Submission from SAIPPA Proposed co-generation (distributed generation) incentive programme

Transcription

1 APPENDIX A: RESPONSE FORM 01 Submission from SAIPPA Proposed co-generation (distributed generation) incentive programme QUESTIONNAIRE The Respondent must provide a comprehensive response to each of the questions below. Demand Response and Distributed Generation Structure/Programme 1. Provide detail regarding your understanding of, and experience in, dispatchable demand response, demand side management or distributed generation; Thank you for affording us the opportunity to respond to this RFI on behalf of the SAIPPA. The goals of the South African Independent Power Producers Association (SAIPPA) are to promote the collective interests of IPP's in South Africa, to assist with public policy formation and implementation, and to serve as a platform for information dissemination to its members, with due regard for the prescripts and limitations imposed by the Competition Act. We seek to pro-actively engage with legislators, government officials, planners and regulators as part of our initiatives to achieve energy security in South Africa, as well as Southern Africa. An Independent Power Producer is a private entity, which is not a public electric utility, which owns and or operates facilities to generate electric power for sale to a utility, central government buyer and end users. An IPP may also be an entity that produces electricity for its own use. SAIPPA s members have been involved in the South African electricity sector since the opening up of the sector around 8 years ago. Many of SAIPPA s members have been involved in a range of demand response and demand side management projects and programmes as well as dispatchable and distributed generation projects. SAIPPA s members have collectively developed a large number of distributed generation projects (the main subject of this proposal) that are currently at Bankable Feasibility level and awaiting a conducive regulatory and commercially viable environment. 2. Provide a description of suitable demand response and distributed generation structures and/or programmes that you believe might be of use in the SA context; to assist with the unique requirements mentioned in section 5 of this RFI. Please indicate where such structure and/or programmes are currently used, where

2 applicable. You are encouraged to inter alia make use of a diagram to explain such structure; The programme proposed herein is intended to enable the implementation of a large number of co-generation projects which can make a significant contribution to solving South Africa s electricity crisis. Many of the projects that can be unlocked are in advanced stages of development and have not been implemented due to the lack of a commercially viable business case. A solution to unlock these projects is to provide a tax incentive which is discussed in detail below. Defining Cogeneration and Distributed Generation The definition of cogeneration in South Africa was formed during the launch of the Pilot National Cogeneration Programme (PNCP) in This definition has, since then, been used in the COFIT documentation and other consultation papers. In the South African context cogeneration covers a much broader range of project types than the classical (international) definition which normally includes Combined Heat and Power (CHP) or Combined Chilling, Heat and Power (CCHP or tri-generation). In the South African context cogeneration is defined as the simultaneous generation of electricity and useful thermal energy from a common fuel/energy source. In the South African context, cogeneration also refers to the production of electricity and useful heat from a fuel/energy source which is a co-product, by-product, waste product or residual product of some underlying industrial process. It differs from conventional generation in that it is coupled to an industrial process of the host plant. The technologies considered as cogeneration include waste heat recovery, generation from furnace off-gases, power generation from discard coal, the combined generation of steam and power from fuels, the co-combustion of industrial biomass by-products to generate energy. It is important to view different types of cogeneration projects separately as they have different impacts on the electricity grid and require different commercial structures to enable them. Some projects, like waste heat recovery and furnace off-gas, are intrinsically linked to the production variability of the host plant and are therefore not as well suited to long term IPP procurement programs, like the REIPPPP. These are more suited to the application of a short term economic incentive instrument. The South African definition of cogeneration (as used in the PNCP and the COBID documentation) has 3 categories and a number of subcategories. In terms of the impact on the grid and commercial structures there are 2 main categories that should be differentiated as per the diagram below.

