reippp - a new dawn for south african renewables? · master thesis by kai simon eikli yuen m.sc....

REIPPP - A New Dawn for

South African Renewables?

An analysis of renewable energy prices in the

South African Renewable Energy Independent

Power Producer Procurement programme

Master Thesis by Kai Simon Eikli Yuen

M.Sc. International Energy

Thesis supervisor: Prof. Giacomo Luciani

Sciences Po, Paris School of International Affairs

June2014

The copyright of this Master's thesis remains the property of its author. No part of the content may be reproduced, published, distributed, copied or stored for public or private use without written permission of the author. All authorisation requests

should be sent to [email protected]

REIPPP – A New Dawn for South African Renewables?

Page 1

“The biggest barriers to developing renewable energy in

Africa to date are not technological, but financial”.

President Jacob Zuma of South Africa

November 2011, Durban1.

1 The Presidency of the Republic of South Africa, 2011


Page 2

Executive Summary

The Renewable Energy Independent Power Producer Procurement programme (REIPPP) is a

South African competitive auction for IPP renewable energy projects. In the auctions held

since its inception in 2011, bid prices for solar PV and wind have fallen by 68 % and 43 %,

respectively.Having awarded tenders for solar PV and wind projects totaling 3.5 GW thus far,

REIPPP is being hailed as a great success and possible model for other countries. On the

other hand, during the renewable energy feed-in tariff regime (REFIT) that preceded it, not a

single project materialized. This research project aims to explore how REIPPP, when South

Africa had only minimal experience with renewables, succeeded in procuring a high number

of solar PV and wind projects at affordable prices within the span of a few years.

Sources: SA Department of Energy and Minerals2013, Pegels 2012

The main goal of this master thesis is to explore the factors that have influenced REIPPP

bidding prices by tapping into the knowledge and experience of renewable energy investors,

project developers and EPC contractors with a presence in REIPPP. The scope is limited to

onshore wind and solar PV projects. While some limited research already exists on the topic,

the author conducts a literature review which finds that four key questions remain

unanswered. Firstly, it is unclear why there has been such a marked difference in investment


Page 3

activity between REFIT and REIPPP. Secondly, it is unknown what the private sector

actorsthemselves perceive to be the primary drivers of reduced bid prices. Thirdly, the

impact of the design and implementation of REIPPP as an energy policy on bid prices are

uncertain. Lastly, there are no records of how perceived investment risk have changed

throughout the various stages of REIPPP.

The thesis finds that the lack of investment activity in REFIT was not due to insufficient feed-

in tariff premiums, but rather the lack of an efficient central procurement mechanism. The

responsibility of procuring IPP projects fell to the state utility (Eskom), which was

notinterested in PPAs for IPPs at the time. Some respondents felt this was due to a conflict

of interest, i.e. that Eskom as a monopoly was not interested in facilitating IPP activity –

others believed this was an issue of capacity. Unexpected changes in feed-in tariff premium

levelsin REFIT also translated into increased investment risk, which discouraged some of the

interviewees. It also contributed to perceived investment risk in REIPPP, albeit only in the

first round of auctions.

The main contributors to the strong drop in bid priceswere found to be gradually increasing

competitionandreduced technology costs for wind and solar PV, as well as an economic

downturn in more established renewable energy markets such as Europe.

Theintervieweesalso claimed prices were too high in the first round of auctions due to a lack

of competition, meaning that the striking aggregate bid price reduction was partly the result

of inflated prices. Competition have since driven prices down to a level where smaller

companies find it hard to operate, and there is a genuine concern among the investors that

large utilities backed by corporate finance will dominate the market in the future, much like

Enel Green Power did in the third round of auctions.

As for the design and implementation of REIPPP, interviewees are generally very satisfied

with both aspects and find that they have had a significant impact on bid prices. The

competitive nature of the auctions, and the fact that there are multiple winners in multiple

rounds of bidding, secures cost-efficient pricing that is seen by some investors as more

sustainable than inflated feed-in tariffs. Interviewees also expressed a sense of satisfaction

in the efficiency, transparency and good communication shown by government institutions

and financial partners in South Africa, and the risk of corruption was seen as minimal. A


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steep learning curve meantthat prices came down as banks, regulators, municipalities etc.

became increasingly experienced with REIPPP. Note that while the stringent requirements

for documentation were seen as leading to excessive costs, interviewees also believed this

discouraged less serious actors from the auctions.

Investment risks were measured through a simplified quantitative survey. The 10

interviewees agree that there has been a strong drop in risks related to the power market,

the issuing of permits and the financial sector. Power market risk registers a perceived

decrease because of reduced uncertainty concerning government handling of the PPA and

REIPPP in general. As initial IPP projects have been finished and are generating and selling

electricity under the terms of the PPA for the first time, interview respondents see power

market risk as significantly reduced. Permitrisk and financial sector risk was elevated in the

first round of auctions, but has since been reduced because both government and financial

institutions have gained capacity, experience and knowledge of the renewable energy

sector. Interviewees also note a slight increase in risks related to grid connection and

transmission, as well as social acceptance, though opinions are the interviewees are divided

in their opinions on this. However, the greatest perceived risk is the future of the South

African economy and the effects an economic downturn could have on theoperations and

the credit rating of Eskom.


Page 5

Acknowledgements

I am grateful for the support and guidance of Professor Giacomo Luciani, my thesis

supervisor, during the process of writing this thesis. He was always interested and readily

available to assist me in my work, and his extensive experience with the energy sector and

methodological expertise was vital. Any mistakes or errors found in this paper are solely of

my own doing.

I am also appreciate the willingness of interview respondents George Pergamalisand

Lamberto Dai Praof Enel Green Power,TimonDubbelingand RomainSormani of Total New

Energies,JensThomassen of Denham Capital, BjørnarBaugerud of Norfund, SilomnuLongelwa

of OMIG, Helen Tregurtha of AIIM, PhylipLeferink of Vestas, Mark Pickering of Globeleq,

Marc Wright of Biotherm and Christian Lie Hansen of Scatec Solarto aid me in my research

efforts. These are all busy professionals that found the time to answer my many questions

on REIPPP and energy investment risks. Their input was crucial for this research project and

the fact that they were able to find room in their hectic schedules for my interviews is

greatly appreciated.

In addition, I would like to thank Manfred Hafner of the Sciences Po energy faculty for

sharing his knowledge and expertise with me. His comments were insightful and provided

me with guidance that helped further advance the process of writing this thesis.

Lastly, I would like to extend my warmest thanks to Mark Davis of Norfund. His ability to put

me in touch with suitable interview respondents proved invaluable. Also, the importance of

renewable energy financing and investment risk was only made clear to me while working

for him during an internship in the fall of 2013, and it was this enjoyable and educating

experience that initially piqued my interest in the field of financing renewable energy.

Without Mark’s support and tutelage, this thesis would not have been written.


Page 6

Table of Contents Abstract ...........................................................................................................Erreur ! Signet non défini.

Acknowledgements ................................................................................................................................. 5

1 Introduction.......................................................................................................................................... 8

1.1 Thesis structure ............................................................................................................................. 9

1.2 Call for research............................................................................................................................. 0

1.3 Context ........................................................................................................................................ 10

1.3.1 The South African electricity sector ..................................................................................... 10

1.3.2 Investing in renewable energy in developing countries....................................................... 13

2 Literature review ................................................................................................................................ 14

2.1 About electricity auctions internationally ............................................................................... 15

2.1.1 A comparison of Brazilian and South African experiences................................................... 16

2.2 Falling technology costs in solar PV and wind power ................................................................. 18

2.3 About REFIT ................................................................................................................................. 20

2.4 About REIPPP............................................................................................................................... 22

2.4.1 REIPPP bid evaluation criteria .............................................................................................. 24

2.5 The South African currency fluctuations..................................................................................... 26

2.6 Summary and research gaps ....................................................................................................... 27

3 Methodology ...................................................................................................................................... 29

3.1 Conceptual framework................................................................................................................ 29

3.1.1 Research questions............................................................................................................... 29

3.2 Interviews.................................................................................................................................... 30

3.2.1 Interview respondent criteria and sampling ........................................................................ 30

3.2.2 Interview topics .................................................................................................................... 31

3.2.3 Pilot interview ...................................................................................................................... 32

3.2.4 About the interview respondents ........................................................................................ 32

3.3 Quantifying perceived changes in investment risk ..................................................................... 34

3.3.1 Investment risk categories ................................................................................................... 35

3.3.2 Measuring investment risks ................................................................................................. 37

3.4 Limitations ................................................................................................................................... 38

4 Findings............................................................................................................................................... 40

4.1 What explains the difference in investment activity between REFIT and REIPPP? .................... 40


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4.2 External factors influencing average bidding prices ................................................................... 41

4.2.1 REIPPP 1................................................................................................................................ 42

4.2.2 REIPPP 2................................................................................................................................ 43

4.2.3 REIPPP 3................................................................................................................................ 44

4.3 Has the design and implementation of REIPPP have influenced average bidding prices? ......... 45

4.4 Investment risk in REIPPP............................................................................................................ 47

4.4.1 Power market risk ................................................................................................................ 47

4.4.2 Permits risk ........................................................................................................................... 48

4.4.3 Social acceptance risk........................................................................................................... 49

4.4.4 Grid and transmission risk .................................................................................................... 51

4.4.5 Technology and resource ..................................................................................................... 52

4.4.6 Counterparty risk.................................................................................................................. 54

4.4.7 Financial sector risk .............................................................................................................. 55

4.4.8 Political risk........................................................................................................................... 56

4.4.9 Macro-economic risk............................................................................................................ 57

5 Discussion........................................................................................................................................... 59

5.1 What explains the difference in investment activity between REFIT and REIPPP? .................... 59

5.2 External factors influencing average bidding prices ................................................................... 60

5.3 Has the design and implementation of REIPPP have influenced average bidding prices? ......... 61

5.4 Risk perceptions .......................................................................................................................... 63

5.4.1 Reductions in perceived investment risk ............................................................................. 64

5.4.2 Increases in perceived investment risk ................................................................................ 65

5.4.3 Risk categories without observed changes .......................................................................... 66

5.4.4 Overall evaluation ................................................................................................................ 66

5.5 Differences from existing literature ............................................................................................ 67

6 Conclusion .......................................................................................................................................... 68

Attachment 1: Investment risk questionnaire ...................................................................................... 70

Attachment 2: Call for interviewees...................................................................................................... 72

References............................................................................................................................................. 73


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1 Introduction

The Renewable Energy Independent Power Producer Procurement Programme is a South

African renewable energy competitive bidding mechanism commonly referred to as REIPPP.

In REIPPP, which has had three phases of auctions since its inception in 2011, renewable

energy deployment has essentially spiked while prices have dropped significantly. In the

annual reports on global renewable energy investment issued by the United Nations

Environment Programme (UNEP) and Bloomberg New Energy Finance (BNEF), South Africa

went from being described as a “disappointment” in 20112 to being called a “runaway star”

and one of the top 10 investor countries in renewable energy in 2012, with total investments

in the first round of auctionsamounting to 5.7 USD billion, up from virtually zero3. IHS has

even proclaimed South Africa to be the world’s most attractive emerging solar market in

20134.

In stark contrast, not a single renewable energy IPP project was started in South Africa

during the two-year long feed-in tariff regime that existed before REIPPP implementation. In

the course of just three REIPPP auctions over two years,the average bidding prices of

projects what have won an auction have dropped 68 percent for solar PV and 43 percent for

wind power (2011 ZAR values). Can these changes be attributed to the planning and

implementation of REIPPP and a perceived reduction in investment risk, or are the reduced

prices resulting more from external factors such as a drop in renewable energy technology

prices?

This objective of this paper is toidentify the main factors influencing REIPPP bid pricing.Prior

to the writing of this thesis, little academic literature on the opinions of investors and project

developers existed. The data for this thesis was therefore gathered from interviews with a

range of investors and project developers that have participated in REIPPP and are therefore

expected to have unique information on the topic.

2 UNEP 2012

3 UNEP 2013

4Woods 2014


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1.1 Thesis structure

The first chapter of the thesis is this introduction, which gives an overview of the thesis. It

also explains the context of the research, with particular focus on the South African energy

sector and the increased global attention on the importance of investing in renewable

energy. The second chapter is the literature review, which studies the literature on REIPPP

currently available and ends by analyzing what gaps regarding the subject that remain

unfilled. Based on these gaps, research questions are then formulated in the third chapter,

which contains the methodology and which also explains the research design and research

methodsused in the paper, in addition to presentation of the limitations of this study.

Findings of the research are presented in chapter four, and a discussion of these findings can

be found in the fifth chapter. In the sixth and final chapter, the conclusions that can be

drawn from this thesis are presented.

1.2 Call for research

When speaking at the Investor Summit on Climate Risk

in January 2014, the Executive Secretary of the United

Nations Framework Convention on Climate Change,

Christiana Figueres, urged investors to move into green

investments5. While renewable energy investments

have generally increased the last few years, they are

still far below what is believed is needed to facilitate a

transformation to a sustainable energy sector.

Ceres, a coalition of investors, pension funds and NGOs,

believe the amount should be even higher.They believe

as illustrated in figure 1, that an annual amount of 1 USD trillion must be reached within

2030 - almost four times of all RE investments registered by BNEF in 2012.Studies on RE

financing could contribute to reaching this goal.

