Power auctions are fast becoming the dominant procurement method for renewable energy globally, particularly in sub-Saharan Africa, but it is not without its crucial requirements for success.
University of Cape Town (UCT) specialist research unit Power Futures Lab research fellow Wikus Kruger on the first day of the annual Windaba conference hosted virtually on October 26 discussed global trends in renewable energy auctions and what this means for South Africa’s Renewable Energy Independent Power Producer Procurement Programme (REIPPPP).
Contextualising the discussion, renewable energy developer Windlab Developments South Africa project manager Ben Brimble explained that the REIPPPP was initiated by government in 2011 as a premier procurement programme to address climate and energy security issues by diversifying South Africa’s energy mix and reducing the country's reliance on coal-fired power.
Subsequently, the first bidders were announced in December of that year, followed by successful bidding rounds two, three and four.
In 2015, however, the world-class and lauded reverse auction process that is the REIPPPP experienced delays owing to political issues at play at State-owned power utility Eskom, which faces crippling debt.
Kruger went on to cite his unit’s research on energy auctions in sub-Saharan Africa, Latin America, India and to some extent in the European Union, which found that contributing factors in successful independent power producer (IPP) procurement include stable country contexts, clear and consistent policy and regulation, as well as coherent power sector planning, including for competitive procurement.
Additionally, at the project level, it is necessary that developers are experts in their field, have affordable debt and secure revenue streams.
Both project-level and country-level factors influence who implements an auction, what the implementation process is like and whether the programme is adequately resourced, he said.
Looking across the regions in Power Futures Lab’s research, Kruger reported that they see increased sophistication during auctions globally, with complex evaluation methodologies being used and more online platforms hosting bids. Although an increase in complexity has resulted in low price bids being achieved, there is uncertainty over whether these projects are real and feasible.
Secondly, Kruger said auctions are becoming more customised to looking at system integration. He explained that bidders are differentiating between capacity and energy and are running separate bids for these products, which is not seen in South Africa yet, but Kruger believes it is necessary for the system operator to procure the products that it needs and to do so cost-effectively.
Looking at project locations, Kruger was seeing bids being evaluated based on their impacts on the grid, for example. “Project location is no longer merely being a matter of choosing the most-endowed site for resources, but we see site selection being influenced by sociopolitical reasons.”
For example, Kruger highlighted that Argentina requires an equitable location of bids across provinces.
He suggested that South Africa should also start looking at this if it is going to consider a just transition away from coal, with the majority of coal mining and coal power generation operations based in Mpumalanga, which currently does not have much renewable energy activity going on as a replacement employer.
Kruger mentioned that an increasing trend globally was around more sophisticated and customised approaches to local content, where auctioneers are looking at what components can be manufactured locally.
He said local content not only involves manufacturing, but extends into the services sector, with South Africa having managed to create a renewable energy services sector as a result of the REIPPPP and subsequently extending its services to many countries over the world.
Kruger added that there are alternative mechanisms to use, such as safeguard duties, which is often more effective in increasing local content and industrialisation.
Further, he stated that projects globally are often focused on scale aimed at cost reduction, using bigger sites for bigger renewable energy projects, often being sites that are designated by government for power generation use; however, South Africa has a cautious approach and limits project sizes in an attempt to increase diversity and ensure that not all of the volume gets awarded to a small pool of bidders.
However, Kruger remarked that, although South Africa sees increased market concentration, it is not deriving the benefits of bigger projects that it could.
Moreover, Kruger believes the secure revenue stream success factor will eventually force South Africa to move away from having Eskom as the only offtaker of power, considering its debt levels.
“We need to seriously consider our options in dealing with the situation. We see many countries moving away from sovereign guarantees, especially once they have established markets.
“Some countries have a portfolio of offtakers – from municipalities to large offtakers. There might for South Africa be the option of having an intermediary offtaker that signs back-to-back power purchase agreements with different entities to limit the extent of risk that a single offtaker has, particularly if it is experiencing financial trouble.”
Ultimately, Kruger says, the REIPPPP needs more trust in the auctioneer and the procurement process, as well as predictability and certainty around policy going forward.
“We can have the most wonderful location ambition or incredible prices, but when that uncertainty slips, you end up losing gains, which South Africa already had with four to five years of zero movement in the REIPPPP, which had a massive cost to the industry and country, all as a result of uncertainty.”