South Africa’s REFIT Programme Starts to Take by Scott Brodsky

South Africa’s REFIT Programme Starts to Take
By Scott Brodsky, September 22, 2009

The latest public consultation by the National Energy Regulator of South Africa (“NERSA”) in relation to South Africa’s nascent Renewable Energy Feed-in Tariff programme (“REFIT”) concluded on 3 September with a full day of public hearings in Pretoria, South Africa. The consultation generated enormous interest, with NERSA receiving 72 written submissions and 19 presentations being made at the well attended public hearings. Presenters at the hearings congratulated NERSA on pushing forward with the REFIT programme, and on the progress made to date, but also noted the need to maintain momentum and a number of key issues and concerns still to be addressed.

In July, NERSA issued a consultation paper (the “Consultation Paper”) in relation to REFIT, NERSA’s proposed mechanism to encourage the development of renewable energy generation. The Consultation Paper followed the publication by NERSA in March of Regulatory Guidelines (the “Guidelines”). The Guidelines themselves followed an earlier consultation process undertaken by NERSA to determine the most appropriate mechanism for promoting renewable energy generation in South Africa. The result of this process was the selection of guaranteed pricing, or a “feed-in tariffâ€?, in preference to mandated renewable energy targets or obligations.

More recently, on 5 August 2009, the Government promulgated regulations entitled the “Electricity Regulations on New Generation Capacityâ€?. These Regulations, made pursuant to the Electricity Regulation Act 2006 (the “Act”), deal primarily with the process for procurement of new generation, including from independent power producers (“IPPs”), but they also include provisions which pertain
specifically to the procurement of new generation under the REFIT programme.

The Consultation Paper specifically requested comments from renewable energy industry stakeholders and other interested parties on the REFIT programme, including the qualifying principles and tariffs for the “Phase 2″ technologies set out in the Consultation Paper, the content, structure and risk allocation between the seller and the buyer under the draft REFIT PPA appended to the Consultation Paper, and more generally in relation to the Guidelines.

NERSA’s publications to date

The Guidelines describe the basic structure of the REFIT programme, including the roles of various parties in the programme, namely NERSA, Eskom and renewable energy generators. According to the Guidelines, Eskom’s Single Buyer Officeâ€? is to be appointed as the Renewable Energy Purchasing Agency (“REPA”), the exclusive buyer of power under the REFIT programme. Generators participating in then REFIT scheme are required to sell power generated by renewable technologies to Eskom as the REPA under a Power Purchase Agreement, and are entitled to receive regulated tariffs, based on the particular generation technology. Under the Guidelines, NERSA is tasked with the administration of the REFIT programme, including setting the tariffs and verifying that generation is genuinely from renewable energy sources.

The Guidelines initially published regulated feed-in tariffs for power generated from four renewable energy technologies – landfill gas, small hydro (less than 10MW), wind and concentrated solar power (“CSP”) with storage. These four technologies were selected initially as they were considered simple to implement a REFIT tariff for, and were regarded as the most established and proven of the numerous renewable energy technologies available. These first four tariffs are described as “Phase 1â€? of the REFIT programme. However, the Guidelines left open the possibility of further technologies being added to Phase 1.

The July Consultation Paper introduced tariffs in respect of a further six renewable energy technologies: concentrated solar power without storage, solid biomass, biogas, photovoltaic systems (large ground or roof mounted), concentrated photovoltaic (“CPV”), and concentrated solar power (central tower). These tariffs are referred to as Phase 2. Interestingly, NERSA excluded from the definition of “biomassâ€? projects utilising pulp and paper or sugar bagasse (the fibrous residue of sugar cane plants once processed), as well as projects based on mill water from industrial processes, and instead classified such projects as “cogenerationâ€?, and therefore outside the remit of the REFIT. A number of developers utilising these fuel sources requested that these fuel sources be included in the programme with an appropriate Cogeneration Feed-In Tariff (or “COFIT”).

The Consultation Paper included a form of power purchase agreement (the “REFIT PPA”), the form of which closely follows that of the PPA proposed for the Medium Term Power Purchase Programme (“MTPPP”), but customised in certain respects for the REFIT programme. Given its genesis in the MTPPP PPA draft, together with the changes that have been made to accommodate the REFIT scheme, a number of detailed comments on the REFIT PPA have already been provided through NERSA’s consultation process, with the aim of ensuring a balanced and bankable PPA.

