Regulatory Framework PPAs and IPPs Perspectives from an IPP African Forum for Utility Regulators Workshop on Regulation 7 December 2016
Agenda Enel Group Overview Introduction to EGP Electricity Policy Framework South Africa Integrated Resources Plan Electricity Regulatory Framework Regulation on New Generation Capacity Independent Power Producers Procurement Programme Renewable IPP Procurement Programme Power Purchase Agreement Conclusions 2
Electricity Policy Framework South Africa Policy Framework White Paper on Energy Policy, 1998 National Climate Change Response Policy White Paper, 2011 National Development Plan 2030 Outcome 6: An Efficient, competitive and responsive economic infrastructure network Renewable Energy White Paper, 2003 initially set a target of 10 000 GWh by 2010 Electricity Pricing Policy Future policies: Carbon Tax part of the climate change response policy Carbon Tax Offset Regulations Country Plans: Integrated Energy Plan Integrated Resource Plan 3
Integrated Resource Plan The Integrated Resource Plan 2010-2030 The March 2011 IRP was the frst iteration of the plan covering period 2010-2030 The plan set a target of 17.8 GW for renewable energy to be reached by 2030 This would constitute 42% of total new generation capacity The 17.8 GW would be comprised of the following: 8.4 GW (Wind); 1 GW (CSP); and 8.4 GW (PV). The plan made a firm committment for renewable generation capacity to be on line by 2015: 800 MW (Wind); 100 MW (CSP); and 1, 200 MW (Wind) The above committments coincided with the start of the Renewable Energy Independent Power Producers Procurement Programme (REIPPPP) The Ministerial Determinations of 2011 and 2012 determined that the renewable capacity to be built by IPPs through the REIPPPP 4
Integrated Resource Plan 2016 Update Integrated Resource Plan Update Assumptions The IRP 2016 Update includes some assumptions that have changed from the 2010 2030 IRP These changed assumptions included: Technology costs Electricity demand projections Expected performance of Eskom power plants Affordibility of electricity Scenarios for caron mitigation strategies 5
Electricity Regulatory Framework South Africa Regulatory Framework Principal Legisltation: Electricity Regulation Act, No 4 of 2006 (ERA) national regulatory framework for the electricity supply industry Relevant Sections of the ERA: Section 2 Objects of the Act Section 3 establishes the Energy Regulator as custodian and enforcer of the regulatory framework (ref: National Energy Regulatory Act, No. 40 of 2004 Section 7 activities that require licensing (generation,transmission, distribution,import and export of electricity, and trading) Section 34 empowers the Minister of Energy (in Consultation with the Regulator) to: Determine new genration capicity; Determine types of energy sources; Percentage of elcetricty generated from each source; Designate a person or persons to whom the electricity is sold; Tendering procedure fair, equitable, transparent, competitive and cost-effective; and Private sector participation. Section 34 results in the Mnisterial Determinations for new renewable energy generation capacity by Independent Power Producers (IPP) including other IPP programmes (base load coal, gas, co-generation) The Ministerial Determinations give effect to the implementation of components contained in the IRP 6
Electricity Regulatory Framework South Africa Regulatory Framework cont d Section 35 is most critical...results in the following: Electricity Regulations on New Generation Capacity sets the framework for the Independent Power Producers Procurement Programme This forms the basis for the IPP Procurement Programme, in general The Renewable Energy IPP Procurement Programme (REIPPPP) Other Regulations; Standards; Codes; Tariff Frameworks 7
Electricity Regulatory Framework South Africa Electricity Regulations on New Gen Capacity Regulations prescribed by the Minister of Energy in terms of Section 35(4) of the Electricity Regulation Act, No. 4 of 2006) - First Issued in May 2011 Regulations applicable to Procurement of new generation capacity by organs of state, including: New gen capacity from RE sources and co-gen; Base load, mid-merit load and peak load new gen capacity;and Cross-border project but excludes New Gen Capacity derived from Nuclear power technology. Objectives: Facilitate planning for the establishment of new generation capacity Regulate entry by a buyer and a generator into a power purchase agreement (PPA) Set minimum standards for PPAs Facilitate the full recovery by the buyer of all costs efficiently in terms of th eppa Provide for a framework for the IPP Procurement programme implementation 8
Electricity Regulatory Framework South Africa Electricity Regulations on New Gen Capacity Other Provisions: Planning for new gen capcity through the IRP developed by the Minister of Energy in consultation with the Regulator Performing feasibility studies to assess new gen capacity requirements Minister or by the Buyer (organ of state designated by the Minister i.t.o Section 34(1) of the ERA Ministerial Determinations indicates the capacity, technology of new gen to be procured; generator; the buyer; the procurer, etc Ministerial determinations are binding on the buyer and the procurer. Procurement process under the IPP Procurement Programme. In this case: Subject to the determination, the programme takes the form determined by procurer Procurer to specify qualification and evaluation criteria IF procurer not the buyer, then the buyer cannot conduct a procurement process Conclusion of PPA betweeen buyer and an IPP Cost Recovery ability of the buyer to recover full costs incurred uner the PPA Exemptions Minister has discretion to exempt a party from the provisions of Regulations, where justifiable 9
