Bright prospects for a cleaner-energy era - about 1 year ago

When considering the vast opportunities for renewable-energy roll-out in South Africa, the question that most in the new energy space are still pondering is: Where to from here? The short answer for those cause-driven activists may simply be: Onwards and upwards – and good for them.

But for many others, it may be time for throttling back on the cash burn and possibly even temporary incubation – at least, until the murky backdrop of final renewable-energy procurement targets and regulatory processes as well as power purchase agreement (PPA) and independent power producer (IPP) selection criteria has sufficiently galvanized. And, of course, there is the question of who is actually going to buy the power in the interim, while the independent system operator (ISO) grapples to find its new legal footing. And who will bridge the ISO’s balance sheet to underwrite the credit risk? Some daunting questions. But there remains little doubt, even among the greatest detractors, that our future holds bright prospects for the dawn of a new and cleaner- energy era.

An interesting market telltale evidences renewable-energy developers in South Africa suffering from the ‘opium of optimism’ as more speculators join the fray each day – that euphoric but compelling sense of bigger, better, faster. On the one hand, it is commendable to see entrepreneurs of all pedigrees fill the new renewable-energy market vacuum. On the other, the vast oversubscription of renewable-energy projects, in particular wind projects now around 10 000 MW (and still growing) in a constrained market size, will inevitably mean blood on the streets.

With a bidding process almost certain under the renewable-energy feed-in-tariff (Refit) at this point, bidder qualification can be expected to be tough. Qualification criteria will, almost certainly, by design, aim to whittle down the vast pipeline to those with global, proven records, intelligent and sophisticated project designs, robust and proven technologies, optimized development impact and financial convertibility. Yet, as with any new market opportunity, the early bird often catches the worm. As a result, some early risk-taking entrepreneurs have already cashed in their chips. Some have sold pre permitted portfolios to large global renewable-energy operators who are expanding their asset bases in favour of emerging and strategic market prospects offered in South Africa.

Good for them too. As things stand, we know that we have 725 MW to be procured under Refit, comprising 400 MW of wind energy, 200 MW of solar energy, 75 MW of landfill gas and 50 MW of small hydro. It is further understood that this has been increased by another 300 MW, bringing the total to 1 025 MW by 2013; however, the details of this additional allocation remain sketchy. This translates into a renewable-energy market opportunity of R25-billion to R30-billion over the next four to five years.

What we do not know at this stage is what the exact preferred renewable- energy mix will be and how this will be prioritized. But we can hedge our bets on low-tariff renewable-energy categories being prioritized over high-tariff alternatives. This means that landfill gas, small hydro, wind and biomass/biogas have a higher probability of winning the race against the more expensive concentrating solar thermal power and solar photovoltaic. But technology and scale dictate that it is not quite that simple. With exact renewable-energy category market allocations being unconfirmed, a rational approach should see the inclusion of all qualifying renewable-energy categories defined under Refit getting some place in the sun.

So, what are the key remaining regulatory barriers and processes and when will they be unlocked to allow the more efficient market mechanisms to take the lead? In sum, we are counting down to the delivery of the final PPA by mid-2010, the final rules for the selection of renewable- energy IPPs from the National Energy Regulator of South Africa, the revised grid codes, the interim (or final) ISO legal framework that mandates it to act as a buyer under Refit, Treasury or other suitable ISO guarantees, grid connect protocols and approvals, a revised integrated resource plan, or IRP2) (although not essential for the start of Refit, as IRP1 provides sufficient enabling conditions for the ISO to proceed), and a strong dose of political will and cooperative governance.

A key factor will be whether our political leaders will approve an interim ISO that may even remain within Eskom for the time being. The creation of an ISO may have a two- to three-year legislative approval process requiring multidepartmental and Cabinet approval. All things being equal, and based on an interim workable plan for the ISO, we should see some rubber on the road by the third quarter of this year.

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