How to stimulate the South African rooftop PV market without putting municipalities financial stability at risk A Net Feed-in Tariff proposal

Transcription

1 How to stimulate the South African rooftop PV market without putting municipalities financial stability at risk A Net Feed-in Tariff proposal Radisson Blu Hotel: Sandton 29 September 2015 Dominic Milazi Cell: DMilazi@csir.co.za Dr Tobias Bischof-Niemz Chief Engineer

2 Agenda Introduction and Background The Status Quo Business Case for a Residential Embedded PV Installation Financial Threat for Municipalities from Embedded PV Proposal: Regulatory Approach to Embedded PV Installations Effects of the Proposed Regulatory Approach 1

3 Actual results: PV and wind in South Africa are cost competitive today First four bid windows results of Department of Energy s RE IPP Procurement Programme (REIPPPP) Average tariff in R/kWh (May-2015-R) CSP PV Wind Coal/gas new-build options Bid Window 1 (4 Nov 2011) Bid submission dates Bid Window 2 (5 Mar 2012) Bid Window 3 (19 Aug 2013) Bid Window 4 (18 Aug 2014) Notes: For CSP Bid Window 3, the weighted average of base and peak tariff is indicated, assuming 50% annual load factor Sources: StatsSA on CPI; Department of Energy s publications on results of first four bid windows CSIR analysis

4 Consequence of renewables cost reduction: PV & wind are now the cheapest new-build options on a per kwh basis Lifetime cost per energy unit R/kWh (May-2015-R) Renewables Conventionals Capital Fixed O&M Fuel Fuel R/GJ PV Wind CSP Baseload Coal Nuclear Gas (CCGT) Mid-merit Coal Gas (OCGT) Diesel (OCGT) Assumed load factor 85% 92% 50% 50% 10% 10% 3 Note: Changing full-load hours for conventionals drastically changes the fixed cost components per kwh (lower full-load hours higher capital costs and fixed O&M costs per MWh); fuel includes actual fuel cost and variable O&M; Assumptions: average efficiency for CCGT = 50%, OCGT = 35%; coal = 37%; nuclear = 33%; IRP cost from Jan 2012 escalated with CPI to May 2015; assumed EPC CAPEX inflated by 10% to convert EPC/LCOE into tariff; mid-merit coal fuel cost 50% higher than base; CSP: 50% annual load factor and full utilisation of the five peak-tariff hours per day assumed to calculate weighted average tariff from base and peak tariff; Sources: IRP Update; REIPPPP outcomes; StatsSA for CPI; Eskom financial reports on coal/diesel fuel cost; CSIR analysis 3

5 Integrated Resource Plan 2010 (IRP 2010) plans generation mix for South Africa until GW of PV is planned by 2030 Installed capacity Energy mix Total installed Capacity in GW Electricity supplied in TWh per year PV CSP Wind Hydro Nuclear Peaking Gas PV CSP Wind Hydro Nuclear Peaking Gas Renewable TWh's in 2030 (14%) Carbon free TWh's in 2030 (34%) Coal 20 Coal Share renewables % 14% 4 Source: Integrated Resource Plan 2010, as promulgated in 2011; CSIR analysis CO 2 intensity The draft of the IRP 2010 Update was published end of 2013 in the Update, PV capacity increased to 9.8 GW by 2030

6 5 Addressing the current situation

7 Two PV markets in South Africa 1: Department of Energy s competitive tender space (REIPPPP) large projects 2: Self-generation, embedded generators small projects Focus of this presentation 6 IRP does not specifically plan for embedded PV, but mentions it as a mean to achieve the planned capacity

8 Agenda Introduction and Background The Status Quo Business Case for a Residential Embedded PV Installation Financial Threat for Municipalities from Embedded PV Proposal: Regulatory Approach to Embedded PV Installations Effects of the Proposed Regulatory Approach 7