In 2011 a UNEP Energy Finance Initiative study in South Africa estimated that the

incremental costs of installing 1-3 GW of renewables per year until 2020-2025 would have a

5UNFCCC 2014

Figure 1: The need for RE investments

Source: CERES 2013


Page 10

net present value of approximately 21 USD billion6. The same study concluded that this

amount of capital would be impossible to raise within South Africa and that international

sources of capital would be needed. These could be raised through “domestic institutional

de-risking and the provision of a blend of concessionary debt and risk guarantee

instruments”. As not one single renewable energy IPP project had been closed under the

REFIT regime, the authors of the study concluded that REFIT was not fit to attract foreign

investments. REIPPP has apparently been a greater success in this regard, but the study was

released before the first auction had been conducted. An investigation of how and to what

extent REIPPP has influenced financier perspectives and succeeded in attracting the capital

needed to decarbonize is therefore of importance.

It should also be noted that while REIPPP is the first large-scale independent power producer

(IPP) electricity auction in Africa, yet very little research has been done on the topic. Seeing

as how the African continent has suffered from a shortage of renewable energy deployment

despite having ample renewable energy resources, the findings from this research could

prove valuable for policy makers in Africa and elsewhere wishing to stimulate increased

renewable energy investment.

1.3 Context

1.3.1 The South African electricity sector

The South African state utility, Eskom, is a vertically integrated actor that is responsible for

the majority of generation, transmission and distribution of power in the country. Eskom

generated 96 percent of South Africa’s electricitybefore REIPPP, and it also owns and

controls the high voltage transmission grid in addition to distributing electricity directly to

approximately half of the end-users (the rest is distributed by local authorities)7.

The South African Network Infrastructure Review on Electricity was written in 2008 for the

South African National Treasury. This was an extensive evaluation of the South African

power sector, which it concluded was facing seven principal challenges8:

6Sullivan 2011

7 Eberhard 2005

8 Newbery 2008


Page 11

1. An urgent need for capacityexpansion due to delays in reforms and unclear decision-

making, to a level that would likely require increased private investment.

2. Eskom’s own investments in power generation could struggle with high cost and

inefficiencies because of soft budget constraints (meaning they can expect the

government to provide loans or allow higher prices if needed).

3. Eskom’s poor management. A series of blackouts, breakdowns and plant failures

questions their energy procurement strategies and O&M systems.

4. A lack of efficiency and cost-reflectivity in electricity pricing, as well as a lack of

transparency in subsidy programmes.

5. Transmission constraintsand interruptions, which are linked to past maintenance

problems and inadequate investment criteria.

6. Very poor municipal power distribution, which could worsen and bring about great

economic cost.

7. Outdated data for electrification planning.

8. South Africa is carbon-intensive, meaning that a carbon tax would have a significant

impact on South Africa’s energy sector.

Coal power constitutes the vast majority of South African electricity generation. A minor

portion of power generated comes from nuclear power, and the remaining 2.1 percent is

predominantly from hydro power. The dominance of coal and the lack of renewable

electricity generation is clearly illustrated in the graph below.

Figure 2: South African electricity generation capacity by source before REIPPP

Source: IRENA 2012

This heavy reliance on coal is not without environmental consequences. The electricity

sector produced 61 percent of South Africa’s CO2 emissions in 2011 and was therefore the


Page 12

main reason why South Africa was the 11th

largest CO2 emitting country and accounted for

38 percent of all African CO2-emissions that year910

.

At the same time, the potential for wind and solar PV power generation is very high in South

Africa. The average solar radiation varies between 4.5 and 6.5 kWh/m2 (compared to 2.5

kWh/m2 in Europe and 3.6 kWh/m

2, at the most, in the US), and very high mean annual wind

speeds along the coast can translate into 200 W/m2, according to aWhite Paper on

Renewable Energy published by the South African Department of Minerals and Energy

(DoE)11

.In a comprehensive energy sector planning document called the Integrated Resource

Plan it was decided that renewables excluding hydro power should constitute 42 percent of

all new power generation capacity by 2030, delivering 9 percent of net electricity12

. The

planned additional capacity is shown in the figure below.

Figure 3: Planned energy mix in 2030

Source: The South African Department of Energy 2011

9IEA 2013

10 EIA 2011

11 The South African Department of Minerals and Energy 2003

12The South African Department of Energy 2011


Page 13

1.3.2 Investing in renewable energy in developing countries

The concept of risk and return is central in finance and investment decisions. Investors

simply want to make a return proportional to the risk they take – more risk therefore leads

to a higher expected return on that investment13

.

Looking at Figure 4, it is important to note that the proportion of the different cost

components change depending on the given investment. According to Waissbein, the fall in

technology costs for renewables has in one sense not been able to mitigate the importance

of the high upfront costs found in renewable energy projects that are typically not found in

fossil fuel investments14

. For example, the investment cost in onshore wind projects will

typically constitute about 80 percentof the lifetime technology costs, but only 15 percentin

combined-cycle gas projects15

. Wind does have the advantage of having low operational

costs – it does not consume fuel in the way that a gas plant does – but the high upfront

investment and the long lifetime of these projects means that the impact of higher financing

costs become all the more important.

13

Justice 2009 14

Waissbein et al, 2013, 15

Ibid.


Page 14

Figure 4: Example ofLCOE for renewables in developing countries

Source: Waissbein et al, 2013

This dynamic is especially challenging in developing countries. Whereas a wind project in a

developed country could have a commercial loan with a tenor (say 18 years) almost

matching the lifetime of the wind plant (say 20 years), commercial loans for projects in

developing countries typically have a tenor that is around half or less of the plant lifetime16

.

Having to pay back the loan on a much shorter tenor, the wind project has to increase the

price of the electricity. One also has to consider the increased investment risk seen in

developing countries and the fact that these are priced directly into the cost of equity17

.

2 Literature review

Information on the South African energy sector is easily available through public sources.

Some quantitative data from the DoE exists on REIPPP, such as the number of bids and bid

prices. Academic literature on REIPPP remains limited as it is a relatively new program that

has only existed for three years. One study briefly discusses investor risks in South Africa

(Waissbein 2013), but only for wind projects. Two short articlescompare REFIT and REIPPP

(Pegels 2012 and Eberhardt 2013). These articles state that REIPPP has been successful in

16

Ibid. 17

Ibid.


Page 15

attracting foreign investors and project developers and that the average price bids from

these developers were decreased, but they do not go in-depth into issues such as

investment risk.One of these papers also studies developments from REIPPP 1 to REIPPP 2.

At the time that this thesis was being written, no academic studies on year-to-year

developments in REIPPPthat included the REIPPP 3 auctions were discovered.

Chapter 2.1 presents literature on international experiences with renewable energy

auctions. In 2.2, we review literature describing developments in technology costs for wind

and solar PV. Academic literature on REFIT is presented in 2.3 and on REIPPP in 2.4.

2.1 About electricity auctions internationally

Lessons learned from electricity auctions elsewhere in the world could be important in

evaluating REIPPP, and are therefore briefly discussed in this chapter. “Electricity Auctions:

An Overview of Efficient Practices” is an extensive study on electricity auctions in the world

conducted by Luiz Maurer and Luiz Barroso of the World Bank in 2011. The study shows that

electricity auctions have grown in popularity and that they are quite widespread, and that

they can be a highly efficient tool in procuring electricity generation projects if designed and

implemented correctly. Still, it should be noted that the majority of the auctions researched

in that study has included fossil fuelled power generation. Experiences with renewable

energy sources in electricity auctions are still limited, especially in developing countries

whose primary goal is to attract high amounts of new generation capacity.

Maurer notes that three common issues are experienced by investors in competitive bidding

in infrastructure projects, notably long time frames, high development costs and the risk of

intellectual property issues (especially seeing a developed project being taken over by other

companies)18

. Together, issues of this nature could imply that competitive bidding is not the

right form of energy procurement policy for a given country.

In addition to these common issues, Maurer finds that electricity auctions conducted

specifically to increase for renewable energy power generation are reliant on a few key

requirements19

. First, they must be able to attract enough bidders in order to secure a

sufficient level of competition. Second, speculators and financially insolvent players must be

18

Maurer 2011 19

Ibid.


Page 16

discouraged from participating in the auctions in order to make sure that the auction

winners actually deliver the projects awarded. And lastly, effective compliance mechanisms

must be in place in order to ensure that projects are delivered on time and operate properly.

2.1.1 A comparison of Brazilian and South African experiences

Special attention should be paid to the Brazilian renewable energy program because of the

number of similarities between the Brazilian electricity auction for wind and REIPPP. Brazil

and South Africa countries are both developing countries and high-growth economies, they

are both using auctions to attract high amounts of new renewable energy generation

capacity and, most importantly, they have both made the transition from a feed-in tariff-

based system to an electricity auction program awarding 20-year PPAs as the main tool for

procuring renewable power20

. The development in pricing and increase in capacity for wind

power in Brazil is somewhat similar to that of wind power in REIPPP, as shown in the graph

below. This implies that the transition from feed-in tariff to competitive auctioning may have

had similar effects in the two countries.

Figure 5: Switching from feed-in tariffs to electricity auctions for wind power in Brazil and South Africa

N

ote:REFIT refers to the first REFIT tariff, which lasted the longest period of time. All figures real USD, 2011.

Sources: Maurer 2011, Pegels 2012, Barroso 2012, Bloomberg 2013

This chart does not adjust for inflation or currency fluctuations, and it does not consider the

differences in timing (Brazil started the auctions just as wind turbine prices started dropping

20

Ibid.


Page 17

significantly in 2009). However, the observed patterns in the transition from feed-in tariff to

electricity auction can still be interesting and provide grounds for further research. Of

particular interest is the trend indicating that the drop in average bidding prices has been

slightly faster in REIPPP, but the Brazilian prices have been lower and the incremental

increase in MW generation capacity found in Brazil is much higher. Wind prices have now

stabilized in Brazil, as witnessed by the average bid price of 5.5 USc/kWh in the 2013 wind

power auction, marginally above that of the 2011 auction21

. That means that there is only a

1.1 USc/kWh difference between prices obtained through electricity auctions in Brazil and in

South Africa in 2013.

It is interesting to note that prices went up in the first auction following REFIT in South Africa

whereas they dropped 44 percent, from 15 USc/kWh to 8,4USc/kWh , after Proinfa in Brazil.

No projects were secured under REFIT, and the fact that the REFIT tariff was actually lower

than the price given by project developers in 2011 could indicate that they were too low to

attract investors. However, it would be premature to conclude that Proinfa was more

successful or better priced than REFIT. Proinfa encountered a range of difficulties since its

inception in 2002 until 2009, when wind power procurement was conducted through

electricity auctions22

.

Brazil did face some difficult in facilitating competitive market forces in their electricity

auctions. In the first auction, participation was limited because developers allegedly

preferred to sell energy to large end-users who generally received discounts on transmission

and distribution, thereby subsidizing direct electricity sales to these large users23

. That being

said, Maurer considers the auctions to have been a success as they have succeeded in

mitigating many of the risks commonly related to wind power investments and that the

auctions were therefore seen as very attractive by investors.

Note that a side-by-side comparison of the two countries does not take the numerous

differences between the countries that could impact the auctions into account, and that it is

therefore not a good basis for measuring the success of these auctions. For instance, REIPPP

places a 30 percentweighting on economic development factors, meaning that prices are not

21

Bloomberg 2013 22

Barroso 2012 23

Maurer 2011


Page 18

directly comparable because higher kWh prices can be compensated for by increasing the

economic development scores. Tax credits can be as high as 75 percent of income tax in

Brazil, and long-term low-cost loans from the Brazilian Bank of Development are given to

projects, allowing for lower bidding prices24

. There could also be any number of differences

in implementation agreements, grid codes and PPAs etc. In addition, Brazil has not held

auctions specifically for solar PV as found in REIPPP, so there are no grounds for comparison

of procurement policies for this technology.

2.2 Falling technology costs in solar PV and wind power

The global deployment of solar PV and wind power installations has increased sharply during

the last decade. At the same time that installed capacity growth has been growing, prices

have also been dropping significantly. This trend is especially clear for solar PV, where a

long-term trend can be observed in which prices for installed generation capacity drop by 22

percent each time the cumulative installed capacity is doubled, as seen in the graph below.

Figure 6: Historical development in solar PV module costs

Source: IRENA 2013

A 2006 polysilicon shortage increased the costs for the solar PV industry for a short period,

but it seems clear that there has been a significant drop in module prices overall. The graph

24

Ibid.


Page 19

below shows a somewhat less coherent overview of developments wind turbine prices over

time, but a significant decrease since 2009 can still be observed.

Figure 7: Historical developments in wind turbine costs

Source: IRENA 2013

The wind turbine manufacturing sector saw a rise in the costs for materials (particularly steel

and cement) and civil engineering in 2009, as well as higher profit margins for the wind

turbine manufacturers and an increase in turbine size that made turbines more expensive

per Watt25

. However, the larger turbines also came with a higher capacity factor (average

increase of approximately 8 percent from 1999 to 2011), thus generating more power and

leaving costs per kWh stable or decreased26

. We have seen the same development solar,

with more expensive 1- and 2-axis tracking systems increasing the capital expenditure for a

project, but at the same time increasing capacity factors by approximately 5-10 percent,

thereby reducing or maintaining a stable cost per kWh27

.

While it is clear that costs for wind turbines and solar modules have dropped, it is important

to keep in mind that a significant part of the costs of an energy project are in fact related to

other factors, the so-called “soft costs”. For instance, the grid connections, foundations and

25

IRENA 2013 26

Ibid. 27

Ibid.


