NERSA Consultation Paper. Cogeneration Regulatory Rules and Feed-In Tariffs

Transcription

1 NERSA Consultation Paper Cogeneration Regulatory Rules and Feed-In Tariffs 19 January 2011

2 Regulatory Rules Cogeneration Regulatory Rules and Feed-In Tariff In terms of the Electricity Regulation Act, 2006 (Act 4 of 2006) and the New Generation Capacity Regulations Government Gazette No of 5 August 2009 [Electricity Regulation Act No.4 of 2006 ( the Act ): Electricity Regulations on New Generation Capacity], the National Energy Regulator of South Africa (NERSA) has regulatory rules to allow for the simplification of the process of developing, evaluating and implementing cogeneration projects, as well as the development of a workable financial support structure for qualifying cogeneration projects. The support structure consists of a Feed- In Tariff for Cogeneration Projects. The support scheme is designed to reward on-site generation of electricity by industries that utilise their waste to produce electrical energy for their own use and/or for selling to the grid. It is in this context that these rules are issued. The document, Cogeneration Regulatory Rules and Feed-In Tariff, which contains these Rules and Tariffs, is hereby published for public consultation. Electronic copies of the document may be downloaded from All stakeholders and public are invited to submit public written comments on important issues raised on Cogeneration Regulatory Rules and Feed-In Tariffs. Closing date for submitting written comments is Friday, 25 February 2011.Written comments and enquires can be directed to Lovemore Seveni or Melusi. Contact details are: cofit2011@nersa.org.za Tel : (012) Fax :(012) EXPLANATORY MEMORANDUM The provisions of the Electricity Regulation Act (Electricity Regulation Act No. 4 of 2006 ( the Act ) and Electricity Regulations on New Generation Capacity) ( the Regulations ) authorise the National Energy Regulator of South Africa (NERSA or the Energy Regulator ) to prepare and pass rules for purposes of setting the qualifying principles, technologies and tariffs for supporting cogeneration projects. These Rules and the Act must be read together when licence applications are made for cogeneration energy plants. The Regulations require the Energy Regulator to develop rules related to the qualifying principles, technologies and tariffs to enable an efficient licensee to recover the full cost of its licensed activities, including a reasonable margin or return. Cogeneration Regulatory Rules and Feed-In Tariff Page 1 of 23

3 Under this Cogeneration Regulatory Rules and Feed-In Tariff (COFIT), the following technologies are considered: a) waste heat and energy from industrial process (Furnace Off Gas, Discard Coal); b) combined heat and power (CHP) based on coal, natural gas and liquefied natural gas(lng); and c) renewable cogeneration based on mill waste such as wood chips and bagasse. This document contains the cogeneration regulatory rules and tariffs that will be used for qualifying projects. In terms of Regulation 7 of GN R 721 No of 5 August 2009 [Electricity Regulation Act No.4 of 2006 ( the Act ): Electricity Regulations on New Generation Capacity], the Regulator shall develop rules related to the criteria for selection of renewable energy IPP or cogeneration IPP that qualifies for a licence. The approved criteria will be used by the single buyer appointed by the Minister of Energy to select qualifying IPPs under the REFIT/COFIT programme. These rules will be applicable to new projects that have not entered the procurement phase at the time of approval. Should the rules be revised, they will be applicable to the next procurement phase only and will not be applied retrospectively. The rules will apply to COFIT projects located in the territory of South Africa. Cogeneration Regulatory Rules and Feed-In Tariff Page 2 of 23

4 TABLE OF CONTENTS GLOSSARY OF TERMS, DEFINITIONS AND ABBREVIATIONS INTRODUCTION AND BACKGROUND PURPOSE COFIT QUALIFYING TECHNOLOGIES & PRINCIPLES PURCHASE OBLIGATION QUALIFYING PRINCIPLES FOR COGENERATION FEED IN TARIFF DESCRIPTION OF QUALIFYING TECHNOLOGIES COFIT FINANCIAL ASSUMPTIONS ASSUMPTIONS COGENERATION POWER PURCHASE AGREEMENT STAKEHOLDERS INPUTS REQUESTED NERSA PROCESS FOR APPROVAL OF COFIT APPENDIX A: COGENERATION TECHNOLOGY DESCRIPTIONS Cogeneration Regulatory Rules and Feed-In Tariff Page 3 of 23

