Renewable energy in South Africa



FW moderates an online discussion looking at the renewable energy sector in South Africa between Ashen Jugoo at Bell Dewar, Eric le Grange at ENS, and Shamilah Grimwood at White & Case.

FW: What is the significance of the Integrated Resource Plan (IRP) and IPP procurement programme for South Africa? What are the key aspects of the initiative and its intended aims?

Grimwood: The Integrated Resource Plan (IRP) provides an indicative rolling projection of South Africa’s cumulative electricity demand and the sources of new electricity generation to be established to meet this demand. The development of the IRP is the responsibility of the Minister of Energy acting after consultation with the National Energy Regulator of South Africa (NERSA). The current IRP, which was gazetted in May 2011 and covers the period from 2010 to 2030, was developed after extensive public consultation. IRP 2010-2030 reflects national government policy considerations in respect of the facilitation of the localisation of renewable energy technology, ensuring security of energy supply through additional nuclear energy capacity and a commitment to a carbon dioxide emission limit of 275 million tonnes per year from 2024. IRP 2010-2030 projects South Africa’s total new generation capacity requirements over the period 2010 to 2030 as around 42.6GW not counting the approximate 12GW new generation capacity which has already been committed. The Renewable Energy IPP procurement programme launched in August 2011 provides for the procurement of energy from renewable energy sources totalling 3625MW, limited to onshore wind, solar photovoltaic, concentrated solar power, biomass, biogas, landfill gas and small hydro power technologies. Apart from diversifying South Africa’s generation mix, this programmes’ objectives include localisation, minimum economic participation by individuals historically disadvantaged by apartheid laws, minimum economic participation by local communities, job creation and skills transfer.

Jugoo: The severe electricity supply constraints experienced in South Africa recently resulted from the lack of infrastructure investment and maintenance. The government introduced the IRP to maximise development of local industry, while mitigating climate change concerns. The IRP balances constraints affecting the supply of electricity, reduces carbon emissions and water usage, emphasises localisation and job creation and regulates technology uncertainties and likely developments. A major reduction – to around 46 percent of capacity by 2030 – in the reliance on coal as the source of electricity is envisaged, due to the introduction of substantial capacity from renewable sources, expansion of the role of nuclear power and the addition of new power stations. Private sector production is vital, with IPPs featuring mainly in the renewable sectors and potentially in coal and gas. However, nuclear and existing facilities will remain public facilities run by public sector producers.

Le Grange: The Integrated Resource Plan 2010, published first in 2010 and updated in 2011, anticipated the introduction of renewable energy into the South African electrical energy mix in excess of 10,000MW over the next 20 years. The current Renewable Energy Independent Power Producer Programme (REIPPP) seeks to procure 3725MW of renewable energy capacity by 2016. The REIPPP aims to firstly attract foreign investment and the total foreign investment during this phase is expected to be in the vicinity of R100bn. The second aim is to allow as much as possible of the investment value to reside with South Africa entities and thirdly to provide a developmental impetus in respect of training, job creation and support for small and medium-sized enterprises. The procurement programme is accordingly designed to provide value for money, but specifically to stimulate economic development. The manner in which the various bidders propose to implement the developmental objectives is accordingly one of the two evaluation criteria, the other one being the electricity cost. Other than in traditional Renewable Energy Feed-In Tariff (REFIT) programmes, the price under the REIPPP is capped and the bidders compete on price below the cap. The REIPPP comprises potentially five bid windows and currently, after the first two bid windows, 798.9MW of the 1850MW of onshore wind allocated under the REIPPP is yet to be allocated, while 256MW of the 1450MW of solar photovoltaic (PV) available under the REIPPP remained available. Concentrated solar power’s (CSP’s) full 200MW allocation had been taken up, while 60.7MW of small hydro capacity remained out of the 75MW allocated.

FW: In terms of procedural aspects, could you outline the implementation timeframes, bidding windows, submission deadlines, etc?

Jugoo: The renewable energy programme intends to procure 3725MW from seven technologies, set out in a programme consisting of five possible bid phases. Each phase specifies maximum MW capacities per technology, with remaining capacity rolled over to subsequent phases. Phase one bids were submitted in November 2011. Twenty-eight preferred bidders were selected, comprising a total of 1416MW. Financial close is expected on 30 June 2012. Phase two bids were submitted on 5 March 2012. Nineteen preferred bidders offering 1044MW were announced on 21 May 2012, with financial close expected by 13 December 2012. A third phase, and if necessary one or two further phases, will follow, with bid submission scheduled respectively for 20 August 2012, 4 March 2013 and 13 August 2013. Preferred bidder selection and financial close intervals will follow on the same basis as for the first two phases.