Page 20

planning constitute 36 percent of the cost of a typical onshore wind farm, whereas the wind

turbine stands for the remaining 64 percent28

. For solar PV, only 31 percent of the cost of an

average utility-scale solar PV system is related to EPC – the rest is shared among balance-of-

system costs, electrical and hardware costs, inverters and racking/mounting of the

modules29

. Such factors are dependent on a range of local cost aspects, such as the

availability of skilled local staff, salary levels, geographical location of the installation,

distance to the nearest grid access point etc.

2.3 About REFIT

The South African Renewable Energy Feed-in Tariff (REFIT) was introduced by the National

Energy Regulator of South Africa (NERSA) in 2009. The first tariff rates were exceedingly low

and were quickly increased substantially (wind tariffs were doubled and CSP tariffs tripled)

when it was made clear that project developers considered them insufficient to incentivize

investment30

. NERSA designed the tariffs (which would be fully indexed for inflation) so that

they would provide investors with an approximate return on equity of 17 percent after

accounting for generation costs31

. Investors and environmental organizations expressed

satisfaction with the new tariff levels32

.

Despite the seemingly attractive tariff levels, the REFIT implementation was followed by a

two year long renewable energy investment standstill. Many investors voiced their interest,

but there were no real procurement mechanisms at the time33

.In 2011, NERSA unexpectedly

released a consultation paper on tariff reviews in which tariffs were strongly reduced yet

again, in some cases by as much as 40 percent34

.

28

Ibid. 29

IRENA 2013 30

Pegels 2012 31

Eberhardt 2013 32

Pegels 2010 33

Eberhardt 2013 34

NERSA 2009, NERSA 2011


Page 21

Table 1: Changes in tariff levels from REFIT 2009 to REFIT 2011

Technology REFIT 2009

ZAR/MWh

REFIT 2011

ZAR/MWh Change (%)

Wind 1250 938 -24.9

Solar PV (>1MW) 3940 2311 -41.3

Landfill gas 900 539 -40.1

Small hydro 940 671 -28.6

CSP through w/storage 2100 1836 -12.6

CSP trough, no storage 3140 1938 -38.8

CSP tower w/storage 2310 1399 -39.4

Biomass solid 1180 106 -10.1

Biogas 960 837 -12.9

Needless to say, project developers were not pleased with the cuts and also deplored the

lack of renewable energy investment climate stability, as the tariff cuts were announced just

before a planned 1025 MW request for project proposals35

. Regardless of its ability to

incentivize renewable energy investments, the National Treasury questioned the legality of

REFIT by claiming it could be unconstitutional. As per the South African 1996 Constitution,

state purchases of goods and services have to be done in a fair, equitable, transparent,

competitive and cost-effective manner. The National Treasury believed that fixed tariffs

were not competitive or cost-effective, and so in July 2011 Minister of Energy Dipuo Peters

announced that price competition was to be the basis of the renewable energy procurement

program (REIPPP)36

. After two years in which not a single renewable energy had been signed,

REFIT was thus removed37

.

It should be mentioned that while no projects were closed during the REFIT regime,

renewable energy developers invested significant resources on project development by

securing sites, conducting environmental impact assessments or having started resource

assessments. For instance, the South African Wind Energy Association claims that wind

developers were reported to have spent 400 ZAR million on project proposals38

.

35

Pegels 2012 36

Ibid. 37

Eberhardt 2013a 38

Naidoo 2011


Page 22

2.4 About REIPPP

REIPPP beganin August 2011 with the release of a request for project proposals (REIPPP 1),

an offer which had a proposal deadline in November 2011. This was seen as a tight deadline

by developers39

. In REIPPP 1, a total of 3,625 MW capacity was tendered, with specific MW

allocations for each technology. There were also upper price caps of 1,150 ZAR/MWh for

wind and 2,850 ZAR/MWhfor solar PV. But with a full 1,850 MW wind capacity and 1,450

MW solar PV capacity was tendered in REIPPP 1, the first auction was undersubscribed. The

projects that were accepted only amounted to 643 MW for wind and 631.5 for solar PV. The

government spent approximately 10 USD million on the tender design and the first round of

evaluation of bids40

.

Table 2: REIPPP increase in competitiveness

Competitiveness Solar PV Wind

Bidsrece

ived

Bidsacce

pted

Success

rate

Bidca

p

ZAR/M

Wh

Change Bidcap ZAR/M

Wh

Change

REIPPP 1

2011

53 28 52.8 % 2850 2758 - 1150 1143 -

REIPPP 2

2012

79 19 24.1 % 2743 1645 40 % 1078 897 22 %

REIPPP 3

2013

93 17 18.3 % 881 68 % 656 43 %

All prices in 2011 ZAR.

Sources: Department of Energy and Minerals 2011, 2012 and 2013

The average bid prices of 1,143 ZAR/kWh for wind and 2,758 ZAR/MWh for solar PV were

just barely under the bid cap. This, combined with the high success rate and the fact that the

full amount of tendered capacity was not awarded to bidders, indicates that there may have

been lack of competition in REIPPP 1. REIPPP 2 took this into account and reduced the total

capacity tendered to 1,275 MW. As shown in the table above, more bids were also received,

possibly because developers now had had more time to prepare their bids. While half of the

bids were accepted in REIPPP 1, less than a quarter were accepted in REIPPP 2. Combined

with the significant drop in solar PV and wind project prices, this indicates that market

competition became a more important factor.

39

Eberhard 2013a 40

Eberhard 2013b


Page 23

This trend continued in the third round, but no academic literature has been found on the

developments since REIPPP 2. Nonetheless, the results of three phases of REIPPP have been

noteworthy. As illustrated in the graph below, investments in solar PV and wind have been

increasing quickly the last few years while also seeing a strong drop in bidding prices.

Figure 8: REFIT tariffs vs average bid prices and MW capacityclosed under REIPPP, 2009-2013

Sources: SA Department of Energy and Minerals2013, Pegels 2012

To date, the first three phases of REIPPP have procured and closed projects with a net

capacity of 3,914 MW in two years (3,468 MW of which are solar PV and wind power). To

put that figure in comparison, the net capacity of all South African energy generating assets

before REIPPP was 42,856 MW (chapter 1.3.1). That means that if all REIPPP projects

secured to this date begin generating electricity, South African power generation will have

increased 8.35 percent by adding nothing but renewable capacity.

The scale, speed and price of these renewable energy additions are noteworthy. According

to Eberhard, the main reasons for the success of REIPPP have been the following41

:

• A well designed procurement policy, partly because of the use of international

advisors.

41

Eberhard 2013a


Page 24

• Efficiency and a demonstrated ability of the government to stick to the deadlines in

the bidding process.

• Flexibility in allowing REIPPP 2 to change tendered capacities and price caps.

• Benefiting from the highly competitive nature of renewable energy sector.

• Stringent thresholds for local content, creating local employment.

• The ability to mobilize the local capital market.

• Incentivizing developers through high returns. 1 percent of REIPPP project revenues

is taxed and used to finance a renewable energy fund for future procurement

programs in South Africa.

2.4.1REIPPP bid evaluation criteria

The Request for Proposal (RFP) is the South African government’s request for energy project

bids in REIPPP. A new RFP is thus released before every new REIPPP phase, andthe

government can therefore change key criteria for bids in different phases. Note that

information on RFPs is available on the website of the South African Department of Energy.

In evaluating the bids received following an RFP, three steps are taken. First, bids found not

to be in compliance with key requirements and rules are ruled out. Second, qualified bidders

are differentiated from the rest following an evaluation of compliance based on a range of

factors, including environmental impact, land issues, potential impact on economic

development, financing, technical issues, price and capacity. Lastly, a comparative evaluation

of projects is made based on pricing and economic development score42

.

It is important to underline that REIPPP bidding does not solely focus on cost-efficiency (bid

price). As a policy that also focuses on local economic development, REIPPPP bid selection

evaluates bids with 30 percent weighting on price and 70 percent and on 30 percent on an

economic development score. The different criteria used to calculate a score for economic

development are shown in the table below.

Table 3: Weighting economic development scores in REIPPP

Economic development factors Weighting

Job creation 25%

Local content 25%

42

Eberhard 2013a


Page 25

Ownership 15%

Management control 5%

Preferential procurement 10%

Development 5%

Socio-economic development 15%

Total 100%

Source: The South African Department of Energy 2011

In REIPPP 3, the approved bid Adams Solar PV2 had an economic development score of 12.6

and a price of 864 ZAR/MWh while another project, MuliloSonnedixPrieska PV, compensated

for its relatively high price of 1100 ZAR/MWh with an economic development score of 18.

The fact that both projects were approved despite a large difference in price shows that

while price is the most important factor in the evaluation process, the score given for

economic development can still be decisive in leading to bid approval and thus leaves room

for significant pricing differences.

Several minimum thresholds have also been implemented for economic development

requirements in REIPPP. As an example, the table below shows the thresholds used for wind

projects in REIPPP in 2013.


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Table 4: Economic development tresholds for wind projects in REIPPP

Source: Eberhard 2013a

According to the South African Department of Energy, the REIPPP evaluation process is

stringently regulated and highly transparent. Evaluation of bids is conducted in “closed”

environments under strict security conditions that include physical separation of evaluation

teams and video recordings of the entire process43

. The evaluators, which are partly

comprised of external consultants, all have to sign a declaration of interest to ensure that no

conflict of interest arises. Independent review teams scrutinize both individual reports and

the overall process.

2.5 The South African currency fluctuations

According to the World Bank, good governance and a well-designed economic policy has let

South Africa experience continued economic growth (which averaged 3.2% percent from

1995 until today), infrastructure development and poverty reduction up until the 2008

43

Department of Energy 2011b


Page 27

financial crisis44

. The main challenges of the South African economy, namely large income

gaps, poverty and unemployment, were exacerbated by the crisis.

The South African Rand (ZAR) has experienced a significant decline after 2011. The USD-ZAR

rate has fallen steadily from 0.15 in August 2011 (RFP REIPPP 1) to a bottom value of 0.09 in

January 201445

. In the same time space, EUR-ZAR rate fell from 0.11 to 0.06. This steady

decline is likely to affect project developers and investors in REIPPP who have their entire

income in ZAR. In addition, a substantial amount of their EPC costs are in USD or EUR.

2.6 Summary and research gaps

One can observe a clear rise in wind and solar PV energy deployment in REIPPP, along with a

significant drop in average bid prices in the projects that have been rewarded in the

auctions. As mentioned in the introduction, the research objective of this thesis is to identify

the main factors influencing REIPPP bid prices by exploring the perspectives of investors,

project developers and EPC providers. While the literature reviewed here provides some

answers, the following gaps have been identified.

Firstly, a few academic articlesdescribe the main drivers of reduced bidding prices exist.

However, the articles are relatively short. They primarilyattribute the reduced costs to the

competitive nature of electricity auctions, but they do not explore this indepth and they only

describe developments until REIPPP 2. The same articles also describe REFIT, though they do

not provide in-depth research with investors or project developers either. As the goal of this

thesis is to focus on investor perspectives, it seems that the experiences of investors on this

topic should be explored to see if their opinions differ from this view.

Secondly, the literature available does not consider to what extent pricing has been

influenced by the significant drop in solar PV and wind technology prices, the macro-

economic situation, the 30 percent weighting of economic development or by other factors

discussed in the literature review. The articles do describe the main differences between

REFIT and REIPPP, but they do not consider whether REFIT has shaped the perspective of

potential investors. This is also something that should be covered by this thesis.

44

The World Bank 2014 45

Currency rates found at www.xe.com.


Page 28

Thirdly, no comparisons have been made between REIPPP and Maurer’s survey of electricity

auctions worldwide. As Maurer has listed several success criteria for electricity auctions, this

gives some room for evaluation of REIPPP in the way that it has been designed and

implemented and to the extent to which this has facilitated bidding price reductions.

Lastly, Waissbein’s study on investment risk in renewable energy in developing countries

claims that investor risk translates directly into higher prices. However, no information is

available on how investment riskshave been perceived and how they havechangedduring

REIPPP.This thesis should therefore aim to chart how changes in investor risk have been

perceived by the investors and developers involved in the process.


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3 Methodology

3.1 Conceptual framework

Considering the limited academic work available on renewable energy financing in South

Africa and the fact that the REIPPP is a fairly young energy procurement policy which has not

been subject to in-depth research, it stands to reason that it is the experiences of the project

investors and developers that have participated in the process that can provide the most

relevant the data for this thesis. Financiers want to understand the risks they face, and those

that have in fact invested in REIPPP will therefore have assessed REIPPP investment risk in

one way or the other. In order to accommodate such aresearch focus, a qualitative approach

based on the principles of grounded theory has been chosen for this study.

In this dissertation, the principles of grounded theory are based on the book The Basics of

Qualitative Analysis by Strauss and Corbin. This framework does not test theories, but rather

sees theories emerge gradually from the analysis of empirical data. The principle advantage

of this approach is that it allows for a flexible approach in which the process of research can

change over time in a manner that helps analysts consider alternative meanings of registered

phenomena46

. Interviews will therefore be used not just to confirm/reject the context set by

the literature review, but also could also supplement the literature review by raising topics

not covered by existing literature and data.

3.1.1 Research questions

Based on the research gaps noted in the last chapter, four specific research questions can be

formed.

1. What factors can explain the difference in investment activity between REFIT and

REIPPP, and how did REFIT impact perceived investment risk in REIPPP?