5 OBJECTIVES The Energy Regulator is guided by the following objects of the Act. The objectives are to: a) achieve the efficient, effective, sustainable and orderly development and operation of electricity supply infrastructure in South Africa; b) ensure that the interests and needs of present and future electricity customers and end users are safeguarded and met, having regard to the governance, efficiency, effectiveness and long term sustainability of the electricity supply industry within the broader context of economic energy regulation in the Republic; c) facilitate investment in the electricity supply industry; d) facilitate universal access to electricity; e) promote the use of diverse energy sources and energy efficiency; f) promote competitiveness and customer and end user choice; and g) facilitate a fair balance between the interests of customers and end users, licensees, investors in the electricity supply industry and the public. A set of objectives encapsulating these objects of the Act is rearticulated for the purpose of these rules and tariffs. The objectives to be met by these rules and feed in tariffs are: a) to develop the qualifying principles and tariffs for cogeneration plants. These tariffs will form a financial supporting mechanism for qualified projects and will facilitate the procurement process; b) the regulation of entry by a buyer and an IPP into a power purchase agreement; c) the facilitation of fair treatment and the non-discrimination between IPP generators and the buyer; d) the methodology to be used in the determination of tariffs which must be adopted by licensees; e) the facilitation of the full recovery by the buyer of all costs incurred by it under or in connection with the power purchase agreement and an appropriate return based on the risks assumed by the buyer there under and, for this purpose to ensure the transparency and cost reflectivity in the determination of electricity; and f) the implementation of the gazetted Integrated Resources Plan (IRP) with a specific focus on the promotion of cogeneration to ensure efficient use of energy sources. Cogeneration Regulatory Rules and Feed-In Tariff Page 4 of 23

6 GLOSSARY OF TERMS, DEFINITIONS AND ABBREVIATIONS COD Commercial Operation Date: the date the IPP planned in accordance with the construction programme to commence commercial operation of the last unit of the source facility. COFIT Cogeneration Feed-In Tariff: a mechanism to promote the deployment of cogeneration plants that places an obligation on specific entities to purchase the output from cogenerators at predetermined prices. Cogeneration has several advantages, such as energy efficiency, environmental and social benefits, which are discussed later in this document. COGENERATION Cogeneration is 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 following technologies have been considered under the three types of eligible cogeneration projects under COFIT: TYPE I Technologies Waste Heat Waste Heat refers to heat produced by machines, electrical equipment and industrial processes for which no useful application is found and is therefore regarded as a waste by-product. The largest sources of waste heat are boilers, kilns, ovens, furnaces and hot process streams. Recovery of some of this waste heat can result in a considerable amount of fuel savings. There are various types of waste heat recovery equipment and recuperators which can recover the heat in a more efficient manner. For the purposes of this paper, one such example that is being considered is waste heat recovery boilers. The waste heat recovery boilers consist of water tube boilers in which exhaust gases (heat) pass to energy carriers over a number of parallel tubes containing water. The water is vaporised in the tubes and collected in a steam drum from which it is drawn out for driving steam turbines, heating or process steam. Energy may then be converted to electrical energy via conversion devices connected to generators. The pressure at which the steam is generated and the rate at which the steam is produced depends on the temperature of the waste heat. The efficiency of the heat transfer will be a function of the temperature level of the gases/heat source, the amount of available gases/heat and the technology employed for conversion. Cogeneration Regulatory Rules and Feed-In Tariff Page 5 of 23

7 Another type of waste heat recovery is a simple exchange of hot process stream with a cold process stream where the cold process stream is used to generate steam in the host plant that increases the load to the host plant steam turbine generators. Another technology type for waste heat recovery is the Organic Rankine Cycle (ORC). The ORC is a thermodynamic process where heat is transferred to a fluid at a constant pressure. The fluid is vaporised and then expanded in a vapour turbine that drives a generator, producing electricity. The spent vapour is condensed to liquid and recycled back. The ORC makes use of an organic fluid with a boiling point lower than water. The fluid enables recovery of heat from lower temperature sources such as industrial waste heat. The low temperature heat is used to drive a turbine and create electricity. Furnace Off Gases Furnace off gases are produced on site as a result of smelting processes, e.g. in the iron and steel making process. These are blast furnace gases, basic oxygen furnace (BOF) and electric arc furnace (EAF) gases. The gases are normally flared into the atmosphere or burnt in an open flame without fully utilising the energy contained in them. Some of these gases are combustible and do not require co-firing/mixing with other fuels in order to produce electricity. However, some do require co-firing. These gases can be captured and burnt in a steam boiler. The steam generated is then used to drive steam turbines for electricity generation. Discard Coal Discard coal is low grade coal that is not suitable for export or industrial use and that is produced as a by-product of the coal beneficiation process at no additional cost. Discard coal also includes by product coal from existing and decommissioned mines. In South Africa, 40 per cent of the coal is not suitable for export. Mines normally stockpile the discard coal in dumps and this causes major environmental problems as the sulphur leaches from the coal into the soil. It can also self ignite and give off methane. This accumulated discard coal could potentially fuel power plants that are specifically designed for this quality of coal. However a plant designed to operate on this low grade fuel would be more expensive than the one operating with conventional coal. It is more feasible to use discard coal using Fluidised Bed Combustion plants that can capture up to 80 per cent of the coal bound sulphur in the fluidised bed with injection of a sorbent without increasing plant water consumption. Cogeneration Regulatory Rules and Feed-In Tariff Page 6 of 23

8 TYPE II Technologies Coal Coal is a non renewable, combustible black or brownish-black sedimentary rock composed mostly of carbon and hydrocarbons. It is the most used fossil fuel for electricity generation in South Africa and the world. For millions of years, a layer of dead plants at the bottom of the swamps was covered by layers of water and dirt, trapping the energy of the dead plants. The heat and pressure from the top layers helped in turning the plant remains into what we today call coal. Power plants burn coal to make steam. The steam turns steam turbines that generate electricity. The residual heat/steam from the generation process can be captured for use in industrial processes. Natural Gas Natural gas is a naturally occurring combustible mixture of hydrocarbon gases and formed primarily of methane. It is colourless, shapeless, and odourless in its pure form. While natural gas is formed primarily of methane, it can also include ethane, propane, butane and pentane. The composition of natural gas can vary widely. Unlike other fossil fuels, however, natural gas is clean burning and emits lower levels of potentially harmful by-products into the air. It is used constantly to heat homes, cook food, and also to generate electricity in a gas turbine. Energy is added to the gas stream in the combustor, where fuel is mixed with air and ignited. In the high pressure environment of the combustor, combustion of the fuel increases the temperature. The products of the combustion are forced into the turbine section. There, the high velocity and volume of the gas flow is directed through a nozzle over the turbine's blades, spinning the turbine and generating electricity. The energy given to the turbine comes from the reduction in the temperature of the exhaust gas. These exhaust gases and the waste heat can be used to make steam to generate additional electricity and/or process steam via a steam turbine; this last step enhances the efficiency of electricity generation. TYPE III Technologies Sugar Cane Bagasse Bagasse is a fibrous residue left after the juice-fibre separation stage in the sugar milling process that can be used to generate steam from a high efficiency, high pressure boiler. The steam is expanded in either in a back pressure or condensing extraction Cogeneration Regulatory Rules and Feed-In Tariff Page 7 of 23

9 turbo generator to generate power and steam from proven technologies. Some of the steam is used for processes within the milling plant (drying and crystallisation). The calorific value is inversely proportional to the moisture content and the bagasse is utilised during the period when the harvesting and milling of the sugar cane is being done, typically nine (9) months in a year. Bagasse can be stored up to one year if its moisture content is less than 30 per cent and thus generation during the intercrop period (between harvests) can continue. The use of coal is limited to start-up periods when the harvesting and milling resumes. Pulp and Paper The process of making pulp and paper from wood generates various forms of waste which can be used for electricity generation. This industry requires significant amounts of process heat and in some cases direct motive power, as well as power for internal operations. There are two basic processes that major mills use to convert wood into paper namely a mechanical process and a chemical process described in detail below. Timber from the forests is prepared for pulping by some or all of the following processes: cross-cutting, debarking, chipping and chip screening. Each step produces a waste stream of off-cuts, bark, sawdust, wood slivers and undersized chips, which form an important renewable fuel source for cogeneration power. The chemical pulping process produces spent pulping liquors, generically called black liquor. These are concentrated and then fired in chemical recovery boilers that produce steam and recycle the pulping chemicals. The steam, if produced at high pressure, can be used in turbines to generate cogeneration power. The pulp and paper industry also produces a number of other streams that can be used as heat or fuels organic soaps and methanol from black liquor, waste gases, effluent sludge and sub-standard pulp and paper can be burnt for power production. COGENERATOR A legal entity who operates a unit(s) that is (are) part of a specific industrial or production process. DISTRIBUTION Distribution refers to the conveyance of electricity through a distribution system. DISTRIBUTION SYSTEM An electricity network consisting of assets operated at a nominal voltage of 132kV or less. TRANSMISSION Transmission refers to the conveyance of electricity through a transmission system. Cogeneration Regulatory Rules and Feed-In Tariff Page 8 of 23