3 South African definition of Co-Generation Electricity recovered from waste The co-generator has no control over the fuel source - at the end of an industrial process Ferrochrome smelters Ferromanganese smelters Cement kilns Steel manufacturing Etc. Combined Heat and Power (CHP) The co-generator has significant control over the fuel source Pulp and Paper Sugar Biomass Natural gas Etc. The essential difference between Energy Recovery Projects (ERPs) and CHP projects is that CHP projects generally have control over the fuel supply and ERPs do not. ERPs, although not necessarily dispatchable, do provide excellent alignment between supply and demand as demonstrated in the diagram below. The impact on the grid is therefore a very close alignment between supply and demand and can be considered as contributing to the base load power supply of a country. Electricity demand from Eskom 120 If the demand from the industrial process on Eskom is LOW, the cogeneration plant produces LESS electricity 100 MW Consumption If the demand from the industrial process on Eskom is HIGH, the cogeneration plant produces A LOT of electricity Daily Consumption Profile Existing demand Demand after cogen implemented

4 Distributed generation projects encompass a range of technology types including renewable energy, cogeneration and thermal power plants. WADE (The World Alliance for Decentralized Energy) defines Decentralized Energy (DE) as: "Electricity production at or near the point of use, irrespective of size, technology or fuel used - both off-grid and on-grid." It includes: On-site renewable energy High efficiency cogeneration (CHP) Industrial energy recycling and on-site power Distributed generation is also sometimes defined as embedded generation. Scope of Projects for this Proposed Programme. The programme proposed in this paper covers the second and third bullet points above. This includes both forms of cogeneration defined above (ERP and CHP) but could also be extended to include on-site renewable energy. It is important to note that the programme proposed herein is suited to projects that do not export electricity to the grid and all electricity produced is used on site. The programme requires a tax incentive to enable the implementation of these projects (and not a power purchase programme). Description of the Proposed Programme. The programme proposed requires a tax incentive programme to promote the implementation of distributed co-generation projects. The tax incentive effectively provides an additional capital allowance to the host party which therefore provides a capital subsidy to the project. Being a tax incentive however means no actual cash spend by treasury but rather a reduced future tax income. The tax incentive is typically given in the tax year of COD. Whilst a number of tax incentives and other instruments currently exist (including Sections 12B, 12I and 12L of the Income Tax Act, MCEP and the Eskom IDM programme), none of them have been successful in promoting the implementation of the projects mentioned above. Some of them exclude cogeneration or electricity generation projects, some have caps that are too low and some have been stopped. The programme proposed in here overcomes these limitations.

5 For distributed generation projects with no electricity export, project developers and industrial hosts commonly favour capital subsidies and tax incentives over long term PPAs for the following reasons: They offer certainty in terms of capital budgeting They are far simpler and less costly to the project developer or industrial host (there is no long and expensive bidding process - relevant due to smaller size projects) They are generally quicker than bidding into procurement programmes and signing long term PPAs. The contracting period is shorter The commitment is shorter which is relevant since the industrial host may not be able to accurately predict the output of the primary industrial process for next 20 years. Power is not exported to the grid so there is no need to find a buyer and negotiate a PPA. The proposed programme envisages the granting of a capital allowance tax incentive rather than a tariff subsidy for embedded generation projects. The reasons for this preference are as follows: Simpler to implement and monitor The government entity responsible for the granting of the incentive has a higher degree of certainty on the value of the incentive since it is a once off commitment rather than a 3-5 years commitment which is more difficult to determine and monitor. No cash outlay from Government After discussions with a specialist advisory firm (COVA Advisory), it is proposed to amend section 12B of the Income Tax Act. Section 12B of the Income Tax Act allows for a tax deduction in respect of the production of renewable energy. Consideration could be given to amending section 12B to allow for an additional tax allowance over and above the existing tax allowance. This additional allowance should be structured to cater for renewable energy, cogeneration and waste-to-energy projects (distributed generation projects) that do not receive benefits under the renewable energy programmes currently in place in South Africa (Renewable Energy Independent Power Producers Programme and the Small Projects Renewable Energy