9 Residential-scale: 70%-80% cost reduction in just 5 years makes PV now competitive with retail electricity tariffs, and new products evolve PV is already today competitive with residential amd commercial electricity tariffs and new products evolve: Plug-and-Play PV Lifetime costs (LCOE) in R/kWh 5 Residential PV installation Commercial PV installation 70-80% Jan/08 Jan/09 Jan/10 Jan/11 Jan/12 Jan/13 Jan/14 Jan/15 Five years ago, a residential PV system of 5 kwp cost R 500,000 (incl. VAT) Today, the same system can be installed for R 120,000 or less (incl. VAT) Time 8 Source: Bundesnetzagentur (German Federal Grid Agency), assumptions: German residential/commercial turnkey prices, translated via historical exchange rate into ZAR-based turnkey prices, assuming 20% CAPEX-premium compared to Germany, VAT added for residential, translated into LCOE, real WACC of 4% for residential & 6% real WACC after tax for commercial customers; tax effects (accelerated 3-year depreciation) considered for commercial; CSIR analysis

10 Levelised cost of electricity for a typical residential PV installation (without subsidies) CAPEX (turnkey, excl. VAT) PV system (6 20 R/Wp) R 120,000 PV system (6 kwp) OPEX O&M, insurance (150 R/kWp/yr) R 900/yr Energy yield ~1,700 kwh/kwp/yr (-0.8%/yr) 10,000 kwh/yr Energy yield 10,000 kwh/yr ~ Cost of capital WACC of a private individual 9% Inflation Average inflation over lifetime 6% Lifetime Economic lifetime of the PV system 25 yrs Levelised cost of electricity (LCOE) = 0.8 R/kWh annual cost of PV system ~ 8,000 R/yr in year 1 9

11 Higher CAPEX of residential or commercial PV can be (partly) compensated by lower cost of capital for residential home owners CAPEX in R/Wp (excl. VAT) LCOE = Levelised Cost of Electricity These are the lifetime costs of the PV system per lifetime energy output, i.e in R/kWh Utility-scale LCOE = 1.2 R/kWh LCOE = 1.0 R/kWh LCOE = 0.8 R/kWh Residential Commercial 4% 6% 8% 10% 12% 14% 16% 18% Assumptions: 20 years lifetime, 1,700 kwh/kwp/yr specific energy yield in year 1, 0.8% annual degradation, 200 R/kWp/yr OPEX, 6% inflation LCOE = 0.6 R/kWh WACC (nominal)

12 Agenda Introduction and Background The Status Quo Business Case for a Residential Embedded PV Installation Financial Threat for Municipalities from Embedded PV Proposal: Regulatory Approach to Embedded PV Installations Effects of the Proposed Regulatory Approach 11

13 Status today: Without embedded PV, the residential customer consumes 12,000 kwh p.a. and pays R 15,600 p.a. to the municipality Munic revenues R 15,600 p.a. Municipality Residential load Electricity bill * 1.3 R/kWh Munic revenues R 15,600 p.a. 12 Grid energy Solar energy Payments

14 Status today: municipality buys electricity from Eskom Wholesaler and pays R 8,400 p.a. for it therefore makes a gross margin of R 7,200 p.a. Munic revenues Munic costs of goods sold R 15,600 p.a. R 8,400 p.a. ============================= Municipality Munic gross margin (on that specific customer) R 7,200 p.a. Residential load 13 The gross margin must cover all municipality costs other than bulk electricity purchases from Eskom (e.g. grid costs, staff, meter reading, billing, etc.) Eskom Wholesaler Munic s Eskom bill * 0.7 R/kWh Electricity bill * 1.3 R/kWh Munic costs R 8,400 p.a. Munic revenues R 15,600 p.a. Conventional generation fleet Grid energy Solar energy Payments

15 4,000 Status today: An embedded PV generator with 40% of the PV energy being self-consumed on site reduces municipality sales & gross margin PV Owner Munic revenues R 15,600 p.a. R 10,400 p.a. Gross PV generation PV panels Munic costs of goods sold R 8,400 p.a. R 5,600 p.a. Municipality 10,000 kwh/yr ~ PV inverter ============================= R 7,200 p.a. Munic gross margin R 4,800 p.a. (on that specific customer) Self-consumption Residential load 14 The gross margin on this specific customer reduces by R 2,400 p.a. 100,000 customers R 240 million gross-margin reduction!!! Eskom Wholesaler Munic s Eskom bill * 0.7 R/kWh Electricity bill * 1.3 R/kWh Munic costs R 5,600 p.a. Munic revenues R 10,400 p.a. Conventional generation fleet Grid energy Solar energy Payments