10 EFFICIENCY The overall efficiency, or cogeneration efficiency, is a measure of how much usable energy is generated from a specified amount of fuel. It is the sum of the net power and net useful energy output divided by the total fuel consumed. ELECTRICAL EFFICIENCY It is the ratio of the net electrical power output to the net fuel consumption, where net fuel excludes the portion of fuel used for producing useful heat output. FOSSIL FUEL Fuel obtained from mineral stocks, regardless of whether it is used in its original form or processed. MINISTER The Minister of Energy. TRANSMISSION SYSTEM An electricity network consisting of assets operated at a nominal voltage of above 132kV. USEFUL HEAT Heat that would be provided from others sources, if not exploiting the CHP-generating plant to satisfy an economically justifiable demand for heating, cooling or technology. Economically justifiable demand is the demand that does not exceed the needs for heating, cooling or technology. GIGA WATT HOUR (GWh) An energy unit in which electricity consumption is measured. 1GWh = 3 600GJ (Gigajoule) (Joule, unit of energy). GREENHOUSE GAS Gases primarily carbon dioxide, methane, and nitrous oxide in the earth's lower atmosphere that trap heat, thus causing an increase in the earth's temperature and leading towards the phenomenon of climate change. INDEPENDENT POWER PRODUCER (IPP) IPPs are defined as typically limited-liability, investor owned enterprises that generate electricity either for bulk sale to an electric utility or for retail sale to industrial or other customers with certain conditions. LEVELISED COST OF ELECTRICITY (LCOE) The present value of the total cost of building and operating a generating plant over its economic life, converted to equal annual payments. Costs are levelised in real dollars (i.e. adjusted to remove the impact of inflation). Cogeneration Regulatory Rules and Feed-In Tariff Page 9 of 23

11 REPORTING PERIOD The period of operation of a Cogeneration plant in which the quantity of electricity generated in high efficiency cogeneration and for which verifications have been received is determined. The reporting period for cogeneration generation plants that receive support under the COFIT shall be one year. REFIT Renewable Energy Feed-In Tariff: a tariff approved by the Energy Regulator for a renewable energy generator. RENEWABLE ENERGY (from White Paper on Renewable Energy, 2003, DME) Renewable energy harnesses naturally occurring non-depletable sources of energy, such as solar, wind, biomass, hydro, tidal, wave, ocean current and geothermal, to produce electricity, gaseous and liquid fuels, heat or a combination of these energy types. TRANSMISSION SYSTEM (TS) The TS consists of all lines and substation equipment where the nominal voltage is above 132kV. All other equipment operating at lower voltages are either part of the distribution system or classified as transmission transformation equipment. WASTE Any energy source that has little or no current commercial value and exists in the absence of the qualifying cogeneration facility. This includes by-products or secondary streams from primary activities such as mining, metallurgical or industrial processes. WATT 1 Joule per second of energy consumption or dissipation (1MW = W). Cogeneration Regulatory Rules and Feed-In Tariff Page 10 of 23

12 ACRONYMS AND ABBREVIATIONS BFB BOF CFB CHP COD COFIT CHP DME EAF FBC GW GWh HRSG IRP IPP JIBAR kv LCOE LNG MTPPP MW MWe NERSA ORC PPA REFIT TS WACC Bubbling Fluidised Bed Basic Oxygen Furnace Circulating Fluidised Boiler Combined Heat and Power Commercial Operation Date Cogeneration Feed-In Tariff Combined Heat and Power (co-generation) Department of Minerals and Energy Department of Environmental Affairs Fluidised Bed Combustion Giga Watt Giga Watt Hour (1 000MWh) Heat Recovery Steam Generator Integrated Resource Plan Independent Power Producer Johannesburg Interbank Agreed Rate kilovolt Levelised Cost Of Electricity Liquefied Natural Gas Medium Term Power Purchase Programme Mega Watt Mega Watt Electrical National Energy Regulator of South Africa Organic Rankine Cycle Power Purchase Agreement Renewable Energy Feed-In Tariff Transmission System Weighted Average Cost of Capital Cogeneration Regulatory Rules and Feed-In Tariff Page 11 of 23