6 Independent Power Producers Programme). The additional allowance would be set at a level to be determined. The benefits of amending section 12B include: Easier to amend 12B than develop a new incentive Once off incentive Simpler to amend than section 12I which would require significant redrafting, but has a similar impact to section 12I. Section 12B is structured as a tax deduction as opposed to a cash grant which would potentially remove some of the challenges being experienced under MCEP. Both the amendment and the administration of section 12B would most likely be simpler than section 12I and MCEP. Easier to implement and monitor than 12L Eskom IDM subsidy has no money available A total cap on the tax deductible could be inserted into the act (for example the 12I cap of R20bn) In amending section 12B, consideration needs to be given to who is eligible for the benefit. Currently, the tax deduction is earned by the taxpayer. If the taxpayer is a new special purpose vehicle and in a loss-making position for the first few years of a project then the incentive will not benefit the taxpayer unless he/she can on-sell the benefit. Consideration could be given to the owner of the assets or the user of the electricity to claim the tax incentive. This would need to be nominated upfront at application stage. An Economic model would need to be developed to calculate whether the VAT, PAYE and other taxes to be paid through the project implementation and operation will cover the tax forgone. This could be done during the development of the programme. Potential Synergies with Existing Programmes to Fast Track Implementation and Ensure Effective Management of the Programme The Eskom IDM programme was suitable for many of the types of projects the suggested programme is aimed at (specifically Energy Recovery Projects). Many of these projects applied to Eskom for the IDM subsidy and were awaiting approval when NERSA issued the MYPD 3 ruling stating that co-gen projects were disallowed from the IDM Programme.

7 The Eskom IDM programme was well developed with good systems, processes and people in place. These processes etc. could be used as a basis for rolling out the proposed programme. This could include the application and evaluation process, the approval processes and the M&V processes. The M&V processes were designed to ensure that Eskom (or Government in this case) received the benefit for which it paid. It should be noted that many of the projects that applied for the IDM programme required additional subsidies to be commercially viable (such as Carbon Credit Revenue, avoided Carbon Tax, other tax incentives, etc.). The value of the IDM subsidy as a standalone instrument was therefore too low. Job Creation and Other Economic Benefits The proposed programme involves the construction of numerous co-generation power plants. Should the programme succeed, thousands of construction jobs and hundreds of permanent jobs (skilled and semi-skilled) would be created. A successful programme will also result in the need to increase the manufacturing capacity within South Africa for certain types of equipment and transfer skills into South Africa from countries that operate many of these types of plants. 3. Give a description of the processes and systems which will need to be put in place in order for the system operator or any other entity to operate your proposed programme, and be able to request a load reduction. This description is particularly relevant for dispatchable demand response and distributed generation; No new processes or systems will need to be put in place they already exist. Embedded generation plants are located on an industrial site with an existing grid connection. The embedded generation plants envisaged in this programme would typically not export power into the grid, but rather use the power on site. However, the embedded generation projects will still need to sign a connection agreement with the system operator to ensure compliance with grid codes etc. The extent of involvement of the system operator is typically to ensure sufficient protection is installed at the point of connection to the grid and to witness and accept the plant during commissioning. Normally no deep or shallow connection costs are required to be funded by the system operator for embedded generation projects.

