: Supply Assessments, Table 57, p. 612.
c Source: American Wind Energy Association (AWEA) (1995)
d Source: Scheer (1993), p. 110.
The Danish comparison has been conducted on a macro economic model for
Denmark. The model includes the induced effects on investment and employment of
sub-suppliers. The comparison has been made on capacity to supply the same quantity
of energy (MWh). A comparison was made between a 420 MW coal–fired power
plant and 1000 MW of wind turbines with a gas fired power plant of 220 MW for
back up.
The result showed that for the wind-turbines project the number of man-years was
14200 and for the coal fired 6200 man-years. The number of employed people in the
wind project is about 12,000 man-years during construction while the subsequent
maintenance only requires 110 man per year. For the coal fired power plant the
corresponding figures are 4100 during construction and 105 man per year during the
subsequently maintenance. The figures reflect the northern European production
methods with limited labour input. For South Africa the employment figures might be
the double.
The employment corresponds to about 13 man-years for each MW installed for wind
turbines and 6 for coal-fired plants. In countries with more labour employed in
production than in northern Europe both figures will be higher.
The assumption for the above employment analysis should be made clear. In
Denmark the import content of investment in both wind-turbines and coal plant is
137
35%. While operating costs of coal plant requires import of coal. The South African
situation is quite different, with wind person years perhaps being reduced (as more of
the technology would be imported). On the other hand coal person years would
increase significantly because the coal is mined locally.
As rule of thumb the investment cost distribution for a wind farm is as follows:
Complete wind turbine excluding the tower
Towers
Site preparation, foundation, road works, grid
connection
45-50 %
15-20%
35%
This implies that, if the tower is imported, 35% of the investment will be delivered
from SA sources. If the tower were manufactured in SA, the local content would be
50-55%.
If more than 80-100 MW of wind turbines will be installed per year, it may be
feasible to produce otherwise imported parts in SA, e.g. blades, gear, generator,
auxiliary equipment, under license agreements with the various suppliers of the
equipment. It may thus be possible to gradually increase the local content to well
above the 50-55%.
The option for further employment therefore requires a policy of expanding the wind
energy sector. In this connection, it is worthwhile to mention that potential SA
manufacturers of wind turbine parts would have a larger potential market than SA
itself, probably the entire region of Southern Africa.
138
7. REVIEW OF INTERNATIONAL RENEWABLE
ENERGY POLICIES
7.1. Introduction
Where renewable energy use has thrived around the world, favourable energy policies
have in part been responsible for this growth. These policies make investments in
renewable energy capacity attractive to power producers through either subsidies or
requirements for renewable energy power generation.
The justification for introducing policies favouring renewable energy (RE) can be
defined at two levels. First of all, an equal level playing field has to be established.
Secondly, RE may be given a special status, including more incentives than other
energy sources.
This chapter describes the main incentives that have been tried, followed by more
detailed information from selected countries.
7.2. Incentives
It is not only important that renewable energy use be increased, but also that this
growth is sustainable. Large subsidies can foster tremendous use of renewable energy,
but since most subsidies are not sustainable, it is important for the technologies to
become cost-competitive for sustainable and commercial markets to be developed.
If the goal is to maximise renewable energy generation, then a fixed incentive or setaside should apply to all technologies. This minimises the incentive payments for
maximum use of renewable energy, and it allows for future cost reduction of
technologies which are currently too expensive to be deployed. This would
encourage biomass power, but solar PV, solar thermal electric or wind would not be
deployed until cost-competitiveness was reached through decreasing technology costs
or discovery of excellent resources. Because this goal is not technology-specific, it
allows for a new renewable energy technology to come on board and does not force
the use of expensive technologies or inadequate resources.
If the goal instead is to deploy and begin commercialisation of certain technologies,
then individual incentives or set-asides can be set for each technology. As an
example, small incentives could be used to promote biomass power, with much larger
incentives for more costly yet still promising technologies such as PV. This is a more
costly and comprehensive program and this should be carefully assessed, because the
amount of funding needed to make PV cost-effective for utilities is quite high on a per
MW basis in comparison to biomass.
One incentive (likely to be a financial incentive) will likely be the primary driver for
renewable energy development. Supporting incentives will be needed to fill the
remaining gaps in overcoming barriers the development of renewables. For instance a
primary incentive which focuses on overcoming the cost-effectiveness barrier may
still need financing mechanisms to overcome the high capital investment barrier.
139
There are many methods for governments to promote renewable energy. A summary
is presented in the table below.
Tool
Production incentives
Advantages
Easy to implement,
Easy for developers,
Encourages renewable
energy production.
Disadvantages
Does not directly address
high first cost barrier.
Can be abused if incentive
too high.
Investment incentives
Overcomes high first cost
barrier
Encourages investment, not
production
Renewable Set-Asides
Allows control over amount
of renewable capacity added,
Competitive bidding
encourages cost reductions
Power Purchase Agreements
Long-term, standard
agreements help developers
and facilitate investment
Environmental Taxation
Correct energy prices
including costs of
environmental impacts
provides a more level playing
field for renewables
Can be very bureaucratic.
Bids may be controlled by
one entity.
May lead to lumpiness in
installations.
Difficult to achieve when the
electricity supply industry is
in the process of
restructuring
Taxes are often politically
unfavourable
Externality Adders
Allows for full-cost
Implementation does not
accounting in power planning always follow planning
Research, Development and
Demonstration
Builds long-term foundation
for technological and
industrial development
Government Assisted
Business Development
Builds market infrastructure
Green Marketing
Allows choice in power
purchases
Difficult to pick a
technological winner to
invest RD&D in
May be under-subscribed
Of these, the methods that have been most successful in promoting renewable energy
development are investment incentives, production incentives, and set-asides. Some
options, such as environmental taxation, RD&D and green marketing, have been
helpful, but have not had the same impact. Other options, such as establishment of
standard power purchase agreements, may be a necessary condition for renewable
energy promotion, but they may not be sufficient.
140
7.2.1. Production Incentives
A production incentive provides a financial incentive for the generation of electricity
from renewable energy. In the case of the US, the production incentive replaced the
investment incentive because of abuses with investment subsidies. Investment
subsidies encourage the installation of renewable energy capacity. But if the power
plants are sited in areas where resource is not good, if proper O&M is not carried out,
or if bad designs are installed, then the result could be a large amount of installed
capacity but little electricity generated. The production incentive is a tried-and-true
mechanism for promotion. Some of the problems with this approach include the
disincentive for cost-competitiveness, as seen in Germany’s wind power incentive,
which gives a fixed high buyback rate. These very high subsidies do not encourage
developers or manufacturers to reduce costs. One way to finesse this is to design a
diminishing incentive over time. Another way to limit excessive profits is to give an
incremental subsidy over conventional energy costs, such as was done in the US in
the 1990’s when $0.015/kWh was paid to renewable energy power producers.
In a South African case study (the Darling Wind Farm), this incremental subsidy
would be of the order of 16c/kWh (= 35-19) to encourage investment.
If a production incentive is used, it is recommended that:
1. The level of a production incentive be carefully designed to encourage costcompetitiveness and efficiency in power production. This could be a function of
technology, location and time of generation. The electricity regulator would have
to set this in a way that encourages least economic cost electricity generation. The
full avoided economic cost of generation would be the ideal level be for this
production incentive. As a starting point or in the absence of quantified external
costs, purchase by the generator of negative units at the wholesale electricity price
could be considered. The purchase of negative units at the applicable wholesale
tariff would effectively mean sale by the generator of the units at the same price as
the wholesale tariff (including whatever time of use or other structure the tariff
might have). There would be no premium to the RE generator per unit nor any
profit to the distributor reselling the units. In this way there is no difference
between the price paid to the generator and the price at which the distributor sells
the electricity. The distributor would have to be obligated or given some other
incentive (like green pricing) to buy this energy.
2. The program be periodically monitored and evaluated to readjust the incentive