13 1. INTRODUCTION AND BACKGROUND 1.1 The combined production of heat and power from cogeneration plants is substantially more efficient than the separate production of heat and power. Overall efficiency can be increased from an average of 40 per cent to about 90 per cent. Due to greater efficiency, cogeneration plants have a significantly lower impact on the environment, for example less Greenhouse Gas Emissions. The plants are usually located closer to consumers which reduces transmission and distribution losses and encourages distributed generation as opposed to centralised generation. There is also a sizeable reduction in fuel resulting in reduced energy costs with typical reduction in fuel consumption of up to 30 per cent. There is increased energy security through the utilisation of wasted energy resources. 1.2 The National Energy Regulator of South Africa (the Energy Regulator or NERSA) derives the mandate to develop regulatory guidelines from the Electricity Regulation Act, 2006 (Act 4 of 2006) and the New Generation Capacity Regulations published on 5 August In 2006, NERSA commissioned the development of cogeneration rules, qualifying principles and a finance support framework for cogeneration projects in South Africa. 1.4 The Energy Regulator sought to develop guidelines for Regulatory policy to allow for the simplification of the process for developing, evaluating and implementing cogeneration projects, as well as the development of a workable financial support structure for qualifying cogeneration projects. 1.5 Consultations and site visits to various representative cogeneration facilities around South Africa were subsequently carried out in October 2009 to become familiarised with their operations and gather information regarding potential capacities, plant cost and performance, technologies, as well as fuel source and types to assist in formulating the Feed-In Tariffs. These included the pulp and paper, sugar processing, steel-making and fuel refining industries. 1.6 The potential cogeneration capacity established from the various industries visited and information obtained through the National Energy Response Team (Cogeneration and Market Workgroup) indicates that a total of 2 000MW of cogeneration capacity could be harnessed in South Africa in the short to medium term ( ). Cogeneration Regulatory Rules and Feed-In Tariff Page 12 of 23

14 2. PURPOSE 2.1 The purpose of this Cogeneration Feed-In Tariff (COFIT) consultation paper is to develop the qualifying principles and tariffs for cogeneration plants. This tariff will form a financial supporting mechanism for qualified projects and will facilitate the procurement process. 2.2 Cogeneration facilities will enable underutilised energy and waste energy to be used for the production of electricity and will have a net positive effect since wasted resources are used and there is diversification of the power generation mix. 2.3 In terms of support mechanism, qualified cogeneration projects will be offered a bankable Power Purchase Agreement (PPA) at an economic tariff based on the Levelised Cost of Electricity (LCOE). 3. COFIT QUALIFYING TECHNOLOGIES & PRINCIPLES 3.1 The LCOE is to be used as the methodology to calculate the Feed-In Tariffs (FITs) for qualifying cogeneration technologies. This allows the cost of capital and the operating cost of the technology to be recovered over the term of the Power Purchase Agreement (PPA). 3.2 The generation capacity to be delivered by cogeneration projects will be on the basis of the Integrated Resources Plan (IRP) approved and gazetted for implementation by the Minister of Energy ( the Minister ). 3.3 The Regulator shall licence cogeneration IPPs pursuant to a procurement bidding process. In the absence of such a procurement process the Energy Regulator shall license cogeneration IPPs on first come first served basis. 3.4 The generation licence shall be for 15 years or longer as determined by the Energy Regulator as per the Electricity Regulation Act 4 of The term of the COFIT PPA shall be a minimum of one year and will be negotiated between the buyer and the seller. The seller may consider generation for own use or sell to a third party outside the COFIT mechanism when the Eskom tariff equals or exceeds the COFIT tariff. The seller can secure another PPA to cover a portion or the rest of the remaining licence period. The applicable tariff will remain the tariff for which the cogeneration facility is licensed. 3.6 The COFIT is to be reviewed every year for the first five-year period of implementation and every three years thereafter and the resulting tariffs will apply only to projects not yet licensed and will not be applied retrospectively. Cogeneration Regulatory Rules and Feed-In Tariff Page 13 of 23