16 4,000 Status today: Excess PV energy that cannot be consumed on site by the customer is fed into the grid with no/too little/too risky compensation Highly risky two-revenues business case for the PV owner. Only PV projects with very quick payback will be implemented (at high effective costs to the system!) PV Owner Net feed-in A Gross PV generation Municipality B 6,000 10,000 kwh/yr Self-consumption ~ Residential load Electricity bill * 1.3 R/kWh 15 Sum of energy stream A and B equals the total amount of PV energy Grid energy Solar energy Payments

17 Status today: None of the key stakeholders concerns is addressed with respect to embedded PV generators Player Concern Addressed? Munics Municipalities will go bankrupt (loose out on gross margin from electricity sales) if no compensation mechanism for self-consumed PV energy is implemented Administrative burden managing large-scale uptake of embedded PV PV Owner Business case not attractive if excess energy has to be curtailed or is not financially compensated Business case too risky if feeding back into the grid is compensated, but not adequately or at unpredictable rates over the asset lifetime SMMEs Utility-scale PV projects are not made for SMMEs as owners/suppliers Rooftop PV market is ideal for SMMEs, but without continuous workflow, small companies are not willing to invest into manpower and skills PV Manufacturers REIPPP Programme very well run, but the demand is too spiky in order to trigger significant investments into local production of modules/inverters Rooftop PV market attractive (it is very fragmented & provides continuous demand that is supplied through wholesaler channels), but not existing 16 Electricity Ratepayers Only PV systems with very short payback are currently implemented That means customers with a) high tariffs and b) high demand implement PV they therefore opt out of the cross-subsidisation mechanism, which means higher tariffs for all other customers

18 Agenda Introduction and Background The Status Quo Business Case for a Residential Embedded PV Installation Financial Threat for Municipalities from Embedded PV Proposal: Regulatory Approach to Embedded PV Installations Effects of the Proposed Regulatory Approach 17

19 Proposal: Net Feed-in Tariff with central off-taker and financial compensation for munics Create a Central Power Purchasing Agency (CPPA) as nation-wide sole off-taker for energy from embedded PV generators fed back into the grid, with two roles A Feed-in Tariff for not self-consumed energy CPPA buys other part of the energy from embedded PV that is not self-consumed (fed back into grid) from the PV owner at a guaranteed tariff (20 years, predefined tariff path) B Financial compensation for self-consumed energy CPPA compensates the electricity distributor (municipality or Eskom Distribution) financially for lost gross margins due to onsite self-consumed energy from embedded PV generators Define an annual target (e.g. 500 MWp/yr) for embedded PV and steer the market size via the level of the FIT for new PV installations under the regime 18 Give a FIT premium to PV systems that use locally manufactured/assembled modules and/or inverter to promote local manufacturing

20 4,000 Proposal: Create a Central Power Purchasing Agency (CPPA) that is the sole off-taker in South Africa of any percentage of excess PV energy PV Owner Net feed-in 10,000 kwh/yr ~ CPPA Municipality 6,000 A B Gross PV generation Self-consumption Residential load Electricity bill * 1.3 R/kWh 19 Grid energy Solar energy Payments

21 4,000 Proposal: CPPA pays the PV owner 0.7 R/kWh for the excess energy (A) at a predefined escalation path, guaranteed for 20 years Net Feed-in Tariff payments 6,000 kwh/yr * 0.7 R/kWh PV Owner Net feed-in 10,000 kwh/yr ~ CPPA Municipality 6,000 A B Gross PV generation Self-consumption Residential load Electricity bill * 1.3 R/kWh 20 The guaranteed CPPA payment de-risks the PV business case and makes it bankable Grid energy Solar energy Payments