Le Grange: The Renewable Energy Independent Power Producer procurement programme (REIPP) comprises potentially five bid windows and currently, after the first two bid windows, 798.9MW of the 1 850MW of onshore wind allocated under the REIPPP is yet to be allocated, while 256MW of the 1450MW of solar photovoltaic (PV) available under the REIPPP remained available. Concentrated solar power’s (CSP’s) full 200MW allocation had been taken up, while 60.7MW of small hydro capacity remained out of the 75MW allocated. Projects bid under the first bid window are expected to close by the end of June and, under the second bid window, by mid December. The projects bid under bid window three are expected to close by the end of March 2013. The third bid window closes on 20 August and this may be the final bid window in the current cycle. The reasons for this would probably be ZAR liquidity constraints in the banking environment and a possible cautious approach by the authorities in terms of what the intention would be to implement the current batch of projects and see what lessons can be learnt. Grid constraints and connection points will also in the short term constrain the roll-out of large projects as these are mostly located in rural areas with relatively under-developed grid support.

Grimwood: The dogged timeliness of the management of the REIPP Programme to date is commendable given its size, procedural complexity and the range of technologies involved. Understandably, given failed starts and delays associated with the IPP procurement programmes initiated in the second half of the last decade, the market appears somewhat unsure of RSA Inc.’s ‘big match temperament’ to successfully close out the programme. However, there is no indication that the programme will not achieve this, and on time. Bidders and the government will likely breathe more easily though once financial close for the first bid window is past.

FW: What implications are there for investors in the suspension of REFIT and the use now of REIPP?

Le Grange: Price is the primary selection criteria, and, as announced by the DoE, between the first and the second window significant competition has seen the average prices offered by the solar PV developers falling from R2.75 c/kWh in window one to R1.65 c/kWh in window two, while wind fell from R1.14 c/kWh to R.0.89 c/kWh. The CSP prices fell slightly from R2.68 c/kWh to R2.51 c/kWh. According to the DoE, during the second-window preferred bidders also offered superior local content terms, being the secondary selection criteria, with solar PV rising to 47.5 percent from 28.5 percent, wind rising from 21.7 percent to 36.7 percent and the CSP projects rising from 21 percent to 36.5 percent. For the bidders under the first bid window, first mover benefit has been significant with returns seemingly in excess of 20 percent. This has fallen sharply under the second bid window and the competition for the remaining capacity will certainly place more downward pressure on these. Economic development is also expected to become more sophisticated in terms of planning and implementation.

Grimwood: The general market reaction to the suspension of REFIT in 3Q 2011 was one of genuine bemusement. After all, national government policy support for feed-in tariffs is evident in the White Paper on Renewable Energy, 2003 and in media statements issued by the Department of Energy immediately following the initial feed-in tariffs published by NERSA in 2009. When NERSA proposed a material decrease of between 7 percent and 41 percent in the 2009 feed-in tariffs in March 2011, leading developers felt justified in publicly questioning South Africa’s commitment to including renewable energy in its generation mix. The suspension of NERSA’s feed-in tariffs later in 2011 was particularly unsettling for some international developers because of reports that the suspension was effected under the direction of the Department of Energy on the ground that the use of feed-in tariffs by NERSA was ultra vires NERSA’s statutory powers, whereas NERSA is mandated to give effect to national policy. This ultimately played out as an all too public dressing down of NERSA, and a possible portent of the gradual undermining of NERSA’s role as the independent economic regulator of the electricity supply industry. 

Jugoo: The REIPP programme invites bidders to bid prices as part of their bids, within caps specified for each technology. Price is an evaluation criterion. So investors have more flexibility and competitive pressures are maintained through the caps and evaluation processes. The approach has been favourably received, with tariffs bid in the second phase generally being lower than those in the first. As the available capacity reduces in successive phases, prices can be expected to become keener. While investors don’t have the certainty offered by the initial generous REFIT proposals, they do now have more commercial possibilities than were available in the reduced revised REFIT fixed tariffs.

FW: Could you outline the scoring criteria and issues connected with them?

Grimwood: Having regard to publicly available information on the RE-IPP Programme, it seems that the bid evaluation has been divided into two stages. The first evaluation stage involves an assessment of the bids against several distinct ‘pass or fail’ qualification criteria, including legal, technical, financial, environmental, land use and economic development criteria, so-called gatekeeper criteria. If the first evaluation stage results in an oversubscription for any qualifying technology, the compliant bids for that technology will then be comparatively assessed by reference to bid price and the economic development criteria.