15 3.7 A reduction rate to provide for technological advances will not be applied to the COFIT. This will be taken into account in the annual review of the COFIT. 3.8 Carbon revenues that the owner of a cogeneration facility may derive from the Clean Development Mechanism shall be excluded from COFIT. 3.9 Revision of qualifying technologies and principles is to be considered annually. Any revisions will apply to new licensees and not retrospectively to PPAs already in place Monitoring and verification of the qualifying COFIT generation will be the responsibility of the buyer A standard PPA based on the Medium Term Power Purchase Programme (MTPPP) PPA is to be used as a basis for the COFIT PPA The Energy Regulator will facilitate the adoption of the standardised PPA for COFIT purposes. 4. PURCHASE OBLIGATION 4.1 The buyer designated by the Minister will be obliged to purchase all the generation capacity delivered by the cogeneration projects licensed by the Energy Regulator under COFIT using criteria developed by the Energy Regulator for the selection of a cogeneration IPP in accordance with the New Generation Capacity Regulations. 4.2 The cogeneration capacity to be contracted for by the buyer will be determined on the basis of the IRP approved by the Minister and published in the government gazette for implementation. 4.3 The COFIT is designed to reward cogeneration projects that export power to the grid. 4.4 Generation licence conditions require that the facility be ring fenced from other operations and that financial and technical performance be reported to the Energy Regulator. To assess the performance of the licensed facility, the seller is required to submit all production cost data and financial charges to NERSA at the end of each year post the Commercial Operation Date (COD). 4.5 Total production costs in a cogeneration system are made up of the cost of electrical power production and heat production. The methodology adopted is thus to impute to power generation the total costs of generation minus the value of the heat produced. This will apply to Type II projects only. The value of heat is assumed to be 10 per cent of the total costs of generation. Cogeneration Regulatory Rules and Feed-In Tariff Page 14 of 23

16 4.6 In order to support a wide green electricity market, co-generators operating as IPPs are permitted to sell power directly to buyers other than the designated buyer, willing to purchase their energy outside of the COFIT mechanism, provided that a generation licence has been granted by NERSA. 5. QUALIFYING PRINCIPLES FOR COGENERATION FEED-IN TARIFF 5.1 The project must be a cogeneration system. Sufficient evidence must be shown that the project model is based on a combined production of electrical energy and useful thermal energy from a common energy source and plant or sufficient demonstration that wasted/under-utilised fuel/energy is harnessed and utilised for the production of electrical energy. The generation of electricity and heat must be coupled to the industrial process of the host plant. 5.2 The cogeneration system must use proven technology. It must be shown that the technology to be implemented is technically and commercially proven, cost effective and environmentally beneficial. A similar technology, of the same or similar size and/or the same or similar fuel must be implemented and successfully operated elsewhere. 5.3 The qualifying technologies under COFIT will be classified for practical reasons as three types as shown in the Table 1 below: Table 1: Eligible Cogeneration Projects Type I Type II Type III Definition Primary Fuel Projects utilising waste or underutilised energy from the industrial process for electricity generation Recovery of Waste Heat or Energy from Wastes 1. Waste Heat 2. Process Furnace Off- Gas 3. Discard Coal 4. Any other energetic industrial wastes from non-renewable sources Primary fuel-based generation which produce, as part of their core design, other usable forms of energy in addition to electricity Combined Heat and Power (CHP). 1. Coal 2. Natural Gas 3. Primary Liquid Fuels Fuel-based projects where the fuel source is both (i) a primary source of energy used for generation and (ii) a co product of an industrial process Renewable Cogeneration 1. Sugar Bagasse 2. Mill Wastes (chips, saw dust, shavings, soaps, methanol, sludges, bark and black liquor) Specific Licensing Minimum of 60% of fuel input to come from Minimum annual coproduction of steam or Minimum of 90% of fuel input to come from co generation Cogeneration Regulatory Rules and Feed-In Tariff Page 15 of 23

17 Conditions to be required by NERSA waste or underutilised fuel consistent with Type I classification thermal energy other than electricity of at least 10% of total combined process energy source consistent with Type III classification. The % of other fuel should be consistent with the % used in Table 4 below 5.4 Qualifying projects must be located in South Africa. 5.5 The project should incorporate higher efficiency and optimised design catering to the heat and power requirements. For Type II projects, the minimum overall cogeneration efficiency for the plant should be greater or equal to 65 per cent. 5.6 There is no restriction for minimum plant net output, but the maximum installed capacity is in principle up to 500MWe, above which specific approval may be sought. 5.7 All co-generators under COFIT require a generation licence issued by NERSA under the Electricity Regulation Act, 2006 (Act No. 4 of 2006). In addition to the common generation licence conditions, the generation licence for cogeneration facilities will include various terms and conditions relating to the preservation of the status of the facilities as Cogeneration Facilities according to the qualification principles. Specific licence conditions for co-generators will include: i. Reporting requirements on the amount of cogeneration energy generated and the fuel mix used. ii. iii. iv. Fuel Supply Agreements where applicable. Monitoring and verification to ensure the credible production of electricity complies with the specified fuel mix proportions as stipulated in Table 1 above for each cogeneration type. Termination conditions for non-compliance on the production of cogeneration energy. 5.8 COFIT only includes power generation from co-generators connected to the National Transmission or Distribution System and excludes off-grid power generation. 5.9 The details of the qualifying technologies under COFIT are provided in the following section. 6. DESCRIPTION OF QUALIFYING TECHNOLOGIES 6.1 In order for a project to qualify as a co-generator, the generating plant shall be based on the following fuel sources under the three (3) types of cogeneration: Cogeneration Regulatory Rules and Feed-In Tariff Page 16 of 23