2. Whathave been the main factors influencing average bidding prices in REIPPP?

3. How has the design and implementation of REIPPP as an energy procurement policy

affected average bidding prices?

46

Strauss 1998


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4. How have perceptions of investment changed from the beginning of REIPPP until

today?

All four questions are inherently qualitative and can be answered using input from in-depth

interviews. However, changes in investment risk is something that can in fact be quantified

as well, and this thesis will attempt to do so through a simplified survey of investment risk

levels perceived by investors and project developers. The methodological framework for the

interviews is presented in chapter 3.2 and for the investment risk questionnaire in chapter

3.3.

3.2 Interviews

Primary data was collected through semi-structured interviewing, a method which provides

flexibility and the ability to handle relatively large amounts of complex data47

. These

interviews were comprised of open topical questions that allowed respondents to talk at

length, but more specific questions were sometimes asked to explore respondent attitudes.

3.2.1 Interview respondent criteria and sampling

In order to avoid interviewees with limited experience with renewables or with REIPPP,

selection of interview respondents was based on the following criteria:

Criteria 1: Works for an organization that has solar PV and/or wind power as a core

competence.

The organization where the respondent works must have extensive insight into solar PV

and/or wind power industries and markets. However, the nature of their experience and

services offered can differ. Interview respondents therefore include EPC providers, project

developers, equity investors, debt providers or a combination of several of the above.

Criteria 2: Involved in all three phases of REIPPP.

The interview respondent has been involved in REIPPP I, II and III. This can mean

involvement through closed projects, unsuccessful bids or merely observing the REIPPP as a

potential market. While this is a wide definition, the key criterion is that the respondent is

able to comment on developments in REIPPP over time.

47

Sarantakos 2005


Page 31

Note that involvement in REFIT is not required. While this would be an advantage for this

thesis, the investment activity was much lower during REFIT and would therefore limit the

choice of potential interview respondents.

Criteria 3: Has reached financial closure for at least one project in REIPPP.

This indicates that a bid has been accepted by the South African government and that the

financing of the project has been successful. It was decided not to list ownership of a

constructed and operational REIPPP project, as construction times are long and REIPPP is a

young project, meaning that this would severely limit the amount of potential interview

respondents.

One can reason that increasing the amount of criteria reduces the number of potential

interview respondents. But qualitative research does not necessarily aim to cover all

information sources – it rather aims to provide depth, rather than breadth48

. Given the

difficulties inherent in attempting to interview all the project developers and investors in

REIPPP, a sufficient yet achievable sampling size had to be chosen.

In December 2013 and January 2013, 18 potential interview respondents were contacted.

These interviewees were identified either through contacting their firms directly and being

referred to the staff responsible for operations in South Africa, or through contacts provided

by Mark Davis in the pilot interview. While using the professional network of one

“gatekeeper” in this fashion could limit the diversity of interviewee backgrounds, this also

provided easier access to interview respondents. Of the 18 that were contacted, 11 replied

positively. Two of the 11 were unable to fill in the questionnaires due to time constraints.

3.2.2 Interview topics

Topics were essentially the same as the research questions:

1. What factors can explain the difference in investment activity between REFIT and

REIPPP, and how did REFIT impact perceived investment risk in REIPPP?

2. What factors have been the primary drivers of the change in average bidding prices in

REIPPP?

3. How has the design and implementation of REIPPP as an energy procurement policy

affected average bidding prices?

48

Burns 2000


Page 32

4. How has perceived investment risk changed from REIPPP 1 to REIPPP 3?

Question 4 was answered through a survey which can be found in attachment 1.

3.2.3 Pilot interview

An exploratory pilot interview was conducted with Mark Davis, Investment Director of

Norfund, in January 2014. This was done in order to assess whether or not the nature and

the number of the questions asked were suitable, and to identify potential practical issues,

such as sufficient time frames.

Following the pilot interview, it was decided that questions should be few in number,

general in nature and allow the interview to be guided in part by interviewee responses.

3.2.4About the interview respondents

The different companies which the interview respondents represented, as well as their main

business activities and renewable energy experience in South Africa, are explained briefly

below. While the companies and the interview respondents are identified by name below,

their comments will be anonymized past this point in the paper and their identities will be

given a random number, i.e. Respondent 1 through Respondent 10.

BjørnarBaugerud – Senior Investment Manager, Norfund

BjørnarBaugerud, is an investment manager with six years of experience in Norfund. He has

been managing the Scatec investments on behalf of Norfund and therefore has deep insight

into REIPPP and its developments over time.

Norfund is a Norwegian development finance institution that invests in the establishment

and development of profitable and sustainable enterprises in developing countries. The aim

is to contribute to economic growth and poverty reduction.Norfund is owned by the

Norwegian Government and is used as an instrument in Norwegian development policy. The

Norwegian parliament allocates annual capital grants to Norfund as part of its development

assistance budget. Norfund has invested in all three solar PV projects, all developed by

Scatec Solar, and also considered energy investments before REIPPP was established. As per

mid-2012, Norfund’s investment portfolio amounted to 1.3 USD billion.

Lamberto Dai Pra - Country Manager, Enel Green Power

Lamberto Dai Pra , Country Manager for Enel Green Power in South Africa, has been working

in the South African market since 2010.Enel Green Power is a renewable energy company


Page 33

that develops power generating projects mostly in Europe and the Americas. Their portfolio

contains almost 750 plants which together have a capacity of almost 9 GW. Enel Green

Power is part of Enel, a large Italian power utility with a strong international presence and a

joint installed capacity of almost 98 GW.

Note that a second interview was conducted with Georgios Pergamalis, Global Head of PV

M&A at Enel Green Power.

Mark Pickering - Managing Director, Globeleq

Mark Pickering is the Managing Director of Globeleq South Africa. Globeleq is an

international developer, owners and operator of power plants across Africa and Central

America. Globeleq has commenced construction of one wind project and two solar PV

projects that were closed in REIPPP 1.

Christian Lie Hansen - Country Manager, Scatec Solar

As a Country Manager, Christian Lie Hansen has been responsible for all Scatec activities in

South Africa for 4+ years.Scatec Solar is an independent solar energy provider that both

invests in and develops solar PV projects of small and large scale, in addition to delivering

EPC services. The company thus owns a number of solar PV parks developed, built and

operated by the company itself. Their current solar project portfolio amounts to 300+ MW

generation capacity.

Scatec Solarhas had one bid approved during REIPPP 1 and two bids approved in REIPPP 2.

TheirKalkbult solar PV park was the first project of all REIPPP solar projects to become fully

operational and deliver power into the South African grid.

Marc Wright - Senior Associate, BioTherm Energy

Marc Wright is a Senior Associate at BioTherm Energy with extensive experience from

renewables in South Africa. BioTherm Energy is a Sub-Saharan African renewable energy

developer dealing in both wind and solar. They closed three projects in REIPPP 1. They have

a 2.4 GW pipeline of projects in South Africa.

SilomnuLongelwa –

Investment Professional,Old Mutual Investment Group South Africa (OMIGSA)

SilomnuLongelwa is an Investment Professional in OMIGSA’s infrastructure and development

department, where she negotiates and manages infrastructure investments. OMIGSA is one


Page 34

of the largest financial services providers in Southern Africa. They offer a variety of financial

products and services, such as investment, life assurance, asset management, banking,

healthcare and general insurance. Their client base comprises of individuals, businesses,

corporates and institutions.OMIGSA is one of the largest investors in solar PV projects in the

country with 9 REIPPP projects in its portfolio.

Helen Tregurtha -

Transaction Manager, African Infrastructure Investment Managers (AIIM)

Helen Tregurtha is a Transaction Manager at AIIM. AIIM is an infrastructure investment firm

with a 1.15 USD billion portfolio. This includes two solar PV projects closed in REIPPP 1.

RomainSormani - Area Manager, Total New Energies

Romain Sorani has 8+ years of experience at Total, where he is currently working as an area

manager with responsibility for South African projects.Total is a world-leading French energy

company that is perhaps more known for its work in oil and gas upstream sectors than for its

work on solar power generation. However, Total is also involved with solar PV and other

renewables through Total New Energies. Total New Energies secured one solar PV project in

REIPPP 3, but have also been submitting bids in earlier rounds.

Jens Thomassen - Director, Denham Capital

Jens Thomassen is the Director of the Power and Renewables department at Denham

Capital, which is a private equity investor with 7.9 USD billion invested through its three

departments: oil and gas, power and renewables and metals and minerals. Mr. Thomassen is

responsible for the analysis, structuring, valuation and execution of investments in his

department. He is also a member of the Biotherm Board of Directors.

PhylipLeferink - Country Director, Vestas

PhylipLeferink has been working at Vestas as country manager in South Africa since 2008.

Vestas is a leading wind power provider that was founded in 1979 and that, by their own

estimates, has supplied 19 percent of the world’s wind turbines. They have been working on

several EPC projects in REIPPP, but have been essentially been active in South Africa since

2001.

3.3Quantifying perceived changes in investment risk

Waissbein’s framework for changes in investment risk categories, found in the UNDP

publication “Derisiking Renewable Energy Investment” from 2013, is used in this thesis to


Page 35

quantify investment risk changes from the RFP for REIPPP 1 until today (after REIPPP 3). This

method is explained in this chapter.

3.3.1 Investment risk categories

Based on an extensive portfolio of renewable energy projects and on several studies,

Waissbein has presented the eight kinds of stakeholders whose behavior, be it through

action or inaction, can contribute to investor risk in renewable energy. These are then tied to

specific risk categories, which form the basis for the questionnaire which was given to

interviewees in relation to this thesis. The 8 risk categories included in Waissbein’s

framework are summarized below49

.

Power market risk:

Risk arising from limitations and uncertainties in the power market. This risk can be related

to the market outlook (lack of certainty regarding governmental energy strategy), the

competitive landscape, the price outlook for renewable energy, limitations in the PPA

design, tendering procedures or market distortions such as high fossil fuel subsidies.

Permits risk:

Risk arising from the public sector’s inability to efficiently and transparently administer

relevant licensing and permits such as power generation licenses, environmental impact

assessments, land titles etc. Examples of issues include corruption, complexity, labor-

intensity and time-frames for obtaining relevant licenses and permits.

Social acceptance risk:

Risk arising from the lack of awareness of and resistance to renewable energy. Examples of

issues include resistance to energy projects from local communities (NIMBYism), political

movements or other special interest groups.

Resource and technology risk:

Risks related to the energy resource and technology. Resource risk can be related to

inaccuracy in the energy resource assessment and supply, such as inaccurate wind

measurements, or difficulties in accessing these resources, be it because of the difficulties in

49

Waissbein 2013


Page 36

securing land with sufficient supply of the energy resource in question or because of a lack

of access due to limitations in civic infrastructure.Technology risk is related to the planning,

design, construction, operations and maintenance of the plant, in particular difficulties

infinding qualified technical staff or skilled and experienced third parties offering the

services or hardware necessary for the energy supply chain to function.

Grid and transmission risk:

Risks related to limitations in grid management and transmission infrastructure in a

particular area or country. Grid codes can include responsibilities for power generators that

reduce commercial viability, and grid management can bring about investment risk if the

grid operator has limited experience or a poor operational track-record with intermittent

energy sources. Transmission infrastructure can increase risk if the grid is old or poorly

maintained, if there is a lack of transmission from the power generation project to load

centers or uncertainties related to the planning and building of new transmission

infrastructure.

Counterparty risk:

Risk related to the ability of the electricity purchaser (usually the utility) to pay for electricity.

Risk is most often measured based on the utility’s credit rating, corporate governance or

operational track record and outlook. It can also be related to the existence or future risk of

unfavorable policies regarding the utility’s cost-recovery arrangements. The impact of this

risk is typically related to the IPPs reliance on the utility’s timely payments for power

purchased.

Financial sector risk:

Risk arising from the availability of local or international capital for renewable energy.This

risk can be in the form concrete capital scarcity coming from an under-developed finance

sector locally or a policy bias limiting investments in renewable energy. It can also manifest

itself through a limited level of experience, skill and familiarity with renewable energy

(knowledge of renewable industrial trends, energy project assessments, project finance etc).

Political risk:


Page 37

Country-specific issues such as good governance and social stability. Examples of risks are

upheavals such as terrorism or civil disturbances, political instability, poor institutions and

governance, impediments or uncertainty due to government policy (such as currency

restrictions or corporate taxes).

Macro-economic risk:

Risk related to the macro-economic environment and the impact it has on renewable energy

investments. For instance, currency volatility or changes in inflation and interest rates can

impact the commercial viability of the energy project. Also, in the event that PPA payments

are guaranteed by the host government, the guarantee is tied to the government’s credit

rating and other indicators of its ability to make these payments.

3.3.2 Measuring investment risks

Waissbein’s methodology for quantifying the impact of the risk categories explained in the

last chapter is based on input from interviews. The statistical treatment for measuring

investment risks can be quite sophisticated, but a simplified approach, which Waissbein

claims is suitable when there are few interviewees50

, is used in this thesis.

Interviewees are asked to score each risk category for both the probability of a risk

impacting the project and the financial impact this risk would have. The probability and

impact scores are multiplied to obtain a total score for each risk category. This is done for

two different investment scenarios (before and after), and this data is then processed.