Jugoo: Phase one required bidders to meet certain thresholds in respect of the qualification criteria, being project structure, legal criteria, land use rights, environmental consents, financial criteria, technical criteria, economic development criteria and bid guarantees. Compliant bids are evaluated on two criteria – price, with a 70 percent weighting, and economic development, at 30 percent. Phase two followed a similar pattern, but for amendments increasing the threshold and target requirements for economic development criteria. The main issues were the prohibition on marking up the project agreements issued with the RFP – which bidders expected and adapted well to – and the heavy demands made in relation to the economic development requirements – which bidders realise is a fundamental part of the development aspects of all government programmes, seeking to spread opportunities and participation in previously excluded or restricted communities.

FW: To what extent will the IRP and IPP procurement programme yield investment opportunities in South Africa’s renewable energy sector?

Jugoo: The REIPP programme creates investment opportunities for successful bidders in a range of projects comprising 3750MW spread among seven technologies as well as in meeting the government’s economic development requirements for localisation of manufacture and maintenance and for training and skills development. There is potential for a further 16,500MW of renewable energy capacity under the IRP. While the state utility Eskom will create a small proportion of that, current plans look to IPPs for supplementation. This will provide investment opportunities for producers and associated manufacturers and operators. Over the period of the IRP there must be a substantial localisation shift, which will mean extensive requirements for building local capacities and skills. There will also be IPPs in non-renewable sectors and even where new capacity is to be provided by public sector producers, localisation requirements will provide extensive opportunities for investment in manufacturing, maintenance and fuel supply areas.

Le Grange: The first mover benefit may be gone, but the current REIPPP is likely to offer solid returns for the prudent developer. Time will tell as regards the robustness of the current batch of projects and some may encounter difficulties, but the general environment remains robust and supportive of investment.

Grimwood: Clearly the investment opportunities in South Africa’s renewable energy sector are staggering. A critical element of the long-term success of these investments though is whether South Africa’s electricity pricing path sustainably achieves cost reflective retail tariffs to ensure that electricity supply costs do not become stranded costs. Whilst prevailing regulatory tariff principles support cost of service pricing, historically, this has been applied in respect of South Africa’s existing largely depreciated generation fleet and so until 2007 South Africa enjoyed amongst the world’s lowest electricity tariffs – a material disincentive to investment in its generation sector. Since 2008, NERSA has guided a phased year-on-year increase in electricity prices by Eskom, the incumbent wholesale electricity supplier, averaging around 25 percent per annum, and this is expected to continue until 2016. It is further expected that significant above inflationary increases will continue into the early 2020s. That said, there is mounting public pressure on the NERSA to curb these increases. 

FW: How are energy and utilities companies in South Africa reacting to the programme?

Le Grange: The procurement takes place through the Eskom single buyer office and supplements current capacity. South Africa does not, as yet, have a merchant energy market.

Grimwood: South Africa’s electricity supply industry is characterised by a vertically integrated supply chain with the substantial majority of its generation, transmission and distribution assets being owned and operated by Eskom. Currently less than 1 percent of generation in South Africa is carried out by IPPs. The transmission grid, which comprises network assets above 132kV and system operation, is owned and operated by Eskom. About 60 percent of the distribution grid is owned and operated by approximately 187 municipalities and the balance by Eskom. The vertical unbundling of the electricity supply chain is however ‘on the cards’ with the proposed establishment of a new state-owned company, the Independent System and Market Operator (ISMO), by end 2012. The ISMO, whose shares will be held by a different line ministry to Eskom’s, is expected to take over all Eskom’s transmission assets and activities on a phased basis commencing six months’ following its establishment. Eskom has been designated as the single buyer for the energy output to be delivered under the RE IPP Programme under a form of power purchase agreement prescribed by the Department of Energy in its capacity as the procuring authority for the RE-IPP Programme. Given Eskom’s potential conflict of interests as the dominant generation utility, the procurement of the RE-IPP Programme is being undertaken by the Department of Energy. It is expected that the role of single buyer will be assigned to the ISMO following its establishment.

Jugoo: The state utility Eskom has actively participated in the programme as the initial buyer/distributor of all power to be produced by the renewable IPPs. Legislative measures are being prepared to eventually place this function with a new systems operator. Prior to the release of the RFPs, the authorities stipulated that the draft agreements issued with the RFP – the Implementation Agreement, PPA, Direct Agreements, Connection and Transmission Agreements – could not be marked up and bids would have to be prepared on the basis of those documents. Although numerous questions on the bid requirements were submitted and answered, the immutability of these draft agreements has not proven an impediment in attracting investor interest or bankable bids. Bidders experience difficulties in satisfying bid requirements concerning environmental approvals and land rights by bid submission deadlines.