18 Table 2: Qualifying Technologies TYPE I TYPE II TYPE III (i) Waste Heat (i) Coal (i) Sugar Bagasse (ii) Furnace Off Gas (ii) Natural Gas (ii) Mill Wastes from renewable sources (iii) Discard Coal (iv) Any other energetic industrial wastes from non renewable sources (iii) Primary Liquid Fuels 7. COFIT FINANCIAL ASSUMPTIONS 7.1 The financial assumption adopted for REFIT Phase I and II has been retained for COFIT except for Nominal Cost of Debt which decreased from 14.9 to 9.93 per cent, resulting in the WACC reducing from 12 to 9.8 per cent. Table 3: Financial Assumptions Financial Parameter Unit IPP COFIT 2011 Debt % 70 Equity % 30 Nominal Cost of Debt % Inflation % 6 2 Real Cost of Debt before Tax % 3.71 Tax Rate % 28 Real Return on Equity (ROE) after Tax % 17 Weighted Average Cost of Capital After Tax % Similar to the REFIT determination the cost of debt is based on the JIBAR rate as at the end of 2010 plus a risk premium for power generation projects. 2 Based on the maximum target inflation rate of South Africa. 7.2 The proposed COFIT prices are derived from recently published information obtained from local and international sources providing up to date information. 7.3 The LCOE methodology was used to determine the COFIT tariffs. Cogeneration Regulatory Rules and Feed-In Tariff Page 17 of 23

19 7.4 Based on the financial assumptions given above, the following Cogeneration Feed-In Tariffs are proposed for each of the three types defined in Table 1: Table 4: Market Conditions, Reference Technology, Cost and Performance Assumptions Type 1: Recovery of Waste Heat or Energy from Wastes. Type 2: Combined Heat & Power Type 3: Renewable Cogeneration Parameter Units Discard coal (FBC) Waste heat Furnace off gas Coal Natural Gas/LNG Wood chips Bagasse (Cane Fibre 1) new Cane Fibre 2 upgrade Capital cost:epc $/kw Land cost % Allowance for funds under construction (AFUC) % Tx/Dx intergration cost % TOTAL INVESTMENT COST $/kw Fixed O & M $/kw/yr Var O & M $/kwh Economic life years Discount rate % Plant Lead Time years Technolgy type Steam turbine Steam turbine Steam turbine Gas turbine Steam turbine Steam turbine Steam turbine Fuel cost $/GJ Fuel cost $/kwh Heat Rate kj/kwh Heat Credit, % % Load factor % LCOE $/kwh Exchange rate R/$ LCOE R/kWh ASSUMPTIONS 8.1 The US Dollar/South African Rand exchange rate is assumed to be 1US$=ZAR The WACC used in the LCOE calculations is assumed to be 9.8 per cent. 8.3 A heat credit to be subtracted from the total generation costs is assumed to be 10 per cent of the total LCOE of the Type II technologies. 8.4 The life of the cogeneration facility is assumed to be 15 years. 9. COGENERATION POWER PURCHASE AGREEMENT 9.1 NERSA will facilitate the conclusion of the COFIT PPA to buy and sell power between the co-generator and the purchaser of electricity. Cogeneration Regulatory Rules and Feed-In Tariff Page 18 of 23

20 10. STAKEHOLDERS INPUTS REQUESTED Stakeholders are requested to provide comments on the following: 1. Methodology used for calculation of the Cogeneration Feed-In Tariff. 2. Cogeneration Regulatory Rules and Feed-In Tariffs. 3. Any other comments or proposals to the Energy Regulator related to the Cogeneration Regulatory Rules and Feed-In Tariffs Consultation Paper. 11. NERSA PROCESS FOR APPROVAL OF COFIT The approval process will be separated into two categories, i.e. approval process of COFIT qualifying technologies, and approval process of COFIT Power Purchase Agreement, in order to effectively manage the public hearing process. The following processes and timelines have been served to the Energy Regulator for approval of the COFIT: Table 5: Timelines for approval of COFIT TIMELINES FOR APPROVAL OF COGENERATION FEED IN TARIFF ITEM/ACTIVITY 1. Electricity Subcommittee meeting approves process, timelines and consultation paper 2. Publication of NERSA Cogeneration Regulatory Rules and Feed-In Tariffs Consultation paper and invitation for written public comments 3. Deadline for submitting written public comments to NERSA on Cogeneration Regulatory Rules and Feed-In Tariffs 4. Closing date for registering to attend and/or present at the Public Hearing on Cogeneration Regulatory Rules and Feed-In Tariffs. 5. Public Hearing on Cogeneration Regulatory Rules and Feed-In Tariffs. 6. Electricity subcommittee consider recommending to the Energy Regulator 7. Energy Regulator approval of the Cogeneration Regulatory Rules and Feed-In Tariffs ACTUAL/TARGET DATE 19 Jan Jan Feb Feb April May May 2011 Cogeneration Regulatory Rules and Feed-In Tariff Page 19 of 23