level in order to encourage renewable energy generation and discourage abuse of
the incentive;
3. The incentive rules and regulations are clearly stated so that developers and
investors can easily develop projects and acquire financing.
The production incentive also does not necessarily offset the large capital investments
and correspondingly high initial risks of renewable energy development. In order to
deal with these problems, supporting incentive measures, such as long-term, standard
power purchase agreements and special financing mechanisms may be necessary.
These are discussed in the next section.
141
7.2.2. Investments subsidies
Investment subsidies and tax credits have proven to be easily abused and have been
replaced with other types of incentives in some countries. Therefore investment
subsidies generally should not be used as a primary driver for renewable energy
development. Investment subsidies are notable for overcoming one of the main
barriers of renewable energy: high capital investment costs. However, financing
mechanisms (access to credit, revolving credit funds, soft loans, etc.) can also
overcome this barrier and are less conducive to abuse. Investment subsidies may still
be very useful in promoting small-scale technologies to residential and small
commercial or industrial enterprises, which have little access to good financing. If
they are to be used, very careful oversight is necessary to guard against abuse.
7.2.3. Set-asides
A set-aside is a block of energy supply, e.g. 50 or 200 MW, that is earmarked for
renewable energy capacity. A transparent solicitation procedure can be used to select
the most competitive projects or standard offers can be set with energy suppliers
meeting capacity on a first-come, first-serve basis.
Such a demonstration programme on a limited scale can be done without neither
setting unwarranted precedents nor changing the current cost of electricity. If 200
MW are 20% more expensive (per MW) than the remaining 40,000 MW in a system,
the influence on the cost of electricity would be 0.1%.
The establishment of full-scale demonstration projects will fulfil several objectives:
 It will significantly help resolve concerns by energy sector stakeholders
 It will support the progress of actions 1-3 by practical learning processes
 It will bring international technology and experience to the country
 It will create show-cases for the citizens on how clean air, clean water, and
sustainable energy systems can be obtained
The winning projects will receive financial support; e.g. a subsidy per kWh or a
guaranteed fixed electricity tariff, to ensure attractive paybacks.
Example: A subsidy of R. 0.05 per kWh in 10 years given to 200 MW (operating
4000 hours/year) would cost R 400 million in total subsidy.
To prepare a bid for power capacity requires that the project be fully developed to the
stage of banking and contracting with potential electricity buyers. This preparation
can be very costly. Therefore it is very important that the bidding conditions are clear
and reliable, so that the bidders can trust that their bids will be treated fairly, and that
the conditions offered are stable and viable. The bidding process should therefore go
through a pre-qualification stage before real bids are invited. During the prequalification process the bidders will outline their project, justify the fuel resources
available and prove the financial viability of the investor.
Many project developers are foreseen to face lack of available expertise for solving
the unfamiliar technical problems related to the project preparation. It is therefore
recommended to establish a team of experts to assist the bidders with information and
142
counsel to help increase the quality of the tenders. The team should be established as a
special unit within the responsible ministry.
The services offered to project developers may be either direct technical assistance or
financial assistance to employ a consultant to carry out a pre-feasibility study (e.g.
max. R 150,000 per project).
The technical assistance should comprise:
 Resource availability analysis, e.g. availability of bagasse as a reliable fuel.
 Legal and regulatory issues
 Commercial issues (PPA’s, fuel contracts)
 Financial issues (as some developers (power companies, multinationals) have
ready access to cheap finance, whereas typical RE owners (e.g. a sugar factory or
a wood industry) only can obtain much more expensive finance, the special unit
could provide guidelines for project financing, including financial risk
assessment).
 Sector experience
 Technical issues (e.g. available cogeneration technologies, contacts to equipment
suppliers, complementary fuels)
To ensure sufficient diversity of the programme, the projects may be grouped in
separate categories, so that no one technology will eclipse others. The programme
may for example distinguish between the following technologies:
 Bagasse CHP’s.
 CHP’s in the wood and pulp industry.
 Wind farms.
 Mini hydro.
 Micro-hydro.
 Solar thermal power generation.
Some of the identified problems with current set-asides are: the UK NFFO has led to
bureaucratic and expensive bidding processes with a “lumpiness” in installations12;
the Renewables Portfolio Standard (RPS) under consideration in the US puts all
renewable energy technologies together, discouraging development of the less mature
technologies.
However, the benefits of this mechanism may be worth the implementation trouble.
The key advantage of using a competitive set-aside is that it encourages costcompetitiveness of renewable energy technologies. This is important because in
addition to reducing the cost to the utility and end-user, it also demonstrates to the
government policy-makers and the public that renewable energy technologies can
become cost-effective. Another important advantage is that the government can
easily determine and control the installed capacity of renewable energy generation.
The RPS, which is under consideration in the US, will help to eliminate this
lumpiness as well as provide economic efficiency through credit trading. However,
the RPS in the US currently sets a minimum percentage of electricity to be generated
12
By lumpiness, we refer to the large amount of installations which follow a NFFO tranche and the lack
of installations between the tranches.
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by all renewables, and thus might only promote the least cost renewable energy
technologies, e.g., wind turbines more than PV. An alternative strategy might break
down the requirement or bidding into technologies, such as in the UK. This would
allow for a minimum percentage of electricity to be generated by wind, solar,
biomass, waste, etc.
The RPS has generated some interesting debate, which can be found at:
http://www.ucsusa.org/energy/brf.rps.html
http://www.igc.apc.org/awea/pol/ngsaresp.html
http://www.renewable.org/ This site lists a series of initiatives and arguments by the
Gas Association against renewable energy
One variation on the set-aside concept would be a standard offer for integrated
resource bidding options which used both renewable energy and energy efficiency
technologies13. This is similar to the integrated resource planning approach that
minimises the cost of meeting energy services, but is designed for implementation.
Standard offers have been implemented in the US, allowing a fixed amount of power
capacity to be met by any party on a “first-come, first-served” basis. This is not a
competitive bid: the advantage of cost-competitiveness is lost and the disadvantage of
bureaucratic and expensive bids is eliminated.
7.2.4. Green marketing.
Green pricing programs allow specified types of generators, determined by size and
type of energy used, to obtain a higher payment than generally obtainable. The extra
costs to the utility are being recovered through a special sales tariff for green
electricity, which is being offered to customers wanting to support renewable energy
through their energy bill.
Green marketing appears to be effective in some countries and is becoming
increasingly popular. However, it perpetuates the idea that renewable energy is
expensive and needs support. It does not aim to decrease the cost of renewable
energy, but may coincidentally have this effect in real terms in the long run.
The motivation for setting ‘green tariffs’ is based on the assumption that there are
certain electricity customers who would be willing to pay a premium for electricity
produced in a way which is deemed as environmentally sustainable. This financial
incentive should be provided for the generation of green energy. An alternative to a
green tariff is that of increasing the taxed component of non-sustainable energy, thus
raising electricity tariffs to the point where green generated energy becomes cost
effective.
This offers a unique opportunity to IPP developers in that the income stream from a
sustainable energy plant can by virtue of the higher tariffs exceed that of other
generation options and offers the potential to increase the profitability of the project.
If the capital and operational costs of two different IPP plants are equal but that one
option can sell its electricity at a higher tariff by generating it in a sustainable manner
Adam Hinge, “Integrated Resource Bidding as a Tool for Introducing Sustainable Energy Investments
amidst Power Sector Restructuring”, prepared for IIEC, May 1998.
13
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the green option will be the preferred one. It was indeed this mechanism which was
used as incentive for the development of much of Europe’s renewable energy IPPs.
It must be kept in mind that green tariffs are not a prerequisite for renewable energy
IPPs. Whilst higher tariffs will not be refused by any IPP, some of the IPPS under
development (such as Fridenheim or Bethlehem) have developed their business plans
based on current electricity tariffs and do not require additional subsidies in order to
become competitive.
In order to market green energy, a number of criteria must first be satisfied.