Of note, the REFIT PPA, like the MTPPP PPA, is designed for self dispatched power generation (that is, power generation which is unpredictable and cannot be determined ahead of time due to the intermittent nature of the fuel source). For example, the REFIT PPA does not require the seller to make binding declarations of availability, but only requires the provision of estimated forecasted availability to the buyer. Nor, however, does the REFIT PPA include substantive terms regarding fuel. The exclusion of specific fuel provisions has given rise to questions from potential developers, as while the most obvious examples of self-dispatched renewable energy generation are wind and solar, which do not use a conventional fuel source, a number of other renewable energy technologies do in fact use a fuel source (albeit intermittent in its supply, such as biogas).

NERSA expressly acknowledged that the REFIT PPA appended to the Consultation Paper is for non-dispatchable energy sources, but has not confirmed whether it will publish a further model PPA for centrally dispatched renewable energy generation. Potential investors and project developers will want the opportunity to review and comment on the terms of a PPA for centrally dispatched renewable energy, as well as that for self-dispatched facilities, as the provisions regarding nominations, capacity, fuel, billing and default will be different for a centrally-dispatched facility than for a self-dispatching facility.

In addition to comments on the draft REFIT PPA, key issues that were raised at the public hearing included:

(i) the procurement process by which renewable energy will be sourced by NERSA under the REFIT programme, particularly in light of the Regulations;
(ii) the role of Eskom as the purchaser of energy from renewable energy developers, and in particular, NERSA’s ability to require Eskom (as the Single Buyer, and acting as the REPA) to enter into a PPA with a REFIT generator; and
(iii) the overall legislative and regulatory framework within which the REFIT programme will operate.

These issues are discussed in more detail below.

Procurement Issues

It is crucial to potential investors and developers to understand how projects will be selected for the REFIT programme. In many countries where a REFIT scheme has been adopted, licences are granted on a “first come, first served� basis. This has the benefit of encouraging prompt uptake and rewarding first movers. An alternative is for the regulator or other neutral body to conduct a tendering process to select developers on the basis of specified criteria (as has been the case for other power procurement programmes in South Africa, such as the IPP peaker projects, and the Pilot National Cogeneration Programme).

It is not entirely clear from the Guidelines and the Regulations how renewable energy developers will be selected or appointed to participate in the REFIT programme. On the one hand, the Guidelines state that applications to qualify as a renewable energy generator are to be made to NERSA in conjunction with an application for an electricity generation licence in terms of Section 10 of the Act. This seems to suggest a “first come, first served� approach, subject to the usual licence conditions NERSA applies when issuing licences. However, on the other hand, the Regulations suggest a different process.

While the Regulations deal generally with procurement under an IPP bid programme (defined in the Regulations to mean a bidding process for the procurement of new generation capacity and/or ancillary services from IPPs), and specify the use of a bidding process involving requests for prequalification, requests for proposals and negotiations with the preferred bidder, the Regulations set out a special process for the procurement of renewable energy and cogeneration under the REFIT programme, described in Regulation 7.

This Regulation states that NERSA is to develop rules related to the criteria for the selection of renewable energy IPP that qualify for a licence and sets out a list of matters that the criteria prescribed by NERSA should take account of. These include compliance with the integrated resource plan and the preferred technologies, the acceptance of the IPP of a standardised PPA, preference for projects demonstrating the ability to raise finance, and “preference for generators that can be commissioned in the shortest time.

It appears, therefore, that successful REFIT projects may not be selected through a conventional bidding process, but instead, applications will be selected on the basis of prescribed criteria. Just what such criteria are, and how they will be applied and weighted is not yet clear, but it is expected that this will be set out in the rules to be developed by NERSA as required by Regulation 7(2)(a).

As the rules governing the selection process for projects have not yet been developed by NERSA, it is currently unknown whether there will be maximum limits on generation capacity – either in terms of overall capacity that may be procured under the REFIT programme, or specifically in terms of particular renewable energy technologies. The Guidelines provide that the NERSA shall be permitted to bring in capacity limits on specific technologies in the future, thus implying that for the present time, there will be no caps on any of the technologies. Potential investors and developers will want to know whether there will be any limitations on their ability to participate in the REFIT programme at an early stage so they can plan accordingly.

While NERSA is stated in the Guidelines as being responsible for the administration of the REFIT programme, under the Regulations, selection of the preferred IPP is not in the hands of NERSA but as been divested to the system operator, subject to its application of the criteria prescribed by NERSA. As the system operator, Eskom will be the entity responsible for selecting participants in the REFIT programme. Potential investors and developers will not only want to know what criteria Eskom will apply in reviewing applications under the REFIT programme, but equally how Eskom will allocate new generation capacity between REFIT applications, other IPPs (under other IPP bidding programmes, such as Eskom’s proposed base load programme), and Eskom’s own build programme.

