SAPVIA s 19 th Networking Event: Early connection as a selection criteria under REIPPP Allen & Overy

Transcription

1 Jason van der Poel Partner Allen & Overy (South Africa) LLP 9 December 2015 SAPVIA s 19 th Networking Event: Early connection as a selection criteria under REIPPP 1

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5 Our South African team Lionel Shawe Partner Mike Duncan Partner Jason van der Poel Partner Lisa Botha Partner Khurshid Fazel Partner Sibusiso Zungu Director Lindani Mthembu Director Allen Leuta Director Anthony Colegrave Director Kathleen Wong Counsel Supported by 5 senior associates, 11 associates, 2 trainees All working across: Projects and project financing, Banking and financial services, Asset management, Financial services regulation, Derivatives, Restructuring, Securitisation, Trade finance, Tax, Corporate/M&A 5

6 What are we seeing from behind our desks? Successful closure of REIPPPP Round 3 Projects, although in some instances, there was a large cost variance between the Cost Estimate Letters and the Budget Quote. The delay in commencement of work, the slowing down and the suspension of work on our REIPPPP Round 4 preferred bidder projects. Expedited Bid Phase bid submission date postponed to 11 November 2015 but large number of bids were submitted. Some Cost Estimate Letters had not been issued before the previous 2 November deadline but all appeared to have Cost Estimate Letters by 11 November. Potential new IPP investors are jittery and adopting a wait and see attitude.. 6

7 Why are we seeing this? Application on 26 September 2015 by Eskom Transmission (Grid Code Advisory Committee) to NERSA RSA Grid Code secretariat for an exemption from the Network code 2(2) for the issue of budget quotes to customers until the end of the MYPD3 period (31 March 2018) on account of Eskom s serious liquidity issues. NERSA statement that it cannot issue guarantees to Eskom outside the regulatory process and that Eskom must follow the prescribed process by submitting either an adjustment in terms of the Regulatory Clearing Account or an early tariff Application. Eskom board expressed willingness to engage on this basis and made a MYPD3 RCA submission in November 2015, which NERSA is now considering. IPP Office establishment of a strategic grid connection committee to examine the way forward; ongoing engagement very helpfully reported on at this year s Windaba. Market eagerly awaiting clarity. 7

8 Connection as a Qualification Criterion under the RFP Bidder must submit a Project Schedule, which must include the anticipated time for completion of the Transmission/Distribution Works (Part B clause (Project Schedule)). Bidder must liaise with relevant Grid Provider (Part A), and provide cost estimate letter for indicative cost and indicative timeline for grid connection (Part B clause (Time and Cost of Grid Connection)). Bidder must clarify which parts of the grid connection works will be implemented by the Bidder, any element defined as self-build or own build it seems that Eskom build is no longer applicable. Bidder must be capable of complying with Codes by Scheduled COD. Earliest connection comparative to others is not a specific technical requirement for qualification, nor is it one of the evaluation criteria. 8

9 Benefits of early connection: CSIR study As the diesel, mid merit coal and LNG fuel saving value of wind and PV declines as the South African system becomes less constrained, bringing such projects online early maximises NPV for the system According to CSIR study each month earlier grid connection adds an NPV of 0.5 r-ct/kwh during the entire PPA Projects with early connection capability could be favoured by: adjusting proposed tariffs upwards for evaluation purposes by 0.5rct/kWh for every month of committed COD after base month; and increasing penalties for late COD. Source: CSIR Report: Value of earlier grid connection of renewable projects: a power system and macroeconomic cost-benefit analysis, 17 August

10 Geographical blindness in the REIPPP bid process Out of 8400 MW of IPP solar farms, 6400 MW is allocated to the Northern Cape, whilst only 2000 MW is dispersed elsewhere in the country Levelised cost of renewable energy (RE) supplied at the point of connection to the grid is weighted at 70% for bid evaluation. Solar PV bidders generally opt for areas with the highest irradiation and thus the best energy yields - typically in the Solar Corridor. Source: Analysis: SA renewable energy bid process flawed, Pierre Potgieter and Chris Yelland, EE Publishers; GIZ Study Report: Analysis of options for the future allocation of PV farms in South Africa 10

11 Geographical blindness in the REIPPP bid process Solar irradiation in South Africa Source: GIZ Study Report: Analysis of options for the future allocation of PV farms in South Africa 11

12 Geographical blindness in the REIPPP bid process Socio-economic Development IGNORED: the costs of additional grid infrastructure and upgrades, and transmission losses to the point of consumption. Cost RESULT: grid congestion, time delays and importantly, additional real delivered costs when the transmission grid upgrades and transmission losses are included Source: Analysis: SA renewable energy bid process flawed, Pierre Potgieter and Chris Yelland, EE Publishers 12

13 Renewable Energy Development Zones GIZ study: 3 options, one of which the allocation of facilities is predominantly within defined Renewable Energy Development Zones (REDZ) REDZ: considers transmission losses, municipalities with high social need and development potential, priority areas for renewable energy manufacturing and import activities, and existing transmission infrastructure integrates environmental, economic and social factors to identify geographical areas where in the medium to long-term wind and solar PV development will have the lowest impact on the environment while yielding the highest possible social and economic benefit Source: GIZ Study Report: Analysis of options for the future allocation of PV farms in South Africa 13

14 Renewable Energy Development Zones Scenario A: Current allocation strategy predominantly in the Solar Corridor (maximum energy yield) Scenario B: Allocation predominantly close to load centres (minimum grid reinforcements) Scenario C: REDZ Total levelised costs for all three scenarios very similar. Total levelized cost of electricity of PV generation Source: GIZ Study Report: Analysis of options for the future allocation of PV farms in South Africa 14

15 Rethinking bid selection Unfairly favours projects with low levelised cost at the point of connection Alternative strategies: Choose projects that can connect quicker to maximise diesel, coal and gas cost offset better distribution allowing for much needed generation capacity to be connected faster Minimisation of transmission grid upgrades and transmission losses Proposed PV allocation in REDZ Source: GIZ Study Report: Analysis of options for the future allocation of PV farms in South Africa 15

16 Key Allen & Overy contacts Jason van der Poel Partner +27 (0)

17 These are presentation slides only. The information within these slides does not constitute definitive advice and should not be used as the basis for giving definitive advice without checking the primary sources. Allen & Overy means Allen & Overy LLP and/or its affiliated undertakings. The term partner is used to refer to a member of Allen & Overy LLP or an employee or consultant with equivalent standing and qualifications or an individual with equivalent status in one of Allen & Overy LLP s affiliated undertakings. JH: