Tuesday, March 29, 2011

Renewable tariff cuts..refit South Africa

While the case has grown for using renewable energy feed-in tariffs to supplement the price paid for generating green electricity, there is little agreement on what the appropriate levels are.

This is true in London or Johannesburg, as evidenced by the outcry over proposed cuts this month in the feed-in tariffs paid to producers of renewable energy.

High renewable energy feed-in tariffs were used to establish markets in Germany and Spain and while developers prefer strong early incentives in new markets too, the governments or regulators in those countries aim to emulate last year’s drop in tariffs in older markets.

The consternation in South Africa and the UK stems from the fact that renewable energy industries in both countries are fledgling, and the proposals knock the viability of projects in the planning stage.

The UK says its tariff cuts are designed to discourage an unexpected number of large-scale solar park applications, as the tariff was intended for smaller projects. However, large solar farms will be affected alongside community-scale solar energy installations under 250 kilowatts proposed by schools, councils and housing estates.

In South Africa, the National Energy Regulator of SA (Nersa) first proposed Renewable Energy Feed-In Tariff (Refit) rates in 2009, but published a draft set of lower rates last week.

It did so because of a differing inflationary and exchange rate outlook, as well as falling technology costs. The proposed cuts apply to projects over 1 megawatt as small-scale installations have yet to come into the regulatory and funding net.

Nersa’s move appeared to surprise even the Energy Department, which said the higher tariff should apply for the first round of Refit bids, which are about to go out to tender, because their projects had to be ready by 2013 and thus could cost more.

We have yet to see the precise make-up of all South Africa’s Refit applicants, but when invited to submit bids they will presumably comprise consortia of international developers, local business groups and some community element.

Do these Refit applicants deserve the higher tariff at the expense of South African consumers? To me it seems logical that the tariffs fall in line with global trends as determined by Nersa after detailed consultation.

However, this doesn’t settle the issue of whether licencees should receive the higher tariff in at least the first Refit round so as not to halt the country’s first big renewable energy power production drive just as it is about to take off.

The higher Refit figures have been the basis of renewable energy project planning for the last two years, a reasonable assumption as Nersa approved Eskom tariffs using these same figures.

On the other hand, renewable energy project developers are not likely to run away from an energy market in which 42 percent of new energy generating capacity will be drawn from renewables over the next two decades.

But that is a bit like having attracted the bunnies, hiding the carrots, which is not good for building relations with people you want to build local manufacturing capacity and skills, and who are now crunching numbers to assess project viability.

There is the possibility that a higher tariff for the first round of Refit would promote corruption in the bidding process as many scrap it out for just 1 050MW of capacity. This heightens the imperative for a transparent licensing process. - Ingi Salgado


Morx said...

Now that the SA Government has adopted and published the ‘in promulgation’ Integrated Resource Plan (for new electricity generation capacity) and now that the Renewable Feed-in Tariff (REFIT) is simultaneously under review by the National Energy Regulator of SA (Nersa), there is a very serious threat of disinvestment by mostly foreign-led Independent Power Producers (IPPs) who have alternative markets for their expertise, equipment and finance.

Plotting a way forward and avoiding a knee-jerk reaction can only be based on the authorities fully understanding and appreciating the potential of disinvestment and IPPs understanding the remaining opportunities for a certain procurement process that has admittedly been under development for far too long.

However, it must be equally appreciated that should the wrong decisions be made now, the unintended consequences - especially electricity tariffs paid by the end-user - would be a burden carried by future generations.

We therefore need to delve into how the REFiT tariffs are determined by the Nersa - using the Levelized Cost of Energy (LCOE) methodology - and its ultimate impact on homes, businesses and lifestyles.

I have come to the conclusion that there are various types of solar power technologies (e.g. Wind, Concentrated Solar Power [CSP] and Solar Photo-Voltaic [PV]) and then various types of systems or solutions within each technology, for example, under Solar PV: Thin-film, Crystalline, etc.

The point is that each category and sub-category has its own costs (for production, finance, etc.) and varies even further based on the Balance of System (BoS). Using PV as an example, the BoS costs include design, materials and technology for the panels (i.e. many PV cells), modules (i.e. many PV panels) and arrays (i.e. many PV modules), including inverters, transformers, etc.

Morx said...

Part 2

A survey of these costs are - in theory - used to calculate the LCOE and thus the tariff that would be paid by the Renewable Energy Purchasing Agency (REPA aka Eskom Single Buying Office for now) to Independent Power Producers (IPPs) - a cost ultimately passed on to the end-user, including taxpayers.

Within Solar technologies, as an example, the REFiT tariffs only distinguish between PV and CSP, but does not reflect cost variations within each technology category, for example, there is no distinction in tariff between Thin-film, Crystalline, and other PV technologies. Each of the PV technologies does however have its merits and demerits, e.g. conversion rates, efficiency degradation, upfront capital expenditure, operational and maintenance costs, etc.

Most experts and commentators would however agree that the costs of PV and CSP are decreasing as the technology is diffused and economies of scale are achieved.

Thus a review of the tariffs is required at regular intervals for tariffs to remain cost-reflective. These tariffs would need to be known (i.e. tariff certainty) before IPPs can make their investment decisions applying the ‘cost-plus-reasonable-profit’ principle.

At the moment, the tariffs published under REFiT Phase 1 & 2 are certain. These were used by IPPs to make their initial investment decisions - perhaps prematurely as no REFiT Request for Proposals (RFP) has been published to date although everyone is expecting it to be soon.

It is the uncertainty of the proposed revised tariffs and the timing of its revision that has caused some buzz in the industry.

Although the REFiT tariffs are now, much to everyone's surprise, being revised by Nersa - proposing lower tariffs based on the latest LCOE assessment of costs (incl. technology, finance, and other costs) - they will only be applicable to "new projects".

There are no projects as yet, but if a REFiT RFP is published before finalising REFiT 3, some projects already at an advanced stage of development could be selected under REFiT 1 & 2.

This 3rd revision will only be completed sometime after 26 May 2011 when public hearings are scheduled to be held. Nersa must then still assimilate the written and oral inputs in its Electricity Sub-Committee before making its revised determination on the REFiT, including the tariffs.

Morx said...

Part 3

My interpretation of the relevant policy, legislation, regulations and regulatory is therefore that if the REFiT Request for Proposals (RFP) is published anytime before Nersa makes such revised determination, then the tariffs determined under REFiT 1 & 2 would be applicable. Nothing prevents this in law.

I would therefore propose or support any proposal that this would be the way forward.

If an announcement were made in this regard IPPs, who have already made significant investments in preparing their projects, should not have any reason to disinvest.

The Department of Energy and National Treasury are certainly aware of those IPPs who are ready to bid in sufficient detail as a result of their participation in the Request for Information in October 2010.

I would also propose that those who might not be selected in the first round of procurement (under REFiT 1 & 2) would, while the interregnum persists, revise their bids and engage in the public consultation process to motivate whatever tariffs would be cost reflective and allow for a reasonable return on their investments, i.e. simultaneously participate in REFiT 3 revision and potentially bid under REFiT (1 & 2) RFP! There was no guarantee at the outset that anyone would be selected under REFiT 1 & 2 anyway. Many technology categories seem over-subscribed judging by EIA and grid connection applications.

The REFiT 3 public consultation process is therefore an important opportunity to correct any miscalculation of the real costs of qualifying renewable energy technologies - its categories and sub-categories - on the basis of the LCOE methodology.

It is also an opportunity for IPPs, and their suppliers no less, to reassess the motivation for tariff reviews in almost every significant market.

Although many may argue that their profit margins are 'tight' or their technology is 'superior', there is a body of evidence suggesting that major cost-savings could be derived from greater efficiencies in their production processes and Balance of Systems (BoS) which could often make up 40-50% of costs. 'Tight' margins and 'superior' technology would need to be quantified and qualified logically.

Morx said...

Part 4

However, energy regulators should be cautious of foregoing important developmental imperatives, such as local content and job creation in the green economy, for example, should the BoS savings be realised purely on 'plug-and-play'-type technologies that require little local content or labour-intensivity in their construction, operation or maintenance.

Other BoS savings could be realised by the remaining non-panel or -module design, materials or processes, e.g. utilising more cost-effective inverter and other technology components. Technology efficiencies may have improved to such an extent that certain suppliers would inevitably no longer be able to offer the most cost-effective, effecient, yet proven technology.

The process, especially the communication between the Department of Energy, National Treasury, Eskom and Nersa, although an independent regulator, must be co-ordinated and managed more sensitively at least for the sake of sustaining the confidence of the foreign investors that rely on the feedback of their local partners.

However, IPPs must also engage the authorities constructively and pro-actively at every instance before we lose the window of opportunity to address the very real possibility of rolling blackouts as identified in the Medium-Term Risk Mitigation plan and the balanced scenarios it sketches.

I am cautiously optimistic that the REFiT RFP will be published before REFiT 3 comes into effect and that the tariffs under REFiT 1 & 2 would be applicable to such an RFP.

However, certainty eludes us and many may run out of oxygen whilst holding their breath until at least early June 2011 when we approach peak electricity demand.

Anonymous said...

Very interesting article for a first timer reading about these initiatives. Do you by any chance know what the new REFiT tariff is for solar voltaic panels?