Wednesday, March 23, 2011

Nersa moves to cut Refit tariffs just as SA promises to boost renewables

Days after it was confirmed that the role of renewable energy in South Africa’s generation mix would be increased between 2011 and 2030, the energy regulator has issued a consultation paper that proposes a material decrease in the level of renewable energy feed-in tariffs (Refit) when compared with those approved and promulgated in 2009.

In fact, the paper, which was released on March 22, proposes tariffs that are between 7,3% lower on some technologies and more than 41% lower on others. A week earlier, Cabinet approved the integrated resource plan for electricity, the ‘IRP2010’. It states that 42% of new generation capacity, or more than 17 000 MW, to be added over the coming two decades would be derived from renewable sources.

The move to decrease the tariff is unlikely to surprise many close observers, owing to the fact that the initial Refit regime, approved in 2009, was considered high. This was primarily as a result of its exchange rate assumptions used, but also because the tariffs were calculated ahead of some significant cost improvements on certain renewable technologies, such as solar photovoltaic (PV).

The new exchange rate assumption is based on R7,40 to the dollar as opposed to nearly R10/$1 in the 2009 version and Camco MD Jonathan Curren, who has worked on Refit systems in South Africa, Uganda and Botswana, says the new rates are probably more in line with international norms.

Nevertheless, the size of the proposed cuts will raise the eyebrows of potential developers, who are already frustrated by the fact that not a single Refit power purchaser agreement (PPA) was signed between 2009 and 2011.

In fact, the proposed changes come ahead of the release of a request for proposals (RFP) for the first 1 025 MW of Refit projects, which will be issued by the Department of Energy and the National Treasury – the RFP is meant to be accompanied by a standard PPA.

Curren says that the proposed changes could raise yet more uncertainty and risk for developers, who will now be unclear whether the PPA will be based on the favourable 2009 Refit rates or the new 2011 regime.

National Energy Regulator of South Africa (Nersa) regulatory member for electricityThembani Bukula tells Engineering News some confusion could be introduced into the procurement process as a result of the publication of a consultation paper entitled a ‘Review of Renewable Energy Feed-In Tariffs’. The paper sets out the qualifying principles and proposed new tariffs for landfill gas, biomass, biogas, concentrated solar power (CSP) trough (with and without storage), CSP tower (with storage), wind, small hydro and photovoltaic (ground mounted and rooftop).

However, Bukula says it was always the intention to review the Refit on a yearly basis and this had not occurred during 2010 primarily because there was a view that the first PPAs would be signed. However, when these contracts were not concluded, Nersa felt it necessary to review the Refit so as to align it with the capital costs used in the IRP2010 process, as well as with a more realistic exchange rate.

Bukula insists that the intention is not to make the programme less attractive, pointing out that the real return on equity after tax has remained 17%, which is better than returns received in other countries.

“The principle of better than reasonable returns remains,” he adds. “But we also have to ensure that South Africans get the best deal possible and that the Refit is not over generous.”

Once approved, the revised tariffs and rules will replace Refit phase I and II tariffs and associated guidelines – a process Nersa anticipates completing by May 26. The document states that the new Refit will apply to projects to be commissioned after the promulgation of the revised tariffs and will lead to the repealing of the tariffs and guidelines approved in 2009.

Therefore, Bukula believes it would be better to align the RFP for the first 1 025 MW to the 2011 tariffs. “But I have no idea what the RFP will contain.”


Under the proposed Refit, wind projects with a capacity greater than 1 MW, will receive a tariff R0,938/kWh in 2011, R0,945/kWh in 2012 and R0,952 in 2013, which would be 24,9% lower than the 2009 tariff of R1,25/kWh.

The biggest cuts of 41,5% and 41,3% respectively are reserved for CSP trough (with six hour storage) and ground-mounted PV. Under the proposed Refit, CSP trough tariffs would fall to R1,836/kWh in 2011, R1,845/kWh in 2012 and R1,854/kWh 2013, from the 2009 level of R3,14/kWh. Solar PV could be slashed from R3,94/kWh to R2,311/kWh in 2011. Also slashed is the proposed tariff for CSP tower with six hours storage, from R2,31/kWh in 2009 to a proposed R1,399/kWh in 2011, a 39,4% decline.

The proposal cuts the Refit tariffs for landfill gas from R0,65/kWh by 17,1% to R0,539/kWh and reduces by 28,6% the R0,94/kWh granted for small hydro projects to R0,671/kWh. CSP trough without storage could fall 7,3% to R1,938/kWh from R2,09/kWh, while the tariffs for biomass and biogas respectively could be cut by 10,1% to R1,06/kWh from RR1,18/kWh and by 12,9% to R0,837/kWh from R0,96/kWh.

The term of any PPA, would remain 20 years and Nersa would facilitate the conclusion of such contracts between the Refit independent power producer and the ‘buyer’, which in the near term is likely to be a ring-fenced single buyer’s office within Eskom.

Nersa would host public hearings on May 2 and would expect to receive written public comment by April 22.

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