FW: Looking ahead, what major trends do you expect to see in South Africa’s energy sector over the coming years?

Grimwood: IRP 2010-2030 proposes the reduction of coal participation in the total electricity generation mix from 90 to 65 percent by 2030. Apart from proposed allocation of renewable energy to the total electricity generation mix of 9 percent by 2030, international interest is keenly focussed on the allocation of 20 percent to nuclear power. The build out of new generation capacity targeted under the IRP 2010-2030 anticipates IPP participation particularly in renewable energy and coal-fired generation. Having regard to statements by the National Cabinet, it appears that the IPP participation is targeted at 30 percent of the total electricity generation mix, excluding nuclear energy. National government policy specifically favours the ‘managed liberalisation’ of the electricity supply market to provide for the staged introduction of IPPs within a single buyer market in which a state-owned company – initially Eskom and ultimately the ISMO – will act as the single buyer of the electrical energy supplied by the IPPs. Entry into and participation in this single buyer market by IPPs is ‘by invitation only’ through a procurement process initiated in the discretion of the Minister, the regulated single buyer market. The potential for significant IPP activity outside the regulated single buyer market is also dependent on ministerial discretion. This centralised control makes it somewhat difficult to reliably predict future trends.       

Jugoo: Emphasis on localisation will result in the substantial development of skills and capacities so that local enterprises will be able to carry out substantial manufacturing, supply, maintenance and operation of components, plants and facilities. As renewable technology costs decrease, the utilisation of renewable projects will continue. The government is planning for new nuclear capacity and decisions on the first new plant are likely to be made this year. Substantial shale gas reserves are believed to exist in South Africa. Although ‘fracking’ is plagued by controversy, the need for clean fuel sources, and costs and uncertainties in importing gas or diesel, will likely lead to shale gas development. Current policy envisages 30 percent of generation capacity to come from IPPs and Eskom’s funding constraints make it likely that at least this will be attained.

Le Grange: Base load energy is needed and renewables cannot fill this space. A new base load procurement programme is expected and an import of clean energy – mostly hydro – from neighbouring countries is likely to be implemented. The nuclear programme is also being mooted and more clarity is expected on this in the next couple of months. South Africa needs to add some 45GW of energy by 2030 and it is clear that Eskom will not be able to install this capacity. We are seeing the start of industrial IPPs taking shape and, of these, Anglo American’s Khanyisa Project is probably the most advanced. Industrial IPPs comprise the development by energy intensive industries of their own generation capacity with electricity wheeling arrangements with Eskom to deliver energy to their plants. With the Independent System and Market Operator (ISMO) bill in the offing, this is probably the start of a merchant base for electricity generation and supply over the coming decades. The REIPPP is probably an appropriate start to show investors that investment in South Africa is possible and that South Africa, considering where Europe is at the moment, is a quality alternative destination for capital.


Ashen Jugoo is a director at Bell Dewar. He specialises in project and infrastructure finance and has advised on a number of transactions locally and internationally. He has also advised both lenders and sponsors in relation to South African public private partnerships. Mr Jugoo has significant experience in infrastructure development in the telecommunication, transport, power and energy and information technology area,s and has been involved in various cross-border projects in Africa which include undersea cable, accommodation, and cellular and fixed line telephony projects. He can be contacted on +27 (0) 11 586 6098 or by email:

Eric le Grange is a director in the Projects and Project Finance Department at ENS (Edward Nathan Sonnenbergs) and has 19 years experience. Mr le Grange specialises in energy (including renewable energy), oil and gas and mining. He has acted for the South African government, many of South Africa’s large corporate entities, international developers and investors, IPPs, gas pipeline owners, utilities, state-owned enterprises, and financial institutions as lead counsel on projects developed, promoted or funded both in South Africa and internationally. He can be contacted on +27 11 269 7911 or by email:

Shamilah Grimwood is a partner at White & Case. She is a member of the firm’s Energy, Infrastructure and Project Finance Group and is admitted to practice in South Africa and New York. Ms Grimwood is recognised as a leading lawyer in the areas of project and infrastructure finance in the power sector and public private partnerships. Her practice also extends to public-sector finance, administrative and regulatory practice, and telecommunications. She can be contacted on +27 11 341 4000 or by email:

© Financier Worldwide



Ashen Jugoo

Bell Dewar 


Eric le Grange



Shamilah Grimwood

White & Case

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