After having calculated the scores of all eight risk factors, the researcher can add together all

scores and see the net change in investment risk and to the impact of the change in each risk

category. An example of this would be as follows:

Figure 9: Example of measurement of developments in all risk categories

Risk 1 Risk 2 Risk 3 Risk 4 Risk 5 Risk 6 Risk 7 Risk 8 Total

Before 15 12 5 20 25 10 10 3 100

After 8 10 5 22 18 8 5 2 78

Net change 7 2 0 -2 7 2 5 1 22

It should be noted that in this thesis, the interviewees have a wide range of backgrounds.

50

Waissbein 2013


Page 38

While they all have significant experience from renewable energy projects in REIPPP, risk

perceptions can differ depending on if the interview respondent is in the EPC, investment or

project development sector. In addition, experience with developing countries, electricity

auctions, economic development factors and other issues means that the subjective

perceptions of risk can differ greatly.

It should also be noted that Waissbein’s framework is a smaller part of a method for

quantifying the decrease of cost of capital by reducing investment risk. The full methodology

provides more detailed information, but also requires specific figures for cost of equity/debt,

which was seen as too commercially sensitive and cumbersome to be gathered through this

thesis. This also falls outside of the scope of this thesis.

3.4Limitations

As a master’s degree candidate with limited resources available, the writer of this thesis was

unable to explore the subject of the thesis in the depth and detail that it deserves. A number

of constraints were thus encountered.

One key constraint was the fact that access to REIPPP bidding documents, which contain

bidding instructions and general information on the REIPPP bidding process, is only given

toregistered project developers. As the bidding documentation is not made public,

information about REIPPPP therefore had to be pieced together from news reports,

presentations from the Department of Energy, press releases etc. This was a somewhat

time-demanding process that led to delays in my research, and interviews were thus started

rather late. With less time spent on this process, it would probably have been possible to

conduct additional interviews or explore other areas more in-depth.

A second key constraint was the difficulty encountered in arranging interviews with debt

providers. The vast majority of debt financing for REIPPP projects come from 3 South African

banks, which failed to respond to the call for research or simply declined to be interviewed

due to time constraints.

The researcher was unable to travel to South Africa and conduct many of the interviews in

person. This meant phone or Skype was used to conduct the interviews, which did lead to

some technological issues, such as poor connections.


Page 39

Another issue was the unwillingness of some interview respondents to have the interview

recorded and their preference for anonymity. Without recordings, the researcher instead

took notes of the interviews by hand or on a computer. This also meant that the researcher

was unable to provide full transcripts of the interviews, limiting the validity of this paper. On

the other hand, fulfilling this requirement was necessary in order to facilitate the interviews

- insisting on recordings and full disclosure of interviewee identity would have limited the

amount of interviews possible in a significant fashion. In addition, anonymity and the lack of

transcripts made the interviewees feel more comfortable with sharing information that

would otherwise be seen as commercially sensitive.

In addition, the research design of the thesis has its weaknesses. Interviews focusing solely

on investors and project developers could overlook actors and stakeholders that have

important insight and attitudes different from those of the investors and project developers.

In addition, focus groups in addition to interviews could have stimulated different

participation and may have provided more data that would have been relevant to this

research. However, given the time constraints and wide geographical distances between the

interviewees, this option was seen as unrealistic.

Another possible issue with the interview respondents is that of vested interests. As the

actors all profit from renewable energy investments, their answers could reflect this.

Lastly, the investment risk survey and the quantification of investment risk developments

across categories is highly simplified and likely not representative of the actual investment

risk climate in South Africa. Interviewees can perceive scores of 1 to 5 differently, giving a

possible misrepresentation of actual investment risk. It should therefore be noted that the

goal of the survey is to discover changes in perceived investment risk, not to quantify

investment risk and translate this into cost of equity in the fashion that Waissbein does. The

survey can therefore only be said to give show perceived changes in investment risk levels.


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4Findings

This chapter presents the findings from the interviews, divided into the four research

questions. Note that the information in this chapter reflects concrete statements given by

interview respondents rather than the analysis and evaluation of these statements.

4.1What explains the difference in investment activity between REFIT and

REIPPP?

All respondents agreed that that the initial REFIT tariff levels were high enough to incentivize

project development. However, while many well-developed projects were presented to the

government, there was no real central procurement mechanism that worked as REIPPP did

later. The responsibility of procuring IPP projects was therefore seen to have fallen to

Eskom. Having tried to approach Eskom directly in order to promote renewable energy

projects, three of the respondents blamed Eskom for the lack of projects. They claimed

Eskom as a monopolywas simply not interested in facilitatingPPAs for IPPs during REFIT.

Without PPAs being signed, there was no real basis for renewable energy projects.

The IRP released in 2010 did help reduce investment risk significantly as it contained

numerous detailed long-term goals, including MW allocations for different renewable energy

technologies, indicating that REFIT was part of a holistic and coherent energy policy backed

by steady political commitment.While it was still not seen as possible to realize PPAs at the

time, three of the project developers interviewed felt the IRP laid the ground for an

attractive future market and therefore started building their project pipeline at this

time.Seeing the long-term market potential, these developers took a strategic position

during REFIT and decided to develop projects at some of the most attractive sites available

despite the fact that it was difficult to get a PPA from Eskom. These developers later felt like

they had a very advantageous position when entering REIPPP 1.

Several project developers also struggled in attracting investors after the tariff levels were

changed abruptly in 2011. Two of the investors interviewed stated that they were

categorically not willing to invest in REFIT projects. They also declared that uncertainty

observed in REFIT influenced their view on REIPPP 1, which followed closely after the tariff

modifications. The uncertainty experienced at this time translated directly into increased


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investment risk. On the other hand, respondent 7 claimed that a key issue for feed-in tariff

stability was the ongoing complex developments in technology costs for wind and solar. This

respondent also claimed many investors doubted that the tariffs were actually going to be

paid – that is to say that the tariffs, which were almost twice that of the European standards

at the time, were so high that they were in fact seen as unrealistic and therefore increased

the perceived investment risk.

Several respondents declared that had a procurement mechanism been in place, REFIT

would be better than REIPPP from the point of view of an investor. The cost of formulating a

bid is significant, and the competition squeezes margins for investors, developers and EPC

providers alike. Tariffs were also far higher under REFIT, and the respondents would

naturally be far more comfortable with such income levels.

Note that three respondents were unfamiliar with REFIT and preferred not to comment on

the subject.

4.2The main factors affecting bidding prices

All respondents mentioned the same two main drivers of reduced bidding prices:

1. Competition: Investors, project developers and EPC providers reduced their margins

in order to be able to offer increasingly low-priced auction bids.

2. Falling technology costs: Cheaper solar PV modules and wind turbines, as well as

increased capacity factors leading to higher electricity generation.

With the exception ofjust one respondent, all respondents believed the impact of

competition to be superior to that of reduced technology costs in reducing bid prices in

REIPPP. When asked to be more detailed in their estimates, the respondents offered varied

responses. One respondent claimed that only 5 percentof the average bidding price

decrease in wind projects was due to technology cost reductions. Another respondent

believed falling solar PV module costs and increasing capacity factors had contributed to as

much as a 30-40 percent of the decrease. Note that most respondents did not wish to

disclose concrete figures, so these estimates are not representative for developments in

REIPPP.


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Some respondents declared that they were not just pulled into REIPPP because of the

attractiveness of its markets; they were also pushed into it by the economic downturn

occurring elsewhere in the world following the 2008 financial crisis. As the home market

weakened, the need to fill up the project pipeline increased. As said by one investor, “the

situation in the renewable energy market at the time was simply a choice of finding new

markets or finding a new job”.This factor was not discussed in the literature review of this

study, but the majority of respondents supported the claim that the downturn of key

European and US markets had given investors and developers added incentive to search for

new markets and to place more aggressive bids in REIPPP.

These factors were present throughout the first three phases of REIPPP. In the following

chapters, the specific trends observed in each phase of REIPPP are presented.

4.2.1 REIPPP 1

Based on the feedback of the respondents, it seems clear that bidding prices were inflated in

REIPPP 1.Firstly, the short time between the RFP and the deadline for bid submission meant

that many interested developers were not able to participate in REIPPP 1. Many were also

surprised by requirements concerning local content, local capital and the 30 percent

weighting of economic development factors, which combined with the three-month

deadline meant they had difficulties integrating this into their bids. This meant that many

developers that were interested in bidding were unable to do so, thereby reducing the

competition. Second, the deadline for bid submission in REIPPP 1 was November 4th

2011,

whereas the RFP was announced on August 4th

that same year. That gave developers a three

month time frame to formulate their bids, which was seen as a very short time to prepare,

especially since some respondents were surprised by economic development factors

presented in the RFP. This further limited the competition in REIPPP 1.Third, the amount of

MW capacity tendered (1,266 MW) was seen as too high to stimulate competition at such an

early stage when so few developers were able to submit bids. And lastly, as developers and

investors were very aware of the lack of competition in the market, the respondents

generally did not feel there was an incentive to bid significantly below the price cap.

In short, the respondents agreed that the REIPPP 1 was fundamentally lacking in

competition. In the words of one respondent, the price cap was essentially just like a feed-in

tariff because bidders knewthat was price the government was willing to pay. Many


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respondents felt that development costs were significant, and some developers had

purchased developed projects from other developers at inflated costs in order to be able to

bid before the deadline. However, most respondents believed competition to be so weak

that the bid prices would have been the same even without these costs.

While the majority of the respondents claimed development costs were higher in REIPPP 1,

they also noted that development costs spent on bids that did not win tenders essentially

became sunk costs. This gave some incentive to lower bidding prices in later rounds, but not

as early as in REIPPP 1.

Only respondent 8 believed prices had to be as high as they were in REIPPP 1. This

respondent claimed that as it entailed the very first large-scale solar and wind project

procurement process in Africa, everyone from EPC providers to Eskom to project developers

and investors had to go through a learning process before being comfortable with lowering

their hurdle rates.

Reported IRRs from REIPPP 1 were in very a wide range: 17 percent to 25 percent. Note that

not all respondents chose to provide IRR rates.

4.2.2 REIPPP 2

REIPPP 2 marked the beginning of a more competitive marketplace for renewables in South

Africa. The MW capacity tendered was capped at a much lower amount than in REIPPP 1,

and developers had more time to develop their bids. In addition, while the consensus among

the respondents was that REIPPP 1 had given lucrative power prices,these prices had also

attracted much attention amongst investors and developers and ultimately increased

bidding participation in REIPPP 2. In sum, REIPPP 2 attracted 79 bids of which only 19 were

accepted (16 of these were wind or solar PV). This was far more competitive than REIPPP 1,

where half of the bids were accepted. All respondents claimed that this competition was the

main driver behind decreasing bid prices in REIPPP 2.

One respondent believed bid prices could have been pushed further down, but claimed local

lenders and investors did not yet fully understand the IPP and renewable energy business

well enough to pressure the margins of developers and EPC contractors at this stage. Still,

the majority of the respondents pointed to the fact that the REIPPP 2 average prices were 40


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percent below the price cap for solar PV and 17 percent below the price cap for wind power,

indicating stronger competition than in REIPPP 1.

Experience and competition also affected the rest of the value chain. EPC providers,

consultants and others in the renewable energy sector gained more experience from South

Africa and started trimming their margins. The drop in the cost of solar PV modules, and to a

lesser extent the cost of wind turbines, has also contributed strongly to the reduced bidding

prices.

While interviewees observed uncertainty in phase 1, they claimed this disappeared after the

industry had seen that the first auction had been executed quite smoothly. Most

respondents claimed they felt more comfortable with the government’s capability to

operate efficiently and transparently.This reduced the perceived investment risk

significantly, which also led to a reduction in the cost of financing. Most respondents felt

that the prices were consistent with the risk levels perceived in REIPPP 2.

IRRs in nominal local currency terms in REIPPP 2 were reported to be in the range of 12-15

percent. Note that not all respondents disclosed their IRR rates.

4.2.3 REIPPP 3

All respondents felt REIPPP 3 was highly competitive. Just 18 percent of project proposals

were awarded a tender in REIPPP 3, compared to 24 percent in REIPPP 2. Respondents

agreed that the trends of increasing competition, lower technology costs, cheaperfinancing

and reduced investment risk continued to contribute to a strong decreasein bid prices in

REIPPP 3. Margins were becoming increasingly small, and bid prices on the projects offered

to the government were very low, to the extent that some called it “unsustainable”.

The decrease in perceived risk and the now well-proven efficiency and commercial viability

of REIPPP attracted bigger players who were able to get cheaper financing. Many of the

respondents expressed that they were surprised to see Enel Green Power, a large Italian

utility, dominate REIPPP 3 and winning a very large share of the capacity tendered (four solar

PV projects and two wind projects). Many respondentsargued that this change constituted a

lasting “demographical change” in the renewable energy market in South Africa.


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The impact of this change was decisive because of the ability of larger actors to access

corporate financing. Corporate financing gives lower investment hurdle rates, a fact which

allows these actors to squeeze their margins further and be more competitive in the REIPPP

bidding process. Many respondents argued that they would not be able to compete with

such players in the future unless they were able to take greater advantage of the economic

development factors. One respondent estimated that Enel Green Power’s IRR was just barely

better than South African bonds and said that other firms would not be able to compete

with someone that would settle for such low returns. Two respondents argued that a

possible future niche for smaller project developers would be to develop projects and simply

sell them to these larger playersinstead of using them to propose bids in REIPPP.

Several respondents noted that Enel Green Power also submitted project proposals that

were based on project finance. None of these projects were awarded a tender, indicating

that the advantage of having corporate finance helped “tip the scales”, in the words of one

interviewee.