8 4. The existing capacity constraints are envisaged to continue for at least five years; where after demand reductions might still be needed but with lower usage. Please indicate a typical contract period required to ensure financial viability under your proposed demand reduction programme. Please motivate your answer; The contracting period will be for the duration of the project implementation until the tax incentive is realised in the year of COD. No long term commitment is required. 5. How would the proposed market structure and/or programme ensure/promote the Department s economic development objectives, as set out in the Broad-Based Black Economic Empowerment Act, 2003 (Act No. 53 of 2003) and the codes promulgated thereunder; The B-BBEE economic development objectives could be built into the proposed programme application and evaluation process. B-BBEE levels can be built into programme to give an additional incentive (e.g. for every extra level above 7 an extra 10% allowance can be achieved). 6. Provide an estimate of the cost/cost components of your proposed structure/programme(s), including but not limited to payments to end-use customers (loads), market oversight, cost of aggregation and/or any other players in the market; and As an industry association, SAIPPA complies with Competition Act. As such we cannot give any specific information on cost in this submission. The DOE or other government entities can engage with SAIPPA s members individually to get further detail on cost. SAIPPA can gladly provide these contact details. In order for the DOE or other entity to fully develop and implement the programme proposed in this document, it would be necessary to undertake a study to determine a cost that is fair and equitable to both the project owners and the South African Government. As a form of high level guidance, the value of the capital subsidy given in Eskom s IDM programme of R5.25m / MWe (2012 money) is too low to incentivise a meaningful amount of participation in the proposed programme. It should be noted that many of the projects that applied for the IDM programme required additional subsidies to be commercially viable (such as Carbon Credit Revenue, avoided Carbon Tax, other tax incentives, etc.). The value of the IDM subsidy as a standalone instrument was therefore too low.

9 The proposed programme requires a tax incentive typically realised in the year of COD. However, in order to evaluate the programme against others proposed, it is useful to provide a comparative metric. The cost to the country will be an effective cost per MWh of far less than any of the REIPPP projects for what is effectively base load power. The power plants will have a life of years (depending on the technology). At a very high level, the value of the after tax allowance could be around R5bn R10bn if the programme were successful equating to a total tax allowance budget of R17bn R35bn. There is precedent in Section 12I for a budget cap (R20billion in case of 12I) and a window for applications. A similar approach could be followed for the proposed programme to manage the cost in windows. An Economic model would need to be developed to calculate whether the VAT, PAYE and other taxes to be paid through the project implementation and operation will cover the tax forgone. This could be done during the development of the programme. 7. Please make any further suggestions or recommendations in terms of the structure or future of demand reduction programmes in South Africa. Nothing further to add. Own participation in your suggested programme 1. Describe your intended role in the proposed demand reduction structure and/or programmes; SAIPPA would not have a direct role in the programme. SAIPPA would ensure that its members are informed about the programme. SAIPPA could also provide the DOE / DTI with contact details of its members so that the DOE can engage with them do develop the programme and discuss the value of the tax incentive etc. 2. What partnership options with energy industry players would you propose, and what roles would you propose to play in these;

10 The proposed programme could be developed and administered by the DOE, DTI and Treasury. The Eskom IDM team and processes could be used as a basis for the application, evaluation and M&V processes. SAIPPA would provide a facilitating role in connecting its members with the team that manages the programme. SAIPPA would also use its network to provide assistance to the DOE and other Government entities to develop the programme. 3. Describe the target market (industry, commerce or residential) and types of loads that will be targeted by your company and/or structures assisting your company with the provision of the required load reduction; The programme will primarily target energy intensive industrial organisations. The programme will reduce the amount of electricity consumed by the industrial organisations. More detail on the load reductions are given in the answer to question 2 above. 4. Give an indication of the technologies and systems that will be employed by your company to implement the required demand reductions and whether these are locally available and/or manufactured; Various types of technologies will be employed including gas engines, boilers and steam turbines, Organic Rankine Cycle technology, gasification technology and others. Items such as gas engines, steam turbines and ORC equipment are not available locally but the remainder of the power plant systems and balance of plant are available locally. Manufacturing capacity for items such as boilers, electrical equipment and other industrial equipment will likely need to be increased within South Africa to meet the demand that will arise from this programme. 5. Give an indication of the percentage of load reductions that will most likely be achieved by load shifting, shedding of non-essential loads or by utilising alternate energy forms (including electricity generation options); This will vary from site to site.