Eskom as Buyer

A key principle of the REFIT scheme enunciated in the Guidelines is the concept of a willing buyer and a willing seller. As noted above, Eskom’s Single Buyer Office has been appointed as the REPA to purchase all power generated pursuant to the REFIT programme, and NERSA proposes to amend Eskom’s licence conditions to expressly require it to be the purchasing authority. The appointment by Eskom as the purchaser of power under the REFIT scheme is in line with the Cabinet Decision in 2007 to designate Eskom as the single buyer, as well as the Regulations, which provide that the buyer (being the person designated by the Minister of Energy in terms of Section 34 of the Act, namely Eskom) must purchase all generation capacity procured pursuant to the REFIT programme. However, the requirement for Eskom to enter into PPAs appears to contradict the willing buyer, willing seller principle. In addition, exactly how and when NERSA intends to amend Eskom’s licence conditions to require it to be the REPA is not clear from the Guidelines or the Regulations.

It is important to potential participants in the REFIT programme to know at the outset that there is a buyer for the power they will generate. Should they enter into the procurement process and be successful in obtaining a generation licence for the REFIT scheme, they will need certainty that they will be able to conclude a binding PPA with an offtaker. Indeed, this goes to the bankability of the REFIT scheme – financiers will only lend funds to investors or developers with secure offtake arrangements.

Legislative and Regulatory Framework

Potential investors and developers will expect the final REFIT scheme to be demonstrably fair, transparent, clear, robust and stable. They are also likely to require that its structure be in place before they begin investing time and money in the scheme. This is usually achieved through entrenching the regime in law, as has been done in other countries.

On reviewing the Guidelines and the Regulations, it is not yet clear what further legislation regarding the REFIT programme will be enacted and the timelines for doing so. While the Guidelines state that it is intended that legislation and regulations will be enacted to implement the REFIT programme, they also refer to NERSA having the mandate to establish guidelines for the implementation of the REFIT, which guidelines are to be used in conjunction with the relevant legislation and regulations already in place.

This includes the Energy Regulator Act 2004, the Act, generation licence application procedures, and the transmission and distribution grid codes. On the other hand, the Regulations expressly provide that the Minister of Energy is charged with making guidelines relating to the REFIT programme, with which all parties to the REFIT programme shall be required to comply. Given the Guidelines released in March were issued by NERSA and not the Minister, their legal status is not clear. The ambiguity created from the current lack of alignment of various documents published so far raises the question of what further legislation is planned, and, crucially, its proposed timing.

Conclusion

The publication of both the Guidelines and the Consultation Paper, together with the promulgation of the Regulations and the consul-tation and public hearing process held recently, show that NERSA and the Department of Energy are making positive strides in progressing the development of the REFIT programme. However, as noted above certain fundamental aspects of the REFIT scheme require further development to achieve a meaningful REFIT programme in South Africa.

With the current momentum of the programme from the Government, and the huge interest from the private sector, there is excitement about the prospect that the REFIT programme will achieve its intended outcome to serve as a reliable, comprehensive and bankable framework for the development of much needed renewable energy in South Africa.

For more information, please contact Scott Brodsky at + 2711 911 4303 or sbrodsky@dl.com, Gregory Nott at + 2711 911 4301 or gnott@dl.com, Rachel Yurkowski at + 44 20 7459 5166 or ryurkowski@dl.com, or your Dewey & LeBoeuf relationship attorney.

About the author

Scott Brodsky
Dewey & LeBoeuf Johannesburg Energy & Project Finance Partner

Scott Brodsky is an energy and projects partner in the Johannesburg office of Dewey & LeBoeuf. He has more than two decades of experience advising sponsors, project companies, financiers, governments, and financial advisors on projects in Africa, the United Kingdom, Western, Central and Eastern Europe, the Indian sub-continent, and Asia. He has advised on a broad range of projects in the power, oil and gas, renewables, transport and other infrastructure sectors. Scott is recognized as a leading project finance lawyer in the 2009 Legal Experts Guide.

——————————————————————————————————————————————————–

CONTACT DETAILS
To secure your participation at this prestigious event, please contact:

Liz Hart
Tel: +27 11 463 9184
Fax: +27 11 463 8432
Email: info@siyenza.za.com

Leave a Reply