While the projects who have been awarded a tender in REIPPP 3 have been announced by

the South African government, they will not reach financial close until June 2014.

Information on IRR rates in REIPPP 3 is therefore highly sensitive, and the investors and

developers behind these projects therefore declined to comment on IRRs. However, several

respondents that had failed to secure projects in this round of bidding estimated that their

more successful competitors had IRRs below 10 percent.They believed suchreturn rates to

be so low that some REIPPP 3 projects would have to be refinanced in the near future.

4.3 The impact of the design and implementation of REIPPP as a policy

All respondents agree that the design of a competitive auction with multiple winners in

multiple rounds of bidding combined with transparency, efficiency and good communication

has been crucial in enabling market competition and decreasing prices.Designing REIPPP as

an electricity auction facilitated a competitive environment that was seenby all respondents

as the dominant driver of falling bid prices.

Several respondents also claimed design of REIPPP 1 actually hindered competition by not

giving developers enough time to prepare, not limiting the MW allocation and including a

price cap. But while respondents who had been awarded tenders in REIPPP 1 were pleased


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to be making what they described as exceptionally high returns, many also felt this was the

main reason REIPPP was able to attract so many more developers, and hence increase the

competition, in latter rounds. Several respondents expressed that they were very surprised

to see competition at this level and that they never expected big European actors, especially

utilities, to enter the market.

All respondents considered the actual implementation of REIPPP by the government to have

been efficient.Respondents noted that some delays did occur, especially in the beginning,

but these have not been critical.

Bidders are given useful feedback on their bid proposals, also for those that are rejected. A

high level of transparency and low perceived chance of corruption also contributes to

reducing the risk perceived by the respondents. One respondent claimed having multiple bid

winners also reduces the incentive to engage in corruption, and that hiring world-class

lawyers, engineers, financiers etc. as consultants for the bid evaluation further reduced this

risk. No respondents saw corruption as an issue in REIPPP – in fact, many respondents felt it

was almost impossible to engage in corruption due to the transparency of the programme.

All respondents, except for one, expressed frustration with the complexity and the amount

of paperwork encountered in the development and submission of project bids. In addition to

concrete expenditures involved, which one respondent claimed amounted to 300,000 to

400,000 USD per project, the process was also seen as highly time-demanding. Many

respondents with substantial international experience claimed REIPPP was among the most

complex IPP procurement mechanisms that they had seen. While some respondents

believed the process had been simplified and that both developers and the government had

gained useful experience that sped up the process, they stated that a further simplification

could reduce costs and therefore also the bidding prices.

One respondent disagreed with this assessment. According to this respondent, paperwork is

to be expected with power projects and also helps filter out bad projects or unprofessional

actors.In REIPPP 1, almost all compliant bids were awarded a tender, whereas only 18 out of

the 50-60 compliant bids were rewarded a tender in REIPPP 3. Based on this development,

the respondent believed the development costs involved in formulating a bid proposal were

acceptable.


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All respondents agreed that local content requirements and a 30 percent weighting of

economic development factors increased costs to some extent, with one respondent

claiming it had increased EPC costs by as much as 50 percent. At the same time, some

respondents claimed they would not have been able to compete in REIPPP with just pricing

as an evaluation criteria. Some respondents expressed confusion about how the scores were

weighted, and one respondent commented that the evaluation of economic development

criteria was the only aspect of REIPPP that was lacking in transparency.

4.4 Investment risk in REIPPP

9 of 11 interviewees completed a survey on investment risk which compared their risk

perceptions upon entering REIPPP 1 with those they had after REIPPP 3.In addition to scoring

a selection of risk categories, respondents were also asked to comment in-depth on the

various risk factors. This section presents this data, divided into the nine risk categories.

4.4.1 Power market risk

As shown in the table below, we can see a general consensus is that power market risk has

declined during REIPPP.

Table 5: Power market risk scores

Respondent 8 was the only one that felt that the power market risk had increased. This was

based on the respondent’s perception of Eskom as a monopolist with significant amounts of

influence and possible conflicts of interest in Eskom’s dealings with IPPs. Many other

respondents agreed with this and also voiced concerns over Eskom beginning to develop

their own solar projects outside of REIPPP, but respondent 8 considered these issues to be

severe.


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All respondents agreed that the PPA, which in essence constitutes a single-buyer market for

electricity for a project, reduced risks greatly. There was a low degree of uncertainty related

to the PPAs and whether or not they would be complied with or even changed by the

government. Two respondents expressed concern that if the government would change or

stop complying with the PPA, their legal options would be quite limited. Some uncertainty

was also tied to NERSA and Eskom and their efficiency in facilitating market access (excluding

the issue of grid access, which is discussed in 4.4.4).

Respondent 4 perceived the high level of competition as a market risk because it had begun

to restrict market access for players who were unable to compete on bidding prices. This

compensated for the increased trust in the PPA, leaving the respondent’s overall risk

perception stable.

4.4.2 Permits risk

The table below shows that respondents generally perceived a significant reduction in

permits risk.

Table6: Permits risk scores

A key concern for respondents in 2011 was the governmental institutions lack of experience

with both IPPs and renewables. Much of the perceived decrease in risk was related to the

increased efficiency of the government in processing permit requests. Some developers also

stated that requirements were not well defined in REIPPP 1, leading to significant delays, but

that this issue was resolved in REIPPP 2 and 3.

Interestingly, the perceived impact of permits risk remains the same for all respondents – it

is the probability which is seen to have decreased. This impact was mainly tied to potential


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delays leading to developers missing the opportunity to submit bid proposals, as these are

fixed to specific dates. A delay in the processing of a permit could therefore lead to

significant losses, especially if being denied a permit after a project has been won an

auction.

Respondent 4, the only one that did not perceive a decrease but rather kept the score

stable, had never encountered any issues related to securing permits. Note that this

respondent gave this risk category a low weighted score of 4, the lowest of all respondents.

It should be noted that investors felt less familiar with the actual process of applying for

permits than project developers and EPC providers. However, few had heard of any serious

issues arising from permits risks.

4.4.3 Social acceptance risk

We observe a slight overall increase in social acceptance risk, though opinions are divided.

Four respondents felt that social acceptance risk had increased whereas another four

believed it had remained stable.One respondent saw a risk decrease.

Table 7: Social acceptance risk scores

The four respondents that registered an increase in social acceptance risk essentially

believed this was due to increased awareness of their projects and the amount of money

involved in them, as well as the groups opposing their projects gaining experience in how to

organize their resistance. Respondent 6, who saw the highest increase in risk, based this on

social acceptance issues that had been experienced by other companies. This respondent

noted that two approaches in particular – ignoring stakeholders or promising too much to

these same stakeholders – tended to increase tensions, and the respondent believed there


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was a risk the resistance encountered in these projects could spread to solar PV or wind

industries as a whole instead of being limited to specific companies and projects.

Three respondents specifically mentioned their strategy of minimizing this risk by managing

expectations in local communities by being open, transparent and honest about what they

were doing and what would happen on the ground. All respondents except one believed

their projects were viewed positively in local communities because of the income generated

by their projects. This was not just because of a requirement of donating 1 percent of total

revenues to local communities, but also the creation of jobs, even though some of these

were only available during construction. Respondent 8 believed social acceptance risk to be

commercial in nature and argued that such issues could be resolved rather easily with

limited impact.

Most respondents’ involvement in REIPPP was in projects in sparsely populated rural areas

where local communities were not affected. Respondent 4 believed that there was still a

sizeable amount of attractive sites that could be developed that were in rural areas, and so

there was no reason to take on social acceptance risk by building in more densely populated

areas.

Most respondents cited special interest groups with commercial interests, such as land

owners or tourism companies, as the main source of social acceptance risk. The sole

exception was respondent 6, who perceived the strongest increase in social acceptance risk.

This was based on experiences with demonstrations and social disturbances encountered in

impoverished areas with high rates of unemployment.

It should be noted that the respondents who saw the highest risks and the greatest increases

in risk in general felt the same way as all the other respondents; that REIPPP was well

received in the country as a whole and that this attitude was also reflected in local

communities near their projects. Many specifically mentioned discontent with Eskom and

issues such as blackouts or load shedding. Local communities were seen to be aware of the

need for increased power generation.


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4.4.4 Grid and transmission risk

Perceived risks in grid and transmission risk increased overall, but responses among the

interview respondents varied greatly, as seen the table below.

Table 8: Grid and transmission risk scores

Respondents were largely content with the grid code, though one respondent claimed that it

was being changed too often, increasing the risk of installing a power plant configured for

one grid code and then have to modify that plant in order to be in compliance with the new

one. While the majority believed the transmission infrastructure to be in need of upgrading,

there was no mention of this as a source of risk.

Instead, the key risk considered was the matter of grid access.This was mainly because of

poor handling by Eskom, which could result in significant delays and increased costs. Several

respondents complained that Eskom has the privilege of providing non-binding grid access

cost estimates and timelines for connection upon which the developers base financial

calculations and thus bid prices. Respondents worried about Eskom increasing costs or

having delays after bid approval for a project, meaning that extra costs incur after the

project has been finalized. One respondent estimated that half of REIPPP projects had

experienced changes in these estimates, which in some cases had had very strong impacts.

In one project mentioned by another respondent, costs for grid access had multiplied almost

fivefold and delays led to grid access being granted after twice the time originally allotted.

The experiences of the individual respondents seemingly had a large impact on their

perception – the three respondents that perceived a large increase in risk and gave a


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weighted score of 20 for their perception of grid risk today had all had incurred significant

costs because of grid access issues.

One respondent said contingencies included in the financing of their projects could usually

absorb cost overruns, but said that there was still was a significant risk of such costs

exceeding contingencies, and that this risk was hard to mitigate. The respondent was mostly

worried about exceedingly long delays providing grid access as projects that are not able to

finish construction or being generating power on agreed dates are penalized by the

government. Four respondents voiced concerns over the limited processing capacity in

Eskom, but felt the probability of such long delays was relatively small.

Another issue is that Eskom was perceived by two respondents to take advantage of their

position and inflate grid access costs. Other respondents believed that while costs were not

being inflated by Eskom, they believed Eskom was liable to grant grid access to projects that

provided the cheapest power. The result is a competition with other developers for grid

access points located near good renewable energy resource sites. In addition, as the “low-

hanging fruits” have now been picked by Eskom, there is a chance that future grid access

points will be more expensive or otherwise problematic for project developers.

4.4.5 Technology and resource

Respondents rated resource and technology risks as medium risks that overall changed little.

Table 9: Resource and technology risk scores

Respondents all agreed that resource assessment risks were minimal. South Africa provides

world-class solar project sites, described by one respondent as being among the top 1

percent in the world. Wind resource assessments were considered to be a little more


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complicated, but the risk was minimal if project developers would take the right precautions.

One respondent was aware of a project in which the wind resource had been overestimated

by 15 percent, but the minimum requirement for wind measurement posed by the

government was according to this respondent just to have one single mast on the proposed

project site for one year. As such, the respondent believed this was largely due to

inadequate groundwork done by developers. In addition, lenders and investors tend to

conduct their own wind measurements at sites, which can reduce this risk. One respondent

also cited climate change as a possible risk, but at this stage no-one had taken this into

account in their risk assessments.

Respondents believed a shortage of skilled staff to be a limited risk, and only a real issue to

the extent that it was raising costs. Three respondents explained that they tried to hire more

staff than needed as a contingency. Competition for labor was expected to increase further

in the future, especially for local skilled labor. Unskilled labor was considered readily

available by all respondents.

Some respondents mentioned the solar PV value chain as a possible issue because there had

been a risk of a decreased capacity in the sub-supplier sector as large companies have been

liquidated (such as Suntech) or withdrawn from the solar industry (Siemens). In addition,

there were some difficulties in foreign EPC providers lacking experience from doing business

in South Africa.For instance, some EPC providers lacking experience in South Africa had

ignored the risk of the “strike season”, in which workers go on strike not to improve their

own working conditions but in sympathy for workers elsewhere. On the other hand, most

respondents found local suppliers of civic infrastructure to be available, reliable and

competitive with international suppliers.


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4.4.6 Counterparty risk

Counterparty risk was seen to have been stable or to have changed slightly by five

respondents, whereas two believed risk had increased and two believed it had decreased.

Table10: Counterparty risk scores

All respondents agreed that Eskom is a large and relatively stable off-taker with adequate

balance sheets which are subject to credit rating by big agencies. Three respondents voiced

concerns about the number of high-cost power stations on their balance sheets, but did not

feel that this constituted a risk at the time being. The two respondents that believed

counterparty risk increased based this on the lowering of Eskom’s credit rating. One

respondent also mentioned possible conflicts of interest as Eskom was developing its own

solar PV projects.

However, as the PPA payments from Eskom are backed by the South African government,

respondents ultimately saw the South African credit rating as the main risk indicator.

Respondents did state that they saw a certain level of risk in South Africa – the credit rating

had been falling – but still felt the risk was acceptable. For the respondents used to working

in developing countries, the South African country risk was one of the lowest in their

portfolios.

Respondents that saw a reduced counterparty risk emphasized the political support

garnered by the continued success of REIPPP as an energy procurement policy (explained in

4.4.8), and felt that the PPA payments would be prioritized should the South African

economy begin to struggle. There was also a consensus risk was being reduced as the bid


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prices guaranteed in the PPA were far lower in REIPPP 2 and 3, and so these would be

prioritized if South Africa at any point will be forced to discontinue PPA payments. This

helped offset the risk seen in Eskom as an off-taker.