The electricity generation sector must be open to competition
The transmission system must be accessible to all suppliers
Electricity distributors must not be locked into a supply contract with a single
generator
Customers must have a choice of suppliers
A certification system for electricity must be in place to ensure that electricity sold
as green is indeed generated sustainable
The last point is very important in terms of the structure of the electricity market. The
actual mechanism used to promote green energy will have a deep impact on the
markets structure and development. The different options followed in Europe and the
different effects resulting has shown that there is currently no ideal model, which will
lead to increased uptake of sustainable energy without skewing the market in an
inefficient manner. The conditions described above are those, which would be found
in a liberated electricity market with at least generation and distribution competition.
7.2.5. Power purchase agreements.
Clearly, one of the most important mechanisms for grid-connected renewables is the
establishment of standard, reliable, long-term power purchase agreements. This is a
key component for the success of renewable energy on the grid. It must be clear to the
private sector and their financiers that they can hook up their power plant to the grid
and receive a certain payment for energy over a set period of time.
In a period, where the electricity supply industry and/or the electricity distribution
industry is being restructured, it may be very difficult, if not impossible, to obtain
long term contracts.
7.2.6. Loan guarantees.
The high investment costs of renewables are a significant barrier and the finance
sector needs to be examined to see if special finance mechanisms are needed. This
will be especially necessary if investment subsidies are not used. With the recent
economic crisis, preferential finance for power plants and preferential loans or tax
breaks for renewable energy businesses may be necessary to encourage the private
sector. Along these same lines, loan guarantees can help to reduce financing risks and
thus lower costs.
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7.3. International Initiatives
The International Finance Corporation, the World Bank, the Global Environmental
Facility and others have kicked off two global investment and market transformation
initiatives know as the Solar Development Corporation and the Photovoltaics Market
Transformation Initiative Respectively.
The Solar Development Corporation is intended to offer advisory and financial
services to speed up the use of solar PV systems. The Corporation will be capitalised
at $50 million with the IFC contributing about $6 million. The SDC will support
many aspects of the solar PV industry including local assembly, system integration,
and energy service companies as well as traditional distribution and retail operations.
It will as well invest in financial intermediaries such as banks, leasing companies, and
non-traditional (e.g. non-bank) intermediaries such as NGOs. There will be another
arm to the SDC, the business advisory service arm, which will fund advisory services
and general PV awareness and capacity building services. More can be found at
http://www.worldbank.org/pics/ifcspi/1ws09137.txt
The Photovoltaics Market Transformation Initiative is targeted at three countries,
Kenya, India, and Morocco. It will make investments in 15 to 20 sales, service or
system integration companies. The PVMTI is supported by $30 million in
concessional GEF funds. IFC says the PVMTI is intended to address PV market
barriers by supplying “appropriate” financing and stimulating business activity.
“Appropriate” means below market terms, e.g. lower interest or longer maturities than
are locally available. The IFC will broadly distribute a solicitation for project
proposals. Successful proposals will get between $500,000 to $5 million. More can
be found at http://www.worldbank.org/pics/ifcspi/1w502223.txt
Launched in February 2000, the Renewable Energy and Energy Efficiency Fund for
Emerging Markets, Ltd. (REEF) is the first global fund organised to tap the
considerable opportunities to invest in emerging markets renewable energy and
efficiency. REEF actively seeks to make minority equity and quasi-equity
investments in profitable, commercially viable private companies and projects in
various sectors. The sectors include electricity generation, primarily fuelled by
renewable energy sources, energy efficiency and conservation, and renewable
energy/efficiency product manufacturing and financing. The International Finance
Corporation joined with several other private and public sector groups to invest in the
REEF. The fund will invest up to US$100 million in these projects and is intended to
stimulate investment in environmentally friendly energy technologies in the
developing world. The fund will target the ample opportunities for investment in
grid-connected renewable energy technologies such as small-scale hydroelectric
plants, geothermal power plants, biomass-fuelled power plants or cogeneration units,
and wind farms. It will also invest in off-grid renewable energy projects and energy
efficiency projects. The fund's investments will be limited to projects with total
capital costs below $100 million, and will also include a deliberate focus on smaller
projects, using GEF co-financing where appropriate.
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7.4. Country Experiences with Grid-Connected Renewable Energy
Policies
Unless specifically noted otherwise, the information contained in this section has been
taken from R. Redlinger (1998), 'Review of International Renewable Energy Policies',
UNEP Collaborating Centre on Energy and Environment.
The renewable energy promotion mechanisms described in the previous section are
rarely implemented in isolation. Rather, countries typically follow a multi-pronged
approach incorporating various mechanisms. In some cases, this is a result of a
clearly developed strategy and recognition that any one mechanism may not be
sufficient to achieve the desired implementation rates. In other cases, the use of
multiple mechanisms is simply a result of poor policy co-ordination and a piecemeal
approach. Significant insight can therefore be gained by examining countries’
comprehensive policies for renewable energy promotion and analysing their successes
and failures.
7.4.1. Denmark
Denmark is the world’s largest wind turbine manufacturer as a result of stable wind
energy promotion policies and strategies. Incentives for wind energy can be
categorised according to ownership: wind energy co-operatives, private, and utility.
Co-operatives and private owners enjoy the following incentives:
(1) guaranteed power purchase contracts with utilities in which utilities pay
generators 85% of the local retail price of electricity, amounting to approximately
0.33 DKK/kWh;
(2) refund of 0.17 DKK/kWh energy tax; and
(3) refund of 0.10 DKK/kWh CO2 tax.
Furthermore, individual persons who participate in wind energy co-operatives can
own up to 20,000 kWh/year worth of shares in the co-operatives, of which the first
DKK3000/yr of income is tax-free (and the remainder taxed at a 60% rate). To the
extent that the wind power purchase contracts increase the cost of electricity, these
costs are passed on to utility ratepayers. Lastly, any grid reinforcement which may be
required as a result of non-utility wind power installations are paid for by the utilities.
Utility-owned wind power projects can only obtain refunds of the CO2 tax.
Denmark’s success in wind energy can be credited to their emphasis on local project
ownership through co-operatives, which has made it possible for local populations to
economically benefit from wind energy. This has also help to reduce local opposition
to wind energy development.
The introduction of a market for green certificates was decided by Parliament in
March 1999, subsequently followed by law in June 1999. Neither the certificates nor
the market has yet been established. It is planned to start issuing the certificates by
January 2001, and create the market by 2003. The system will cover electricity
produced by wind turbines, different types of biomass, solar PV, geothermal plants,
and hydro less than 10 MW. The government guarantees that the value of the
certificates shall be between 0.1 and 0.27 DKK/kWh (1 ZAR = 1.2 DKK).
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Consumers are obliged to purchase a certain amount of certificates. If they do not or
cannot, they will have to pay a penalty of 0.27 DKK/kWh. Government will regularly
announce RE-quotas, where all consumers will be obliged to purchase an increasing
share of electricity from renewable energy. By setting a high initial target (20%), the
government ensures that the value of certificates in the beginning will be close to 0.27
DKK/kWh.
7.4.2. Germany
Germany has become the country with the largest installed wind energy capacity in
the world. Three primary components have been responsible for this growth:
guaranteed power purchase contracts, generous per-kW payments, and highly
favourable financing terms.
The Renewable Energy Feed-In Tariff (REFIT) contained within Germany’s
Electricity Feed Law (EFL) provides the guaranteed power purchase contract
component. The REFIT specifies the price at which German utilities must purchase
all power from renewable generators; and this price is tied to the residential electricity
tariff. Wind generators receive a payment of 90% of the residential tariff, amounting
to a payment of 0.1721 DM/kWh in 1996. At the May 1998 exchange rate of 1.76
DM / US$, this would be equivalent to 0.098 US$/kWh, approximately 10% higher
than the payment for wind provided in Denmark. The extra costs of purchasing this
wind power compared to conventional electricity are passed on to electricity
customers of the local purchasing utility, causing higher electricity prices in areas
with substantial wind energy development. This is changing, however, to uniform
funding by consumers throughout the country to reduce regional funding inequities.
The second component comes in the form of an investment subsidy of DM 200/kW
for each project. The maximum subsidy is DM 100,000 for project smaller than 1
MW, and DM 150,000 for projects larger than 1 MW.
The last component is that below-market loans are available from the Deutsche
Ausgleichsbank (DtA) that have a fixed interest rate of 1 – 2 % below commercial
rates and a maximum repayment grace period of 5 years to ease cash flow constraints
during a project’s initial years. Such loans can cover approximately 75% of total
project costs. Furthermore, another 17 - 20 % can be loaned from local banks and
grants, thus reducing investor equity requirements to only 5 – 8 % of the total project
costs.
Although Germany’s program has successfully promoted a large growth in the
country’s wind energy capacity, the level of subsidies has been higher than what
could be justifiable on the basis of avoided costs or environmental benefits. One
important component that is lacking and is important to the long-term development of
renewable resources is pressure for project developers to reduce costs.
Green electricity as a marketing product has been introduced on a voluntary basis. It
is not yet a success; by February 2000 less than 0.1% of all customers were
purchasing green electricity. Grid companies are obliged to buy RE electricity.
Approximately 15 new green power trading and supply companies have been set up.
Solar PV dominates the market.
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Additional information can be found at http://www.dewi.de/.
7.4.3. India
India has been supporting renewable energy development since the late 1980s through
the Ministry of Non-Conventional Energy Sources (MNES) and interested state
governments. MNES’s homepage is at:
http://www.renewingindia.org/organisations/MNES/html/mnes-main.htm . Similar to
the previously discussed European countries, India’s efforts to develop grid-connected
renewable electricity have been focused primarily on wind, though biomass-based
cogeneration has begun receiving significant attention more recently. General
information on India’s renewable energy programs can be found at the following
Internet website: http://www.renewingindia.org/.
Indian wind policy has been successful in creating a domestic market for private
development of wind power, which now accounts for the vast majority of the
country’s installed wind energy capacity of more than 900 MW. India’s success can
be credited to the following three incentive mechanisms: guaranteed power purchase
agreements, tax incentives, and concessional loans.
Power purchase agreements allow the wind power developer in India to “wheel” the
generated electricity by using the utility grid as a means to store wind energy for use
at another location or time. For example, the developer can use its generated wind
power by wheeling it through the grid, and draw the same amount of power from the
grid at its own industrial facility located at another geographic location. Other
possibilities is that the developer can wheel the power to a third party consumer, or
sell the power to the state utility. The developer can also distribute the wind power to
the grid at the time of generation, and claim it back later in the year during the lowwind season. The conditions for wheeling wind power generally vary from state to
state.
The central government also offers tax incentives in order to encourage wind power
development. Wind power developer enjoy the following tax benefits:
 Five-year tax holidays on revenue from sales of electricity;
 Accelerated depreciation of 100% on investment in equipment for the first year;
 Excise duty and sales tax exemptions for wind turbines;
 Import duties on a variety of components waived.
Lastly, the government created the Indian Renewable Energy Development Agency
(IREDA) in 1987 to provide assistance in obtaining loans from the World Bank, the
Asian Development Bank, and the Danish International Development Agency
(DANIDA). IREDA offers favourable loan conditions for investment in all forms of
renewable energy. Additional information on IREDA can be found at the following
Internet website:
http://www.renewingindia.org/organisations/IREDA/html/iredamain.htm.
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7.4.4. Netherlands
Although the Netherlands has traditionally been one of the world leaders in wind
energy, the Dutch government continues to seek policy mechanisms that encourage
more renewable energy development. Over the past few years, several marketoriented mechanisms were adopted, including Green Funds, the Accelerated
Depreciation on Environmental Investments Scheme (VAMIL), a regulating energy
tax, and Green Labels.
Several banks established the Green Funds program in 1995 to allow the public to
invest at an average interest rate of 4% per year. This interest is tax-free for investors.
The bank is then obligated to invest at least 70% of the capital in the Green Fund on
environment-friendly projects, which includes most renewable energy technologies.
The VAMIL allows environmental investments such as renewable energy
technologies to be depreciated more rapidly, thus reducing taxable income at the
beginning of projects and thus improving cash flow.
The regulating energy tax was introduced in 1996 to stimulate households and small
businesses to increase their energy efficiency; highly efficient consumers can avoid
paying the tax if their electricity consumption is less than 800 kWh per year and gas
consumption is less than 800 m3 per year. This tax also supports renewable energy
because the revenue collected on electricity generated by renewable energy projects is
paid to the generator rather than to the government.
The latest and perhaps most radical development is that, as part of the liberalisation
process and as part of the MAP 2000 covenant between the government and utilities
to increase renewable electricity’s market share, a tradable “green labels” market has
started as of January 1998 (Windpower Monthly, 1997). Under current laws, local
energy distribution companies (LEDCs) must purchase renewable electricity from
independent power generators at a price determined based on the current market price
of electricity (currently around 0.08 NLG/kWh) and the Regulating Energy Tax
refund (approx. 0.03 NLG/kWh). However, under the new program, in addition, the
LEDCs must issue green labels to the renewable generator based on the number of
renewable kWh sold to the grid (one green label represents 10,000 kWh of renewable
electricity). The renewable generator can then sell these green labels on an open