21 Stakeholders are invited to comment on the NERSA Cogeneration Regulatory Rules and Feed-In Tariff Consultation Paper. Comments should be sent to: Lovemore Seveni/Melusi Nyoni at 526 Vermeulen Street, Kulawula House, Arcadia, Pretoria or PO Box 40343, Arcadia 0007 Pretoria, or via to The consultation documents will be available on the NERSA website: The deadline for submission of comments on the Cogeneration Feed-In Tariff is 25 February Cogeneration Regulatory Rules and Feed-In Tariff Page 20 of 23

22 APPENDIX A: COGENERATION TECHNOLOGY DESCRIPTIONS 1) Direct Combustion Fuel (biomass and/or fossil fuel) is burned in a boiler to produce high pressure steam which is introduced into a steam turbine generator. In an extraction steam turbine the extracted steam may be used for an industrial process (cogeneration system) or for feed water heating, as is the case in most utility power plants. Figure 1: Direct Combustion Flow Diagram Steam/Hot Water Heating/ Cooling Fuel Boiler Steam Turbine Steam Turbo Generator Facility Power Grid 2) Fluidised Bed Combustion (FBC) The FBC technology allows the fuel to burn more completely and efficiently than in a conventional boiler. One of the advantages of the Circulating Fluidised Boiler (CFB) is its ability to burn a variety of fuels, another is its low nitrogen oxide and sulphur dioxide emissions into the atmosphere. There are two types of fluidised bed combustion as detailed below: (a) Bubbling Fluidised Bed (BFB) Bubbling fluidised bed (BFB) pulverised fuel is mixed with a bed material, such as sand, and low velocity under fire air is fed in to achieve a fluid-like circulation of particles, similar to a boiling liquid. The resultant mixing and churning promotes effective combustion, but in bubbling beds, the bed volume grows only slightly compared with its at-rest condition. This technology is particularly flexible with regard to fuel type and size. Cogeneration Regulatory Rules and Feed-In Tariff Page 21 of 23

23 (b) Circulating Fluidised Bed (CFB) Circulating fluidised bed (CFB) much higher under fire air velocities are used, which causes the bed volume to expand more dramatically, and fill much of the combustion chamber. Far more violent mixing is achieved, but small fuel particle sizes are required for efficient combustion. Particles of bed sand, and fuel char, are entrained in the combustion gases and carried upwards; they are then captured in a cyclone separator before being circulated back into the bed from underneath. Figure 2: Fluidised Combustion Boiler Flow Diagram Limestone Electricity Fuel Fluidised Bed Combustion Boiler Steam Turbine Steam Heating/ Cooling 3) Gas Turbines with heat recovery The fuel (e.g. natural gas or fuel oil) is added to the gas stream in the combustor, where it is mixed with air and ignited. In the high pressure environment of the combustor, the combustion of the fuel increases the temperature. The products of the combustion are forced into the turbine section. There, the high velocity and volume of the gas flow is directed through a nozzle over the turbine's blades, spinning the turbine which powers the compressor and, for some turbines, drives their mechanical output. The energy given up to the turbine comes from the reduction in the temperature of the exhaust gas. Energy is extracted in the form of shaft power, compressed air and thrust, in any combination, and used to power generators. Cogeneration Regulatory Rules and Feed-In Tariff Page 22 of 23

24 The waste heat from the exhaust gases can be harnessed through a Heat Recovery Steam Generator (HRSG) and the steam utilised as process steam and/or for second stage electricity generation using steam turbines. Figure 3: Gas Turbine with Heat Recovery Flow Diagram Combustor Electricity Fuels Compressor Hot Gases Turbine Generator Heat Recovery Steam Generator Steam Turbine Generator Exhaust Gases Heating/Cooling Electricity END Cogeneration Regulatory Rules and Feed-In Tariff Page 23 of 23