22 4,000 Proposal: CPPA pays municipality a financial compensation, linked to amount of self-consumed PV energy (B), measured on aggregated level Net Feed-in Tariff payments 6,000 kwh/yr * 0.7 R/kWh PV Owner Net feed-in 10,000 kwh/yr ~ CPPA Municipality 6,000 A B Gross PV generation Self-consumption Gross-margin compensation 4,000 kwh/yr * 0.6 R/kWh Munic compensation R 2,400 p.a. Electricity bill * 1.3 R/kWh Munic revenues R 10,400 p.a. Residential load 21 Grid energy Solar energy Payments

23 4,000 Proposal: Gross-margin compensation makes municipality not better & not worse off, it simply makes it financially indifferent to embedded PV Net Feed-in Tariff payments 6,000 kwh/yr * 0.7 R/kWh PV Owner Munic revenues R 15,600 p.a. R 10,400 p.a. Net feed-in Munic gross-margin R 2,400 p.a. 6,000 10,000 compensation kwh/yr ~ CPPA Municipality Munic costs of R 8,400 p.a. B Self-consumption goods sold R 5,600 p.a. A Gross PV generation Gross-margin compensation 4,000 kwh/yr * 0.5 R/kWh ============================= R 7,200 p.a. Munic gross margin R 7,200 p.a. (on that specific customer) Gross margin remains constant Electricity bill * 1.3 R/kWh Residential load Grid energy Solar energy 22 Payments

24 4,000 Proposal: Finally, CPPA transfers the PV energy to Eskom wholesaler, where it is blended with the energy from all other power sources Net Feed-in Tariff payments 6,000 kwh/yr * 0.7 R/kWh PV Owner Net feed-in 10,000 kwh/yr ~ CPPA Municipality 6,000 A B Gross PV generation Self-consumption Gross-margin compensation 4,000 kwh/yr * 0.6 R/kWh Electricity bill * 1.3 R/kWh Residential load Wholesale value 6,000 kwh/yr * 0.5 R/kWh 23 6,000 kwh/yr Eskom Wholesaler Eskom bill * 0.7 R/kWh 2,000 kwh/yr Conventional generation fleet Grid energy Solar energy Payments

25 4,000 CPPA de-risks business case for PV owner which brings costs down and makes the municipality financially indifferent to embedded PV Net Feed-in Tariff payments 6,000 kwh/yr * 0.7 R/kWh PV Owner Net feed-in 10,000 kwh/yr ~ CPPA Municipality 6,000 A B Gross PV generation Self-consumption Gross-margin compensation 4,000 kwh/yr * 0.6 R/kWh Electricity bill * 1.3 R/kWh Residential load Wholesale value 6,000 kwh/yr * 0.5 R/kWh 24 6,000 kwh/yr Eskom Wholesaler Eskom bill * 0.7 R/kWh 2,000 kwh/yr Conventional generation fleet Grid energy Solar energy Payments

26 Once NETFIT mechanism is in place, it can be utilised to control size of embedded PV market Target Set by DoE; for example: 500 MW of new embedded PV installations per year Adjustment of NETFIT for new installations only! Existing installations are guaranteed the NETFIT that was valid at the time of commissioning for 20 years. Compare target & actuals Adjust NETFIT quarterly Actuals New installations in the South African rooftop PV market in MW per year Measure via Net-FIT reg-istry Feedback loop 25

27 Agenda Introduction and Background The Status Quo Business Case for a Residential Embedded PV Installation Financial Threat for Municipalities from Embedded PV Proposal: Regulatory Approach to Embedded PV Installations Effects of the Proposed Regulatory Approach 26

28 Funding requirement for CPPA would be approx. R 290 million/yr for every 500 MWp of installed PV capacity (plus CPPA staff & processes) Sales to Eskom wholesaler (500 MWp R 240 million/yr) Additional (net) funding requirement (500 MWp R 290 million/yr) Total funding requirement (500 MWp R 530 million/yr) CPPA Municipality 27 Gross-margin 0.6 R/kWh for all self-consumed energy 500 MWp R 190 million/yr Total PV energy Municipality supply area Assumptions: 1,600 kwh/kwp/yr; self-consumption ratio of 40%; NETFIT of 0.7 R/kWh; gross-margin compensation of 0.6 R/kWh; wholesale value of PV energy of 0.5 R/kWh A B The PV owners get compensated for the sum of energy A (fed into the grid) The municipality gets compensated for the sum of energy B (self consumed)