IPP Procurement Programme Salient Features Emanates from the Electricity Regualtions on New Generation Capacity Primary mandate to secure electrical energy from private sector from renewable and non-renewabe energy sources Guides procurement of both renewable and non-renewable energy (coal, gas, co-gen) Sets rules and guidelines for undertaking of bid programme and procurement of new generation from IPPs New generation procurement is in compliance with targets sets in the IRP Standardised Power Purchase Agreements Other considerations: Establishes the IPP Procurement Office professional services; procurement management services; monitoring, evaluation and contract management; advisory services Institutional factors: Department of Energy, National Treasury and the Development Bank of Southern Africa Memorandum of Agreement to provide support to implemet the programme Contributes to broader national development objectives job creation; socia-economic upliftment; and broader economic ownership Source: Independent Power Producers Procurement Programme (IPPPP An Overview, June 2016) 10
Renewable Energy IPP Programme Features Procurement specific to procurement of renewable energy Launched in August 2011 first Ministerial Determination for RE issued Competitive bidding process based on an issued Request for Proposal Procurement announced via Ministerial Determinations RFP has 3 parts Rules; Qualification; and Coparative Evaluation A balance between Price (70%) and Economic Development Criteria (30%) RFP sets the RE technologies to be procures sometimes capacity level is specified Procurement Process Source: Department of Energy, 2015 11
Renewable Energy IPP Programme Agreements Power Purchase Agreement 25 years Implementation Agreement Government Support Framework Connection of Use of System Agreement Ancillary Service Agreement Other: Generation License Distribution Facility License Contractual arrangements Source: Department of Energy, 2015 12
Renewable Energy IPP Programme Current Status Programme recognised as successful all over the world Current Status: Programme has gone through 6 Bid Windows (BW1; BW2; BW3; BW3.5; BW4; and Expedited Window) As at June 2016, the Department of Energy reports the following: 6, 376 MW procured - 2 292 MW (PV); 600 MW (CSP); 3 357 MW (Onshore Wind); and 128 MW (Other biomass, biogas, landfill gas) 102 RE IPP Projects About 2 220 MW capacity is in operation and connected to the grid Average prices per KW across technologies have dropped by 39% from BW1 to BW4 Investment totaling R195 billion Projects still outstanding for Financial Close this will increase RE capacity and investment 13
Renewable Energy IPP Programme Other Successes From a qualitative point of view: Robustness of the evaluation of projects Strong institutional support Contribution to skills development Participation of local communities Quantitative view: Job creation 24 838 Job Years in constructions and 1 952 JY during O&M Higher Ownership by black people above the set thresholds (31% black shareholding and 11% for local communities) Megawatts online 2 200 (to date 9 602 GWh generated) Cost effectiveness price reductions per technology between Bid Windows ( Investment R190 billion (~R54 billion foreign investment) Challenges: Status of PPAs Updated IRP Project specific grid access; proximity to load centres; local procurement Job year defined as an equivalent of a fulltime employment for one person per year Source: Department of Energy, 2015 14
Renewable Energy IPP Programme Power Purchase Agreement As per the The Electricity Regulations on New Generation Capacity, defined as: an agreement concluded between a generators and the buyer for the sale and purchase of new electricity generation capacity or electricity derived therefrom, or both A PPA must meet the following requirements: Value for money Technical, operational and financial risk transfer to generator Mechanism for implementation, management, enforcement and monitoring of PPA Due diligence in respect of the buyer s representative and proposed generator in relation to competence and capacity to enter into PPA 15
Power Purchase Agreement Salient Features Legal basis Long-term in nature Take or pay Design and perfomance requirements Pass through of costs incurred by the buyer (if it is state organ) Matters relating to delays,, under perfomance Grid unavialability Force majeure Termination Testing standards prior to operations Project operations Change in Law 16
Power Purchase Agreement What IPPs want to see Take or pay basis Long-term Binding legally Price certainty with escalations (inflation based) Backed by a guarantee Government (if state organ) of bank guarantee (if private off-taker) Protection from delays liquidated damages Deemed energy payments to guard against grid unavailability Conflict resolution mechanism Strong off-taker 17
Conclusions Enabling conditions for RES Programme is anchored on clearly defined policy and regulatory framework Policy: Integrated Resource Plan that considers all Renewable Energy Sources and strategy to set Renewable Energy Targets Introduction of clear and transparent procedures to foster renewable development Create standardized PPAs enforceable and binding Creation of Government preferential procurement guidelines, and tender management processes Other: Clear and fair grid access rules that will accommodate renewable additional capacity Third Party Access rules to promote wheeling of energy and allow the possibility for IPPs to set up bilateral PPAs with large consumers (such as mine) Policies and regulatory framework to facilitate private sector involvement in decentralized renewable energy technologies (i.e. mini grid projects, net-metering rules etc) Rules for the development of bilateral PPAs for captive renewable power plants 18