market to distribution utilities who will all be required to own a certain quota of green
labels as part of their agreement with the government.
Let us take wind energy as an example and assume current production costs of
approximately 0.16 NLG/kWh and current payments from utilities of approximately
0.11 NLG/kWh (0.08 market electricity price plus 0.03 Regulating Energy Tax
refund). The renewable generator would have to sell its green labels for at least 0.05
NLG/kWh to realise a profit (Windpower Monthly, 1998b).
Utilities can fulfil their renewables quota commitments in three ways: by developing
their own renewable power plants, by negotiating bilateral agreements with
independent producers, or by purchasing green labels on the open market. This
mechanism is similar to the Renewables Portfolio Standard (RPS) mechanism being
contemplated in the USA and essentially reserves a certain percentage of the
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electricity market for renewable energy within an otherwise liberalised market.
However, unlike the RPS, the Dutch green labels scheme guarantees that all
renewable generators can sell power to the grid at an assured price, thus removing
some of the market uncertainty of the RPS but simultaneously perhaps reducing the
economic incentive to reduce renewable energy costs.
The Dutch policy mechanisms such as the Green Funds and Green Labels programs
represent creative new initiatives, although the overall effort has its drawbacks. For
example, Dutch wind energy activity has dropped off drastically since previous
subsidies were eliminated in the effort to take a more market-oriented approach in
supporting renewable energy. Inadequate co-ordination to address local planning
concerns also has led to wind turbine siting difficulties similar to the UK experience.
The Web site for Dutch Green Financing Schemes:
http://www.novem.org/netherl/green.htm
The green electricity monitor is the WWF Netherlands branch known in Dutch as the
Wereld Natuur Fonds.
http://www.wnf.nl/home.cfm (in Dutch)
7.4.5. Spain
A fixed premium price is paid to all renewable generators. This has resulted in a rapid
increase in installed renewable energy generation capacity and in the establishment of
strong manufacturing industries.
7.4.6. Sweden
The government of Sweden has offered capital cost subsidies in order to encourage
renewable energy development since 1991. Its new energy law (effective February
1998) provides subsidies as a percentage of capital costs as follows: 30% for biomassbased cogeneration, 15% for wind, and 15% for small hydro.
In addition to capital cost subsidies, small renewable energy projects also receive
guaranteed power purchase contracts with local utilities. The new energy law
requires local distribution utilities to purchase all electricity generated by projects of
less than 1,500 kW within their service territories. The small generator is paid the
residential tariff plus a credit for reduced transmission and distribution losses minus
reasonable costs for utility administration and profit.
7.4.7. United Kingdom (UK)
The UK introduced its Non Fossil Fuel Obligation (NFFO) program in 1990 to
promote renewable energy technologies. Under the NFFO, a certain portion of the
electricity market is set aside to be supplied by renewable technologies. Developers
submit bids for proposed projects within each technology category such as biomass,
wind, etc., and the projects with the lowest per-kWh price are awarded power
purchase contracts. The regional utilities are obligated to purchase power from
NFFO-awarded generators at a premium price. The difference between the premium
price and the average monthly power pool purchasing price is subsidised through the
Fossil Fuel Levy as administered by the Non-Fossil Purchasing Agency.
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The NFFO is one of the few successful working models for providing stable
renewable energy contracts within a privatised competitive electricity industry
structure. However, it is not without its faults and controversies. Some important
lessons learned from the NFFO are:
 Small renewable energy projects have difficulties in attracting financing despite
the existence of the NFFO;
 The NFFO start-stop auction process led to projects being developed quickly with
limited public planning input. The lack of co-ordination between the NFFO and
local planning authorities sometimes led to local public opposition, especially in
the cases where wind farms were developed in scenic areas;
 The competitive nature of the NFFO is useful for stimulating technological
innovation and cost reduction;
 In the case of the NFFO, production incentives paid on a per-kWh basis have been
shown to be more effective than cost-based incentives.
The latest status of the NFFO issues is that a number of generators who received
support under NFFO 1 and 2 have had to make the transition to the open market at the
beginning of this year. The Renewable Generators Consortium was formed with the
support of the Department of Trade and Industry's Renewable Energy Programme in
order to help this transition process.
The roles of the Consortium were:
(i)
to give power suppliers the opportunity to purchase renewable power in
geographical and technological blocks;
(ii)
to act as a single negotiating point of contact which both reduced negotiating
costs and offset the oligopoly power of the large suppliers;
(iii) to allow more sophisticated trading opportunities than could be secured
through over 100 separate bilateral deals.
The Consortium has 116 members, out of the total of 146 generators who received
support under NFFO1 and 2. Consortium members account for 312 MW of capacity,
out of a total of 326 MW implemented under NFFO1-2, and a total of about 600 MW
implemented so far from all rounds of NFFO. (NOTE: it is important to distinguish
between the capacity ordered and the capacity up and running. Although NFFO tries
to support projects, which stand a good chance of going ahead, some projects, which
are accepted under NFFO, never get implemented due, for example, to problems with
securing planning permission etc. The figures quoted in literature usually represent
the orders rather than the actual implemented projects.)
The RGC has successfully negotiated offers from one or more of nine large suppliers
for all 116 members, to purchase their output at a premium price. Presumably the
suppliers think that they can recoup this premium through 'green power' pricing
contracts with end-users, or maybe simply regard having some renewables generation
in their portfolios as a way of 'future-proofing' themselves against the possibility e.g.
of a carbon tax. As of July 1998, 40 of the 116 generators had actually accepted the
offers made, although the expectation was that many more would do so. The 40 offers
so far accepted represent 120 MW of generating capacity.
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The government is very excited at the success of the RGC in negotiating these
agreements as it clearly demonstrates the possibility of generators to make the
transition from a protected niche into the open market. However, it must be
remembered that the first two orders of NFFO paid a much higher premium to
generators than subsequent orders, part of the reason for which was to ensure that they
could pay off all the capital costs before the NFFO contract period finished. It remains
to be seen whether projects under later rounds of NFFO will find the transition to
open market as smooth, although we will have to wait until 2009-2012 to find out as
the contracts were for a period of fifteen years.
The contact details:
Christine Mitchell, Energy Technology Support Unit, Harwell, Oxfordshire, OX11
0RA
(Tel. +44 1235 433 240).
Catherine Mitchell, Science Policy Research Unit, University of Sussex, Brighton,
BN1 9RF
(Tel. +44 1273 686 758, Fax +44 1273 685 865)
NFFO information can be found at:
http://www.dti.gov.uk/NewReview/nr38/html/generator.html.
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8. RECOMMENDATIONS
Based on the research undertaken, a number of recommendations were developed.
There are five areas according to which the recommendations can be grouped. A short
overview of the recommendations in the respective areas is given here. The
recommendations are outlined in more detail below.
Policy and legislation – immediate initiatives