11 A typical Energy Recovery Project (ERP) will reduce an industrial site s electricity usage by around 10-30%. A CHP plant could reduce an industrial site s electricity usage by up to 100%. 6. Describe any constraints or foreseen risks that may impact on the availability of load reduction contracted, either on a seasonal basis and/or the number of hours for which the load may be available; in reference to seasonal availability (winter, summer or both) and your proposed structure or programme; The biggest risk for ERPs is Eskom supply risk. ERPs use waste energy as a fuel source. This waste energy is a by-product of an industrial process which can only operate with the required Eskom supply. If Eskom reduce the supply to the industrial host, then less waste energy is available and correspondingly less electricity can be generated. It should be noted however, that in this case, the load reduction for the industrial process is typically greater than the amount of electricity generated by the ERP so the nett effect on the grid is still positive. The biggest risk for CHP projects would be a fuel supply risk. For projects using Sasol gas as a fuel source the risk is not being able to enter into a long term contract with Sasol or other gas provider. 7. Give a realistic estimate of load reduction envisaged to be made available (load reduction in MW). Indicate the capacity and the profile that could be made available within the first twelve months of a contract; Please provide a high scenario, as well as a low scenario The capacity of projects that could be enabled by the proposed programme is difficult to quantify in the absence of the value and quantum of the tax incentive (naturally the higher the value and quantum of the tax incentive the more projects will be implemented). A study sponsored by GIZ to estimate the size of the market is underway and due for completion shortly. Hopefully GIZ will share this information with the DOE. Until the results of the GIZ study are released, a rough estimate of the market size is given below: Energy recovery projects = 500MW. These are typically projects with fuel sources such as waste heat, waste gas, biomass residue and other unused energy sources. The projects are typically in the range of 1MWe to 50MWe.

12 Small scale Thermal and CHP Projects (<10MW) projects up to 1000MW Large scale CHP projects (typically in the pulp and paper and sugar industries) are normally better suited to a procurement programme due to exporting of power from the site. Smaller projects in these industries may however be better suited to the proposed tax incentive programme. The capacity estimate of these projects is as follows: o Pulp and paper CHP and biomass condensing plants = MW. o Sugar CHP plants = 600MW to 1000 MW The timing of the load reduction or electricity generation is effectively 24/7. Projects in certain sectors (such as agricultural projects using biomass as a fuel source), may have seasonal specific production profiles. Start Time Summer high scenario Summer low scenario (MW) (MW) 7:00 8:00 8:00 9:00 9:00 10:00 10:00 11:00 11:00 12:00 12:00 13:00 13:00 14:00 14:00 15:00 15:00 16:00 16:00 17:00 17:00 18:00 18:00 19:00 19:00 20:00 20:00 21:00 Start Time Winter high scenario (MW) Winter 7:00 8:00 8:00 9:00 9:00 10:00 10:00 11:00 11:00 12:00 12:00 13:00 13:00 14:00 14:00 15:00 15:00 16:00 low scenario (MW)

13 16:00 17:00 17:00 18:00 18:00 19:00 19:00 20:00 20:00 21:00 8. Give an indication of foreseen restrictions (if any) on potential usage of the envisaged demand reduction resources; Max. Number of consecutive days per week Max. Number of days per year Notice period required for load reduction Not applicable continuous Not applicable continuous Not applicable continuous 9. Provide an indication as to how quickly the load reduction (MW) might be made available/ramped up; and Projects using gas engines can typically reach COD months after financial close. Projects using boilers can typically reach COD 24 months after financial close. A programme such as the proposed tax incentive can bring projects to financial close far quicker than a procurement programme. Many of the projects that would apply for the programme could be equity financed by the industrial hosts and the process to reach financial close would therefore be far quicker than a project finance funding arrangement. 3 months after contract signature (% of indicated load in 13) 6 months after contract signature (% of indicated load in 13) 9 months after contract signature (% of indicated load in 13) 12 months after contract signature (% of indicated load in 13) 10. Please make any further suggestions or recommendations in terms of the structure or future of load reduction programmes in South Africa.