29 Funding requirement for CPPA would be approx. R 290 million/yr for every 500 MWp of installed PV capacity (plus CPPA staff & processes) The net funding requirement may possibly go down to zero with increasing wholesale value of the PV energy (as Eskom phases out more and more of the cheapest coal generators and phases in more expensive new-builds) and decreasing PV costs Sales to Eskom wholesaler (500 MWp R 240 million/yr) Additional (net) funding requirement (500 MWp R 290 million/yr) Total funding requirement (500 MWp R 530 million/yr) CPPA Municipality 28 Gross-margin 0.6 R/kWh for all self-consumed energy 500 MWp R 190 million/yr Total PV energy Municipality supply area Assumptions: 1,600 kwh/kwp/yr; self-consumption ratio of 40%; NETFIT of 0.7 R/kWh; gross-margin compensation of 0.6 R/kWh; wholesale value of PV energy of 0.5 R/kWh A B The PV owners get compensated for the sum of energy A (fed into the grid) The municipality gets compensated for the sum of energy B (self consumed)

30 Lower Net Feed-in than Electricity Tariff makes electricity customer shift loads from peak into day-times to increase PV self-consumption One-family residential house 12,000 kwh annual demand (actual data) 6 kwp PV installation (simulated data) kw Net Feed-in Tariff (FIT) 0.7 R/kWh Excess PV power fed into the grid Load supplied by the grid Load supplied directly by PV 4.0 Load shifting h00 12h00 18h00 Electricity Tariff 1.3 R/kWh Avoided electricity tariff 1.3 R/kWh 29 The load-shifting effect of NETFIT is very beneficial for the overall power system, as it reduces net demand on the grid

31 Concerns of all key stakeholders are addressed via the NETFIT with financial compensation for municipalities Player Concern Addressed? Munics Cannot afford to loose out on gross margin from electricity sales Administrative burden managing large-scale uptake of embedded PV PV Owner Business case not attractive if excess energy has to be curtailed or is not financially compensated Business case too risky if feeding back into the grid is compensated, but not adequately or at unpredictable rates over the asset lifetime SMMEs Utility-scale PV projects are not made for SMMEs as owners/suppliers Rooftop PV market is ideal for SMMEs, but without continuous workflow, small companies are not willing to invest into manpower and skills PV Manufacturers REIPPP Programme very well run, but the demand is too spiky in order to trigger significant investments into local production of modules/inverters Rooftop PV market attractive (it is very fragmented & provides continuous demand that is supplied through wholesaler channels), but not existing 30 Electricity Ratepayers Only PV systems with very short payback are currently implemented That means customers with a) high tariffs and b) high demand implement PV they therefore opt out of the cross-subsidisation mechanism, which means higher tariffs for all other customers

32 Further advantages of a NETFIT-based scheme for residential PV Transparency & Safety All embedded PV generators would be centrally registered: because no registration no NETFIT money Distribution grid operators are fully aware of all embedded PV generators, which increases maintenance safety Job creation & local content Potential for rural enterprises to run a micro-utility business with small-scale PV generators wherever there is a grid, there is a PV business opportunity! Huge potential for SMMEs in PV design, installation & verification for residential & commercial customers Reduced grid losses and system costs Embedded PV is close to the load, i.e. grid losses are low (saves add. up to 5% of costs) Generally only very little grid strengthening and no grid extension required (PV follows the grid) Lower export than import tariff incentivises load-shifting & peak-shaving to better match PV supply and onsite demand; good for the system: matching onsite supply & demand reduces grid losses & need for peaking power Aggregated supply profile of spatially distributed embedded PV generators is very smooth and highly predictable Reduced transaction costs Project development costs, legal fees, environmental assessment, etc. are all reduced or non existent for embedded PV as compared to large PV installations Funding easier due to granularity (small project size, R 100,000 to few millions) With a proper standard offer and NETFIT defined, rooftop PV installation would become bankable Banks could put the asset into the home loan (with residual NETFIT revenues as collateral) for easy financing

33 Thank you Dominic Milazi CSIR Energy Centre: Markets and Policy Team or