Recommendation no. 1:
Renewable energy IPP set-aside programme

Recommendation no. 2:
Interim power purchase regulation
Policy and legislation – longer term initiatives

Recommendation no. 3:
Power purchase regulation

Recommendation no. 4:
IRP inclusion of RE IPPs

Recommendation no. 5:
Electricity information

Recommendation no. 6:
Capacity development, government

Recommendation no. 7:
Capacity development, civil society
Regulation - tariffs and grid connection

Recommendation no. 8:
Transparent licensing

Recommendation no. 9:
Technical grid connection code

Recommendation no. 10:
Renewable energy tariff structure
Support activities

Recommendation no.11:
Long term barrier removal

Recommendation no.12:
Investment capital for renewable energy

Recommendation no.13:
Green power marketing
Demonstration activities

Recommendation no.14:
Darling wind farm

Recommendation no.15:
Mini-hydro

Recommendation no.16:
Cogeneration in sugar industry

Recommendation no.17:
Cogeneration in wood industry
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Next Steps
The next steps would be to obtain acceptance of the recommendations by government
and the key stakeholders and on implementation of accepted recommendations.
Approved recommendations will have to be prioritised and an action plan developed
for each recommendation higher up in the list such that individuals can be identified
and empowered (given the time and money) to deliver on the recommendations by an
agreed time.
In view of the industry restructuring activities that is happening, it will be most
appropriate to incorporate the requirements for renewable energy and energy
efficiency in the new licences and to develop the tariffs and frameworks as part of
restructuring. This will, however, only happen with clear instructions and policies
from government.
The present proposals should be integrated with the planned use of renewable
generation in hybrid-off-grid systems. These plans are already at an advanced stage.
8.1. Policy and legislation – immediate initiatives
8.1.1. Recommendation 1: Renewable energy IPP set-aside programme
Through a cabinet memorandum set aside approximately 200 MW of generation
capacity for a transparent solicitation procedure to select the most competitive
renewable energy projects to test and expand the prospects for the development of
renewable energy IPPs in South Africa.
Eskom Distribution and/or the future REDs shall be obliged to purchase the electricity
generated. Award of a power purchase agreement shall be an integral part of winning
the bid.
Eskom may be enabled to establish a fraction of the set-side itself, but independent
power producers should establish most of the capacity.
Justification:
Bulk generation of renewable energy is the fastest growing energy sector
internationally. Already today many exporting South African companies have come
under pressure from their overseas clients regarding environmental issues. Export
driven economic development objectives make it imperative for South Africa to join
this trend.
In order for South Africa not to "miss the boat", it should speed up the integration of
these technologies into the generation system. It is important to note that it is not
primarily the technological development that is of concern, but the development and
implementation of adequate legislative and regulatory frameworks. A wind farm can
be built from scratch within a period of less than half a year, as opposed to building a
single new coal-fired power station which can take up to a decade. As South Africa
155
considers reduction goals for greenhouse gas emission, it will be important to
anticipate likely technologies to identify and pursue. This fits within the current
discussions on Clean Development Mechanism approaches. If South Africa waits, it
will be too late to only then start developing and implementing relevant regulation.
The set-aside programme will effectively become a catalyst to solve a range of issues
related to the market penetration of IPPs and thus the forthcoming restructuring of the
electricity supply industry.
With the current structure of the electricity supply industry, the most of appropriate
purchaser of the electricity generated by the renewable IPPs appears to be Eskom
Transmission.
.
Eskom Transmission has three major functions: 1) Operation of Eskom’s internal
pool, 2) owner of the network, and 3) international trading. The purchase of
renewable energy generated electricity appears to be comply appropriately with the
international trading function.
The Regional Electricity Distributors should be given the right to purchase some of
the renewable energy generated electricity in their respective areas, and also to
establish own renewable energy capacity within a reasonable limit.
As part of the bidding requirements, special priority can be given to projects with high
employment potential, high rural development potential etc.
Supporting Information:
The proposed demonstration programme on a limited scale can be done without
neither setting unwarranted precedents nor changing the current cost of electricity.
Eskom Transmission may have to purchase some of the electricity at a price, which is
higher than the long run marginal costs of alternative capacity (coal or nuclear).
However, the impact on the electricity tariff would be negligible. As a conservative
estimate, if 200 MW of renewable energy IPPs would receive an incremental tariff of
6 ZAR cents/kWh (4000 hours operational hours per year), this would add up to 48
million ZAR per year. It is suggested that electricity consumers cover these costs. In
that case, the average electricity tariff would have to increase by 0.03 ZAR
cents/kWh.
To ensure sufficient diversity of the programme, the projects may be grouped in
separate categories, so that no one technology will eclipse others.
There is some overlap between this recommendation and recommendations 14-17, in
particular the already endorsed National Darling Wind Farm Demonstration Project.
However, the set-aside is much broader in scope, as the set-aside:
 will be more diversified thereby forming a more sound experience upon which to
base the long-term development;
 will mobilise a much larger number of stakeholders (project developers, investors,
financing institutions);
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 will get a higher international profile than a single project demonstrating a
technology.
The preparation and implementation of the Darling project will, however, in many
ways create substantial input for the set-aside programme.
8.1.2. Recommendation 2: Interim power purchase regulation
Develop an interim regulation regarding conditions for the grid-connection of power
from small and distributed generators to facilitate the implementation of the set-aside
programme (recommendation 1).
Justification:
When it comes to the determination of fair grid-access conditions around the world it
has almost invariably been the case that conflicts have arisen between power utilities
on the one hand and distributed power generators on the other. The distributed
generators on their side claim that the power they provide represents a value in terms
of avoided costs to the power system, which they should be accounted for. The power
utilities on their side tend to look upon distributed generators as a very uncertain
business.
There is therefore a need for a neutral body to regulate and intermediate the area on
grounds of generally accepted criteria.
The establishment of the REDs will result in the establishment of network service
providers as opposed to the present utilities that own generation. The REDs will be
obliged in its network licence to provide a regulated network service to all users of the
network (including independent generators). The network prices for putting energy
into the network (and to take it out) will have to be developed and must receive
priority by the REDs.
Supporting information:
Some key issues that should be addressed by the regulation are:
 How to determine the avoided energy costs and the avoided capital costs. The
avoided energy cost is not an immediate issue, given Rec. 1. If the RED (or
Eskom Distribution) is obliged to purchase, there will be less pressure to develop
these rates, but it is essential that it be developed.
 How to share the connection costs.
 How to cover the costs of eventual increased fault level in the local distribution
system.
 How to determine the eventual reinforcement of the local grid, and how to cover
the costs.
 How to determine the change of energy losses imposed by the new generator.
 How to meet distribution and/or transmission constraints.
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8.2. Policy and legislation – longer term initiatives
8.2.1. Recommendation 3: Power purchase regulation.
On the basis of the interim power purchase regulation (cf. recommendation 2) a
regulation regarding conditions for power purchase from small and distributed
generators beyond the set-aside programme should be developed.
Justification:
There is a need for an interim power purchase regulation right from the beginning of
the set-aside programme. During the programme several experiences will be gained,
and the interim regulation would therefore need to be amended to facilitate the further
development of IPPs after completion of the set-aside programme.
It may likely be appropriate to establish a standard price for the purchase of renewable
energy based on the avoided cost plus a premium to allow for externalities, as is the