4.4.7 Financial sector risk

There was a clear consensus that financial risks had decreased or remained stable, as shown

in the following table.

Table 11: Financial sector risk scores

All respondents agreed that the increasing knowledge of renewables and project finance in

the South African financial sector was the main reason financial risk had decreased. Access

to equity and debt was generally not seen as problematic. Some had been worried about

black empowerment fund requirements, but these had received backing from the

Development Bank of South Africa and were therefore still with capital in the market,

although with somewhat increased minimum rate of returns. There were also descriptions of

more creative financing structures being used to maximize the availability of black

empowerment funds. None of the respondents saw this as a problem in itself, but two

respondents claimed it could be indicative of capital shortages in the near future.

Respondent 9 did experience some difficulties in finding the suitable financiers with

sufficient experience and insight into renewables, but stated that capital was generally

available.

Respondent 10 claimed that transaction capacity was a key issue in REIPPP 1, and to a lesser

extent in REIPPP 2. This was due to a high number of proposed investments coming in at the

same time in an industry in which the financial sector had very limited experience in.


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4.4.8 Political risk

Few changes were registered in political risk, though the scores varied significantly from one

respondent to the other.

Table12: Political risk scores

Two respondents expressed concern regarding the stability of energy policy. With an

election upcoming in 2014, these were worried that a new government could lead to a

change that could impact REIPPP. While it was not seen as a likely scenario, respondent 3

had experienced that governments had cancelled PPAs elsewhere in the world.

However, the majority of respondents believed political support of REIPPP would continue to

be very strong in the future. In their opinion, energy security remains important in South

Africa because of the heavy reliance on energy-intensive industries. They also stated that

load shedding and blackouts have contributed to REIPPP support among the public. With

employment rates remaining high, these respondents also believed REIPPP to be important

because of its focus on job creation and economic development factors. They also noted

that REIPPP projects have far shorter construction lead times than Eskom projects, and that

REIPPP 3 prices are in fact comparable with Eskom coal and nuclear costs. There was

therefore little risk of losing political backing. Respondent 5, who rated political risk the

lowest, felt there were far too many beneficiaries in REIPPP for the politicians to dare

changing it.

Strikes and public unrest remained a concern for many respondents, especially following the

massacre at Marikana mines in 2013. Respondent 4 believed strikes in South Africa were

often triggered by minor details, which indicated a lack of communication and poor handling


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by the firms involved. This respondent therefore felt due diligence was important in

selecting local suppliers and service providers.

4.4.9 Macro-economic risk

No clear pattern is discernible in the scores given by respondents for macro-economic risk.

Scores vary greatly, as do the perception of risks have increased, decreased or remained

stable.

Table13: Macro-economic risk

While the respondents have scored the macro-economic risk very differently, they largely

discussed the same risk factors during their interviews. The primary risk driver mentioned by

all respondents was the 25 percentdevaluation of the South African rand opposite the US

dollar, and to a lesser extent opposite the Euro. This has had a large impact and continues to

be considered a significant risk.

However, the respondents also agreed that the PPA provides significant currency risk

protection as the ZAR value on the day of the bid submission will be used on the day the

Department of Energy announces the bid winners. Several respondents pointed to REIPPP 1,

in which the ZAR/USD rate dropped from 0.15 to 0.13 in that space of time.With a continued

strong drop in the ZAR, this PPA clause has reduced losses significantly in the two

consecutive auctions. Most of the responders stated that they hedged the currency risk as

well, which increased project cost but helped mitigate this risk.

There was some worry among someof the respondents that the South African credit rating

could drop further, making it difficult for the government to continue guaranteeing PPA

payments. An over-reliance on commodities, continued high unemployment rates,


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continued currency fluctuations and possible difficulties in the mining sector were

mentioned as risk factors for the South African economy.

Respondent 4 was, except for the drop in the ZAR, not concerned about the South Africa

economy. Instead, this respondent worried that macro-economic changes elsewhere,

specifically a quicker economic recovery in European and North American markets, would

draw foreign capital back to their home markets and limit capital for projects in South Africa.


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5Discussion

This chapter briefly discusses the findings gathered through the research conducted. It is

divided into sections corresponding to the four research questions.

5.1 What explains the difference in investment activity between REFIT and

REIPPP?

The findings from this thesis give grounds to conclude that the main reason why investment

activity suddenly spiked with the inception of REIPPP was the arrival of a viable IPP

procurement mechanism as well as the importance of a coherent, long-term energy policy.

While the lack of a real procurement mechanism has been described by most respondents as

the main reason for the lack of renewable energy investments, some respondents felt this

was not the case. Eskom did have the opportunity to facilitate IPP projects, but three

respondents claimed that Eskom essentially had little to gain from REFIT and was caught up

with various cumbersome state procurement rules limiting their ability to engage with IPPs.

One can only speculate as to the reason for why Eskom was not interested at the time, as

one respondent did by expressing his belief that REFIT did not incentivize Eskom to offer

PPAs because the tariff levels were so high that they would have been able to do the

projects on their own at a lower or equal price. While the findings in this thesis cannot

support this claim, it is an interesting possibility because the mainfocus of the researcher

when conducting interviews for this thesis was whether or not the tariffs were high enough

to stimulate private investment, not whether or not they were low enough to stimulate

Eskom’s interest in facilitating the investment.

Note that another possible contributing factor to Eskom not offering PPAs could be a lack of

capacity. As noted in 1.3.1, the company has had a history of poor management and limited

capacity. However,this discussion is beyond the scope of this thesis.

Findings from this thesis also underline the importance of having stable policies. Many

respondents felt IRP laid the framework for a coherent energy policy, and even though no

projects were initiated under REFIT, the IRP gave investors faith in future developments.

Many respondents have therefore stated that they started developing projects even though


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PPAs were not seen as achievable. However,the sudden modification of REFIT tariff levels in

2011 made other respondents perceive policy uncertainty and thus increased risk. It is

somewhat odd the tariffs were changed just before REIPPP was announced. Based on the

input of the respondents, it is possible that a few more bid proposals could have been

submitted in REIPPP 1 had the REFIT changes not shaken their belief in market, though one

cannot conclude that this is the case based on the findings of this thesis.

5.2 External factors influencing average bidding prices

The most important external factors influencing bidding prices were found to have been

stronger competition, falling technology prices and a downfall in more established

renewables markets – in that order. Interestingly, a majority of respondents interpreted the

topic in such a way that inflated pricing in REIPPP 1 due to a lack of competition was also

named as an important driver of price reductions.

Based on the input of the interview respondents, it can be claimed that competition has

been the most important driver of bidding price reductions in REIPPP by far. While much of

this is due to the competitive nature of electricity auctions and the way it has been designed

and implemented as an energy procurement policy (discussed in the chapter 5.3), interview

respondents all mentioned that an external factor had a large impact. Specifically,

respondents all claimed the entrance of large utilities with access to cheaper financing may

have changed the competitive landscape of REIPPP permanently. Enel Green Power

submitted several project proposals in REIPPP 3 that were project financed, but that these

were not awarded contracts. The fact that only the corporate financed projects from Enel

Green Power were awarded contracts in REIPPP 3 indicates that corporate finance can be

seen as a crucial competitive advantage. The extent to which corporate finance continues to

be utilized in future REIPPP auctions can therefore have an important impact on this market.

The fall of solar PV module and wind turbine prices and its influence on bid pricing is rather

self-explanatory – all respondents stated that this had had a strong impact, and that it has

contributed to falling prices. However, as described in chapter 2.2, while this decrease in

costs began before REIPPP started, this did not lead to lower bid prices in REIPPP 1. The

impact of technology cost reductions is therefore more likely to have bolstered profit

margins for developers in the first round of auctions, but in REIPPP 2 and 3 they have

contributed to the drop in bidding prices. The two respondents that provided estimates of


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the impact of this effect said reduced technology costs constituted 5 and 40 percent of the

actual reduction in bid prices. Quotes from two respondents cannot be considered to be

representative, but it seems fair to claim that the impact of falling technology costs has been

significant.

Many investors claim they werepartly pushed into the South African market because of

economic downturns or weakening of renewable energy marketsin their home markets or

elsewhere in the world. If international markets pick up again, this could then possibly

reverse some of the reductions in REIPPP bidding prices. One respondent believed this was

particularly true for the large utilities, but interview respondents from such large companies

stated that REIPPP had shown itself to be attractive for them in the long run. Regardless,

based on the findings of this research, it is not possible to estimate exactly to what extent

this factor contributes to reduced prices.

Note that the decrease in bidding prices has been strong despite a 25 percent drop in the

ZAR opposite the USD. Some risk reduction is provided by the PPA, which was seen by

respondents to offer important protection. However, respondents generally also stated that

the costs of hedging this risk were significant, so while risks are partly mitigated these costs

directly contribute to higher bidding prices.

It is difficult to say anything about future developments in regards to competition. While the

number of bids and the success rate of bidders shows a clear increase thus far, many

respondents believed that prices were now so low that they were not sustainable in the long

run, and the low success rates in REIPPP 2 and 3 are seen as demotivating by many who

would consider investing, therebyreducing competition.

5.3 Has the design and implementation of REIPPP have influenced average

bidding prices?

The findings in this thesis showed that interview respondents strongly believed that REIPPP

had enabled market competition, which in turn became the biggest driver in reducing prices.

All respondents also voiced their satisfaction with the transparency and openness in REIPPP.

At the same time, a number of problematic issues were also raised. By comparing the inputs

against Maurer’s research on electricity auctions described in chapter 2.1, we can discuss as


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to what extent REIPPP can become more efficient in facilitating competition and thus

influence bidding prices.

Maurer believes that problems related to high development costs, long time frames and

intellectual property issues are common for infrastructure auctions in general. The research

conducted in this thesis finds a strong consensus that development costs are high in REIPPP

– it was noted as an issue by all but one respondent (respondent 4). However, as noted by

this respondent, the number of compliant bids is in fact increasing, which could imply that

more and more developers find that the chance of winning an auction outweighs that of the

development costs. In addition, most of the respondents also noted that the possibility of

submitting a bid for a second time in a consecutive round of auctions means that the

development cost incurred partly becomes a sunk cost. As bidders realize that the

development cost is lost, they are more willing to reduce the bidding price, a dynamic which

could in fact increase the competition. This is not to say that REIPPP would not benefit from

simplifying bidding procedures or reduce development costs in another manner - the

majority of interview respondents still claim high costs incurred contribute directly into

higher bid prices. Nevertheless, based on the input of the interview respondents one can

claim that the extent to which development prices increase bidding prices is limited by the

design of REIPPP.

Maurer also discusses issues commonly experienced by renewable energy auctions that limit

their ability to facilitate competition. These were attracting sufficient bidders, preventing

speculators and unprofessional players from participating and have effective compliance

mechanisms in order to ensure that projects are delivered on time and operate properly.

This thesis has found that all interview respondents believed REIPPP 1 had insufficient

competition, partly due to a lack of bidders, and that this resulted in inflated bidding prices.

They further stated that this was because of a few key factors, namely the short time frames,

stringent requirements for documentation in bid proposals and the choice of including a

price cap. As described by respondent 1: “With so few bidders, compliance became the only

requirement and all of the bids came in at the price cap. We might as well have kept the

feed-in tariff”.


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On the other hand, respondents generally believed that the development costs and strict

requirements for paperwork filtered out unprofessional actors. No mention of

unprofessional actors was recorded. REIPPP can therefore be said to have succeeded in

preventing unwanted actors from participating in the process.

It is too early to say if the compliance mechanisms are working efficiently in REIPPP. While

REIPPP 1 and 2 projects all reached financial close, only a handful of REIPPP 1 projects have

been constructed and become fully operational at the time that this thesis is being written.

Regardless, it should be noted that the effects of one particular compliance mechanism has

been found problematic by several interview respondents. As projects are penalized for not

finishing construction or beginning operations on time, this makes them vulnerable to third

party decisions. The example mentioned most frequently by respondents was the reliance

on Eskom to facilitate grid access in a cost-effective and timely manner, as it can delay

projects past deadlines and thus result in severe penalties. Note that the findings do not

specifically indicate that this problem lies in the compliance mechanism itself – all the

respondents who raised concerns about this stated that the problem was with Eskom and

what they perceived as inefficiencies or even possible conflicts of interest.

Findings on wind projects in REIPPP can also be compared to Maurer’s evaluation on the

Brazilian wind power auctions and the issues that arose there (described in chapter 2.1.1).

However, based on the input of interview respondents, REIPPP has not encountered any of

the issues that the Brazilian power auction has been struggling with.

In conclusion, we can make the claim that REIPPP has been designed and implemented in a

fashion that evokes trust from investors and developers and that it strongly contributes to

the reduction of bidding prices. A few outstanding issues are still troublesome according to

interview respondents, but it seems clear that REIPPP as an energy procurement policy has

been successful in attracting investors and facilitating competition.

5.4 Risk perceptions

The findings in this thesis gives basis to claim that investment risk as perceived by investors

has been decreased in certain risk categories. The chart below shows the average scores

provided by interview respondents in response to the questionnaire. Divided across all 9 risk

categories, the average risk reduction is 1.3 points. Naturally, presenting average values can


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ignore important individual observations made by respondents, so one must consider to

what extent the average values are backed by uniform opinions amongst the respondents.

Figure 10: Changes in average perceived risk scores

As noted in 4.4, there is a strong agreement amongst the interview respondents that the

perceived risks related to the power market, permits and the financial sector have all been

reduced significantly, and this is clearly reflected in the figure above. Grid and transmission

risk as well as social acceptance risk, on the other hand, see a slight increase in average

values. Nevertheless, the interview respondents are divided and so these risks must be

explored further in order to draw a conclusion. For the remaining four risks (macro-

economic, political, counterparty and resource and technology), the research does not give

grounds to say that perceived investment risk has changed overall, but respondents are clear

in arguing that some components of these risk categories have increased while others have

decreased, thus explaining the lack of change in average score despite ongoing

developments.

5.4.1 Reductions in perceived investment risk

It is important to note the three risk categories with the largest average changes (power

market, permits and financial sector) not only because these scores are high, but also

because the scores have a small degree of variation. All the respondents perceived that


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these risks had decreased (except for just one respondent in the power market risk

category).

Power market risk registers a perceived decrease because of reduced uncertainty concerning

government handling of the PPA and REIPPP in general. As initial projects have been finished

and are generating and selling electricity under the terms of the PPA, interview respondents

see power market risk as reduced.

Regarding permits risk and financial sector risk, the reason risk was elevated going into

REIPPP 1 was due to the lack of capacity, experience and knowledge of the renewable

energy sector. A significant decrease has been noted for both risk categories, and all the

respondents note the same reasons – that the public institutions issuing permits and the

financial institutions offering debt orequity had become more experienced with REIPPP and

renewable energy in general. The institutions were also caught by surprise in REIPPP 1 and

were not prepared to handle the significant workload that REIPPP entails. As both IPPs and

renewable energy were fairly new sectors in South Africa, especially on a scale comparable

to REIPPP, investors perceived a higher risk. In other words, the main reason these risks have

decreased is simply due to the fact that relevant institutions and the companies

themselveshave gone through a steep learning curve.

5.4.2 Increases in perceived investment risk

We can register an increase in the perceived average values of both social acceptance risk

and grid and transmission risk, but the respondents are divided in their opinion. It is clear

that the experience of respondents has had a defining influence on how they perceive these

risks. The main conclusion that can be drawn from this is that the risks have increased, but

that the risk is highlydependent on the site of the project and the proximity to areas of

interest to third parties and impoverished areas. Grid and transmission risk has an additional

dimension – proximity to grid access points is important, but risks increase when other

projects in the same area compete for grid access. It also seems clear that grid access is seen

as a much greater problem for the respondents that have been affected by it, and their

comments indicate that the role of Eskom as a monopolist in energy generation,

transmission and distribution is not without conflicts of interest when South Africa

introduces IPPs through REIPPP.


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While it is outside of the scope of this thesis to evaluate Eskom, it should be noted that

another possible reason Eskom has failed to deliver grid access in time to several of the

respondents is capacity rather than willingness. Issues related to the capacity,

organizationand management of Eskom were described in chapter 1.3.1. Based on the

findings of this study we can therefore not conclude that Eskom’s role as a monopolist

constitutes a risk factor, but the opinions voiced by respondents gives grounds to explore

the subject in future research projects.

5.4.3 Risk categories without observed changes

In the last four categories, changes are small and scores given by the interview respondents

are fairly similar. No significant change can be seen in political risk or resource and

technology risk. The only conclusion that can be drawn is that interview respondents do not

see significant changes, though they do worry that risk can increase in the future. However,

it is interesting to note that the perceptions of macro-economic risk and counterparty risk

remain stable despite obvious increasing risk in certain metrics.

Macro-economic risk is seen as the second highest risk, barely behind grid and transmission

risk. Respondents do not see a change in perceived risk, despite the 25 percent drop in the

ZAR and a worsening of the economic situation. There can be many reasons for this, but one

possible explanation is the belief that REIPPP PPA payments would be prioritized if the

macro-economy should worsen. Respondents continued to underline that REIPPP prices

have been dropping while the macro-economy has worsened –this has helped offset this risk

in their opinion.

Counterparty risk is similar to macro-economic risk in the sense that changes in risk

perception are small whilst the credit worthiness of both Eskom (off-taker) and the South

African government continues to fall. And again, respondents specifically mentioned their

belief that PPA payments would be prioritized if Eskom or the government should have to

prioritize. As with macro-economic risk, the strong drop in REIPPP bidding prices was seen as

a great advantage in this regard.We can therefore conclude that the majority of the

respondents believed that the drop in prices reduces their exposure to counterparty risk.

5.4.4 Overall evaluation

We can register a decline in overall perceived investment risk of 1.3 points, unevenly spread

across different risk categories. While 1.3 points on a scale of 25 seems small, it should be


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noted that the average score across all categories was 10.4 before REIPPP 1. That means that

a decrease to 9.1 is a reduction of 12.4 percent, which is significant. But while this decrease

is substantial and directly contributes to lower bidding prices according to respondents, it

clearly cannot be said to constitute the 68 percent decrease in solar PV bid prices and 43

percent decrease in wind bid prices seen since the beginning in REIPPP. Also, as mentioned

in the chapter on methodology, quantified subjective risk perceptions must be seen with

some degree of skepticism.

5.5 Differences from existing literature

The findings in this thesis by and large support past academic works and strengthen their

conclusions. However, while past work focuses on the lack of a procurement mechanism and

possible legal issues as the reason for why no projects were procured during REFIT, this

thesis finds that Eskom responsiveness and interest in IPPs also played a role.

Furthermore, while market competition has been the key driver in the reduction of costs in

earlier work as in this thesis, the interview respondents have also underlined the importance

of falling technology costs and the downturn in international renewable energy markets. A

new development that has taken place after the publication of past work is the arrival of

utilities backed by corporate finance. This thesis finds that the importance of this

development has been very important in reducing bid prices in REIPPP 3.

While the design and implementation of REIPPP has also been mentioned as a success factor

in past research, REIPPP developments have been compared to international experiences

with electricity auctions in this thesis. The findings are largely the same –REIPPP has been

successful in attracting investors, who see it as efficient and trustworthy. It is also noted that

insufficient competition was an issue in REIPPP 1 and that development costs are seen as

high by investors, and this shows that REIPPP had the potential to press prices further down.

Lastly, we have found that perceived investment risk has decreased significantly, though

some risks decreased far more than others. While Waissbein has made a similar survey for

wind power investors in South Africa, little information on the scores given by his interview

respondents is available. There was an overlap in the qualitative feedback in Waissbein’s

study and this thesis, and parts of Waissbein’s findings are supported by this study.

However, this study took place at a later time, allowing for the latest developments of


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REIPPP to be included, and it also included solar PV. Lastly, whereas Waissbein focused on

perceived risks at a given time, this thesis also measured the change in perceived risks over

time. The findings of this thesis show that power market risk, permits risk and financial

sector risk have decreased significantly, and that grid and transmission risk and social

acceptance risk has increased for certain projects.

6Conclusion

The objective of this thesis was to identify the main factors influencing REIPPP bid prices. We

conclude that the strongest driver of the rapid reductions in renewable energy prices in

South Africa has been the implementation and design of an electricity auction that has been

successful in facilitating competition. This was made possible as South Africa published

acoherent long-term energy policy with concrete goals and ambitions for renewable energy

deployment, which was followed up by a viable IPP procurement mechanism through

REIPPP. When REIPPP replaced REFIT,it opened the South African markets to international

finance and renewable energy expertise. Falling technology costs and reduced investment

risks have contributed to decreasing bid prices in REIPPP, but the most substantial

contribution remains the competitive forces facilitated by an electricity auctionwhich

investors, project developers and EPC providers interviewed in this thesis see as efficient and

trustworthy.

Thanks to the cost reductions achieved in REIPPP, solar PV and wind have become

commercially viable power generation options in South Africa. It is remarkable that this

transition has taken place in less than three years and that IPP projects have already started

to come online, especially when considering South Africa’s past troubles with IPPs and

complete lack of experience with renewable energy. While South Africa is not the only

country to successfully implement electricity auctions, the developments in REIPPP further

strengthen the case that electricity auctions, when correctly implemented, have the

potential to unlock large sums of investment capital for renewable energy and facilitate

strong competition.

In the context of global warming and a lack of capital going into renewable energy, REIPPP’s

success is important. It has shown that developing countries with practically no experience

with renewables can procure large amounts of renewable energy generation capacity at low


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prices if they succeed in facilitating competition. As the keys to facilitating competition partly

lie in the quality of state institutions, this is not something that can be copied by any

country. However, REIPPP does provide valuable lessons for other countries wishing to

conduct electricity auctions.

Three discoveries that supplement or differ from that of previous research conducted on

REIPPPwere made in this thesis. Firstly, the recent appearance of corporate-backed utilities

has had a significant impact on bid pricing and may have fundamentally changed the

competitive landscape in REIPPP. Second, this thesis finds a perceived reduction in

investment risk, though this is mainly in power market risk, permits risk and financial sector

risk, as well as in grid and transmission risk and social acceptance risk for certain actors. It

also finds that the increasingly lower bid pricing has reduced the perceived counterparty and

macro-economic risk, as investors see more cost-reflective power prices as sustainable in the

long term, but that this effect has been negated by the falling credit ratings of Eskom and

South Africa andconcerns of a slow-down in the South African economy. Third, falling

technology costs and the downturn in international markets have also contributed

significantly to reducing bid prices.

Further research will be needed to confirm these developments, as REIPPP is still a very

young project in which only a few power generating projects have actually been successfully

constructed and actually generate power today. It is also unclear what the long-term impact

of utilities backed by corporate finance will have on this market, as this is a new

development. Regardless, the developments of REIPPP to date give reason to believe that

South Africa has unlocked the potential of its renewable energy sector and shown what

competitive market forces are capable of in securing affordable green energy.


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Attachment 1: Investment risk questionnaire Please score the following investment risk categories by impact and probability on a scale of 1 to 5,

with 1 being very low and 5 being very high. This should be done for the risk level perceived before

bidding for REIPPP 1 in 2011 and for your perception of investment risks today. You may comment on

your scoring under “description/comment” if you wish to do so.

Risk category Description/comment REIPPP I Today

Prob Imp Prob Imp

Power market

risk

Limitations and uncertainties in the energy market and

market regulations.

Examples of barriers: PPA limitations, market outlook, market

distortions such as fossil fuel subsidies.

Permits risk

The public sector’s ability to efficiently and transparently

administer licenses and permits needed for energy projects

Examples: Delays, complexity, time-consumption.

Social

acceptance risk

Resistance to energy projects from local communities,

political movements, special interest groups, NIMBYism.

Resource and

technology risk

Risks related to the energy resource and technology.

Examples include inaccuracy in resource assessment and

supply, finding qualified technical staff (also locally),

uncertainties related to planning, construction and

operations such as sub-optimal plant design.

Grid and

transmission risk

Risks observed in grid management, grid access, transmission

infrastructure, grid code.

Counterparty

risk

Eskom’s credit rating, ability of government to back PPA

payments.

Financial sector

risk

Risk related to the availability of capital for renewable energy

projects. Includes the level of experience with renewable

energy (project assessments, project finance etc.) and the

availability of “black empowerment capital”.

Political risk

Country-specific issues such as good governance and social

stability.

Examples of barriers: Upheavals such as terrorism or civil

disturbances, political instability, poor institutions and

governance, impediments or uncertainty due to government

policy (such as currency restrictions or corporate taxes).

Macro-economic

risk

Risk related to the macro-economic environment.

Examples: Currency volatility, inflation, interest rates.


Page 71


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Attachment 2: Call for interviewees

Call for Research Interviewees You are hereby asked to contribute to a Sciences Po research project. This document briefly explains the process and the purpose of the research. Research Summary : The research paper in question is a master thesis on the South African Renewable Energy Independent Power Producer Procurement Programme (REIPPPP). REIPPPP is widely being hailed as a success in developing renewable energy projects, but academic literature analyzing its outcomes is currently highly limited. Tapping into the experiences of project developers, investors and EPC providers, the thesis aims to provide first-hand information on how investment risks have changed during REIPPPP and how this and other factors have impacted the average bid prices. The current hypothesis is that while factors such as the frequently quoted overcapacity in the PV module market have decreased costs, the design and implementation of REIPPPP has also led to a significant drop in the prices of solar PV projects. By focusing on investor perspectives, the research project aims to assess REIPPP policy design and implementation and discuss how this has impacted investment risk. Such lessons learned could be valuable for political decision makers wishing to increase power generation capacity or decarbonize their energy mix. Interviews : Data will be gathered through semi-structured interviews with approximately 10 interviewees that will last about 45 minutesand be conducted via Skype or phone. Interviewees will be asked to loosely discuss a list of topics including developments from REIPPP 1 to REIPPP 3, perceived changes in investment risk and differences between REFIT to REIPPP and fill in a short questionnaire on the probability and impact of various investment risks. Interviews take place at the convenience of the interviewee, but preferably before 30/01-2014. About the master’s candidate : Kai Simon Eikli Yuen is a Norwegian-Chinese candidate for a Master of Science in International Energy at Sciences Po, Paris School of International Affairs. He has previously worked for Orkla, the United Nations and the Norwegian Refugee Council, and he has also had a 6 month internship in the renewable energy department of investment facility Norfund. The thesis supervisor is Professor Giacomo Luciani. Your cooperation in this research project would be greatly appreciated, but note that participation is unpaid. Questions and comments can be sent by e-mail ([email protected]) or by phone (+47 92855482).


Page 73

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