case in other countries (see recommendation 10).
8.2.2. Recommendation 4: IRP inclusion of renewable energy IPPs
Create a long-term plan for the inclusion of renewable energy IPPs into the electricity
system. The plan should be based on an Integrated Resource Planning framework that
explicitly considers environmental, social, and economic costs and benefits of
resource alternatives.
Justification:
International experience is indicating that renewable energy without any doubt
constitutes an important part of the energy mix in the future. However, as with any
technology, the start-up and phasing in difficulties have to be overcome. Medium to
long term national energy planning needs to consider the inclusion of renewable
energy into the national energy mix. To achieve this, energy modelling and
forecasting activities should provide concrete estimates of the target renewable energy
capacity, considering macroeconomic, social, and environmental costs and factors.
The integrated resource plan should be a comprehensive plan comparing the
advantages and drawbacks of on-grid and off-grid solutions, emphasising the potential
of renewable energy to nourish rural development.
Government policy regarding the desired share of renewable energy or subsidy for
externalities would have to be developed.
The REDs will be required through their license to present a plan of their electricity
purchases, energy efficiency and demand management interventions. Their tariff
plan, for NER approval, will have to be linked to their resource plans and the resource
plans will have to take government policies into account.
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Supporting Information:
The DME is presently undertaking such an exercise with the overall Integrated
Energy Planning framework, as stipulated in the Energy White Paper. It is important
to use the existing stakeholder forum (IEP steering committee) to ensure that
Renewable Energy is being allocated a realistic and appropriate share.
8.2.3. Recommendation 5: Electricity information
Make all essential power sector data publicly available (e.g. generation costs, future
investments, and external impacts) through a central electricity information service.
Justification:
Project identification, planning, feasibility studies and the securing of finance for IPPs
are significantly constrained by the lack of sufficient and reliable information.
Potential investors are hesitant, if the framework for their decision making is not
clear. Comprehensive and detailed information about cost structures, tariffs, growth
forecasts, and development programmes etc. in the industry must therefore be
publicly available.
The public awareness of energy issues in general, renewable power producers and
energy economy and energy environment issues would be systematically improved
through a public involvement initiative. Some elements of this are in place already
through participation of non-government organisations in various review and policy
panels. The efforts would benefit from broadening the knowledge of a wider group.
The initiative needs to be well co-ordinated to ensure data is relevant and that
proprietary information is respected.
The envisaged IRP process will provide for an information depository together with
checks and balances to ensure that data is relevant.
Supporting Information:
Government is presently in the process of addressing this issue by creating adequate
legislation based on international experience. Most countries have energy information
agencies reporting to government that are mandated to undertake this task. As an
example, the Thailand National Energy Policy Office publishes substantial
information on its web site (www.nepo.go.th). In Europe and the US similar activities
and organisations exist.
8.2.4. Recommendation 6: Capacity development, government
Sustainable capacity development within DME and NER seems to be a crucial
precondition for the longer-term success of renewable energy in the country. Other
relevant government and non-governmental institutions may also need strengthening
in this field.
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Justification:
The imminent changes to the structure and governance of the electricity sector places
large demands on DME and NER. Furthermore, DME’s capacity to facilitate and
support the development of renewable energy is fairly limited, due to the fact that
renewable energy is a new policy issue in South Africa.
Supporting Information:
There is a significant amount of international assistance and also domestic expertise
available that should be utilised and co-ordinated. This is already happening, such as
evident in this project.
8.2.5. Recommendation 7: Capacity development, civil society
Develop mechanisms to support potential owners of renewable energy IPPs and
organisations promoting renewable energy.
Justification:
Traditional power plant operators are usually big corporations. They are very
experienced and they can afford to acquire extra technical, economic, financial, and
legal expertise. Small owners often cannot afford to acquire much expertise. By
taking up a strong international IPP developer or utility as partner renewable energy
independent power producers can compete on equal footing. The policy choice as to
whether to provide additional support is in some cases related to whether the
government wants small local enterprises to be able to enter this market or whether
they want to leave it nearly exclusively to international joint ventures. It is clear in
either case that renewable energy independent power producers can be successful if
the competition with conventional generation is open, fair, and accounts for all the
costs.
The support would primarily be technical, legal, and commercial assistance to trade
associations (associations of sugar millers, wood industries etc.), NGOs and
institutions.
The IRP framework (recommendation no. 4) and project-licensing framework are
interlinked. The industry structure has a fundamental impact on how generation will
be licensed, as will the formation of the REDs. Progress will be dependent on the
vision for the ESI and the associated government policies.
8.3. Regulation – tariffs and grid connection
8.3.1. Recommendation 8: Transparent licensing.
Develop transparent and accountable licensing conditions together with more
consistent IPP license procedures.
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Justification:
In order for RE IPPs to plan and to make viable investments, the playing field needs
to be well defined and prepared. To this end, licensing procedures must be published
and should address the detailed information requirements that RE IPPs have.
Supporting Information:
The licensing frameworks must be aligned with the overall energy policy and
legislation that is available. In particular, the outcome of the Integrated Energy
Planning and Integrated Resource Planning activities that are presently undertaken
should enable the NER to develop and publish adequate IPP licensing frameworks.
The licensing procedures are very much in line with the Environmental Impact
Assessment under the jurisdiction of the Department of Environmental Affairs and
Tourism (DEAT). Liaison with DEAT would therefore be beneficial.
8.3.2. Recommendation 9: Technical grid connection code
Establish a national grid connection code, which specifies connection requirements
appropriate to the size and other characteristics of the resource and does not impose
inordinate financial or technical burdens. This includes synchronisation conditions
and rules for sharing the connection installation costs.
Justification:
Grid connection barriers are often described by utilities as technical and safety issues
not subject to policy solutions. However there remain significant obstacles to smaller
resources, even though technical solutions to legitimate safety and operational issues
have already been successfully implemented around the world. Technical
requirements for grid connection should be adequately structured according to power
generator capacity, voltage, and location. Small power plants should and can have
simpler grid connection specifications than large power plants.
Supporting Information:
Many countries have now developed grid codes that include appropriately reduced
requirements for smaller resources. IEEE (the international Institute of Electrical and
Electronic Engineering) established a standard (no 929) for grid connection. The
standard actually applies to the inverter, a device that adapts the voltage and
frequency of the IPP generator to the standard AC power transmission network.
Inverters are used for distributed generation systems such as fuel cells and micro
hydro-turbines, and many of the interconnection measures from IEEE 929 can be
adapted for these other technologies. An IEEE working group is currently drafting
IEEE SCC21 P1547 relating directly to technical grid connection requirements for
distributed energy systems. The final IEEE draft will be available in early 2001.
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Eskom is currently developing a grid code for the transmission network (above 132
kV). A grid code for the distribution systems may probably be developed from this
code.
8.3.3. Recommendation 10: Renewable energy tariff structure
To ensure a development of renewable energy IPPs beyond the set-aside programme,
end-user tariffs should be set which reflect the following conditions:





The avoided-cost principle should reflect the long run marginal cost of
electricity, not only the short run marginal cost.
IPPs situated close to loads should be credited for avoided line losses. This is in
line with the transmission network charges of the proposed wholesale electricitypricing system (WEPS) as outlined in section 6.3.1 on transmission costs.
Tariffs should be based on full cost accounting.
Tariffs should include environmental externalities. In case this results in overrecovering of the expenses, the surplus income can be transferred to
environmental mitigation measures.
Third party access to the transmission system and the distribution systems should
involve reasonable wheeling and banking tariffs defined by NER14.
Justification:
For non-utility generation, the tariffs shall be approved “on the basis of full avoided
costs” (White Paper of Energy Policy for the Republic of South Africa 1998). The
paper further noted “By including environmental costs into the pricing structure for
further development of renewable and environmentally benign generation
technologies such as hydro, wind, solar thermal, and waste incineration will also be
encouraged”.
Supporting Information:
The following were stipulated in the energy white paper as requirements to be taken
into account in developing a wholesale electricity pricing system (WEPS):






A level playing field for generators and distributors/customers
Cost reflectivity
Transparent subsidies
Improved efficiency in supply and usage
Open access to the transmission system
The enabling of competition
14
Wheeling is the transfer of electricity via the grid from a generating resource to a customer. Wheeling
tarrifs recognise that transmission line is a common carrier, open for access by multiple electricity
buyers and sellers. Banking is the storage of intermittent electricity for resale at a later time. Depending
upon the dispatch flexibility of other system resources, banking can be agreed to occur over hours,
days, weeks, or months.
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8.4. Support activities
8.4.1. Recommendation 11: Long term barrier removal.
In parallel with the recommendations in the areas of demonstration and regulation,
and based on the experiences from the concrete projects, proper long-term and general
solutions to mitigate all essential barriers shall be systematically identified and
implemented in order to further nourish the development of renewable IPPs.
Justification:
The national electricity landscape is changing. However, since existing players enjoy
a great number of advantages over new market entrants, pro-active steps aiming at the
removal of barriers are necessary to ensure a level playing field. This could be
achieved through appropriate legislation that forces the transformation process to
include the needs of future market players.
An important part of the activities would be to investigate and implement mechanisms
to ensure as a minimum an equal level playing field for central power plants and IPPs.
For example, new resources should be selected based upon least-cost principles,
which explicitly value and quantify the total cost of resource options including
environmental externalities.
Long term barrier removal has high priority in the current reform debates.
Supporting Information:
The country has recently embarked on a reform of the electricity sector, which
involves restructuring of the distribution industry as a first step. As the issues
relevant to RE IPP are addressed with in these activities, these needs of RE IPP need
to have particular attention so as not to be overlooked.
8.4.2. Recommendation 12: Investment capital for renewable energy
The availability and accessibility of investment capital for small project developers
should be improved. Innovative ways of accessing low-cost finance should be made
available to IPPs. Several options have been developed internationally. A project
should be launched to investigate such options and come up with recommendations in
this area.
Justification:
Traditional power utilities, by virtue of being well established, usually have ready
access to cheap finance (low interest, long maturity), whereas typical renewable
energy owners only can obtain much more expensive finance.
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Supporting Information:
There are many meaningful avenues to increase the availability of financial resources
for investments in renewable energy. The various types of capital that can be targeted
for investments include equity capital, debt/loan capital, credit enhancements, grants,
risk guarantee schemes as well as any operationally feasible combination of these
sources. A survey should address the real risks (or the perceived risk by the lenders
and/or investors) associated with investments in renewable and develop the most
appropriate mechanism to underwrite these risks. Issues like contingent grant and/or
loan financing, portfolio diversification, performance contracting, risk sharing
arrangements, risk insurance premiums and collateral requirements (hardware, fixed
assets) need to be addressed in the financial risk mitigation strategy to be developed.
8.4.3. Recommendation 13: Green power marketing
Allow a “Green Power” option to cover the incremental costs of renewable energy
power producers. The best option for a “green power” based electricity sale, within
the time frame considered for this project, would be to recruit from industrial
customers.
Justification:
The first glimmer of demand for green energy has already emerged in South Africa.
The demand is stemming from several sectors of the market.



Private enterprises. There is increased international demand for environmentally
friendly products. South African enterprises seeking international markets for
their goods are increasingly asked to take actions towards reducing the
environmental impacts of their manufacturing processes. The ISO 14000
certification initiative is evidence of this trend.
Local authorities. If the power is generated locally, it may carry employment
benefits and thereby reduce the demand for other job creation programmes. In
addition, various electricity generation sources do have distinct direct
employment and spin-off characteristics.
Households. There are consumer segments concerned about the environment and
willing to pay an increased tariff for green energy, electricity from more benign
resources such as wind, solar, etc.
Many of the aspects are already being developed in anticipation of an electricity
market that allows energy trading. Small players will be able to participate in the
markets by allowing the aggregation of small generation and aggregation of loads to
make use of the opportunities available to large players.
Supporting Information:
This can be done under the current regulatory and legal environment. The renewable
power producer would negotiate a PPA with a specific customer. The NER would
approve the Green Power tariff on the basis that it serves a legitimate public purpose.
The following steps would be required to develop a contractual system:
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






Identify a producer of green electricity and sign a supply contract.
Identify an industrial user which would be willing to buy green energy
Negotiate and sign a power purchase agreement (PPA) at a mutually acceptable
tariff.
Submit the tariff to the NER for approval.
Submit the PPA to the NER for approval.
Negotiate a wheeling charge with Eskom and/or the local distributor through the
NER for the transmission of the power.
Develop and implement an electricity metering system to control and audit the
generation and consumption of the green energy.
In a later stage a more market-based system can be developed, i.e. a multiple-supplier
multiple-customer retail market based e.g. on green certificates as in some European
countries.
8.5. Demonstration activities
A small number of national demonstration projects should be launched as real-life
case studies to identify and mitigate barriers that may hinder the establishment of
renewable power producers.
8.5.1. Recommendation 14: The Darling Wind Farm
Implement the Darling Wind Farm demonstration project.
Justification:
The Darling Wind Farm has already been adopted by Government as a National
Demonstration Project for both wind energy and independent power producers. It will
be a useful source to identify barriers that may hinder the establishment of renewable
power producers. The Darling project will therefore create a basis for the
development of long-term solutions for renewable energy IPPs.
Supporting Information:
The general issues that will be addressed in preparing the Darling project are:






Key technical aspects of grid connection
Availability and accessibility of investment capital, incl. strategies to mitigate the
financial risk in renewable energy projects
Financial inter-mediation
Full cost accounting
IPP licenses
Commercial requirements for grid connection, incl. potential power sales
channels and power purchase, power wheeling and power banking agreements.
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

Mechanisms to cover incremental costs of commercial wind farms, incl. clean
development mechanisms (CDM) and green power market
Environmental impact assessment
It is however important to note that progress in the Darling project should not be
made subject to the other advances as outlined in this report. It is more envisaged that
the Darling project should move ahead into the "unknown" so that the issues can be
addressed on a reactive rather than proactive basis. If the Darling project has to wait
for the establishment of the appropriate regulation, and the regulation needs
experience from the Darling project, the process will be unnecessarily prolonged.
8.5.2. Recommendation 15: Mini-hydro
Establish a mini-hydro power plant as a national demonstration project.
Justification:
This would most probably be a competitive project. Creating awareness will result in
more viable projects beings identified.
Supporting information:
The Bethlehem project would be a proper candidate.
8.5.3. Recommendation 16: Cogeneration in sugar industry.
Establish a combined heat and power plant in a sugar industry using bagasse as fuel as
a national demonstration project.
Justification:
South Africa has a considerable potential for generating electricity from bagasse.
Most sugar industries are already generating electricity for their own use, however
using fairly inefficient equipment. By introducing modern high-efficient equipment
the industries could generate much more electricity, more than they need themselves.
Access to the grid and fair power purchase agreements are therefore prerequisites.
The project should start with determining grid access conditions and a fair purchase
price.
8.5.4. Recommendation 17: Cogeneration in wood/pulp industry
A combined heat and power plant in a wood or pulp/paper industry using wood
residues as fuel as a national demonstration project.
.
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Justification:
South Africa has a considerable potential for generating electricity from residues from
the wood and pulp industries. Currently, almost all industries use their wastes as
boiler fuel for steam generation, while some also practice cogeneration, however with
fairly inefficient equipment. By introducing modern high-efficient equipment the
industries could generate much more electricity, more than they need themselves.
Access to the grid and fair power purchase agreements are therefore prerequisites.
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