Renewable energy industry participants have expressed grave reservations over the nature, as well as the timing, of proposed cuts to South Africa’s yet-to-be-deployed renewable energy feed-in tariffs (Refit).

The National Energy Regulator of South Africa (Nersa) has published a consultation paper entitled a ‘Review of Renewable Energy Feed-In Tariffs’, in which it proposes substantial decreases to the Refit rates when compared with those approved and promulgated in 2009. The paper also sets out new qualifying principles for landfill gas, biomass, biogas, concentrated solar power (CSP) trough (with and without storage), CSP tower (with storage), wind, small hydro and photovoltaic (ground mounted and rooftop).

South African Wind Energy Association chairperson Mark Tanton, who is also an executive at wind development company Red Cap Investments, told Engineering News Online he was surprised by the size of the proposed cuts.

But he was equally troubled by the timing of Nersa’s announcement, which came ahead of the imminent release of a request for proposals (RFP) for the first 1 025 MW of Refit projects.

The Department of Energy (DoE) and the National Treasury were expected to issue the RFP, along with a standardised power purchase agreement (PPA), by the end of March, or in early April.

“We are now in the dark as to how this affects the procurement process,” Tanton told Engineering News Online, adding that, prior to the Nersa paper, developers had been given the undertaking that the promulgated 2009 rates would be used in the PPA.

G7 Renewable Energies’ Dr Kilian Hagemann described the proposed 25% cut in the tariff for wind projects as “very concerning”, adding that it could lower investor appetite for South Africa.
“Implementation of new technology for the first time on a large scale in a new country includes significant risks for investors. An attractive up-front profit margin is required in order to make the investment worthwhile, and the revised tariff will impinge on that significantly,” Hagemann added.

Tanton estimated that potential renewable energy developers had already invested “north of R400-million in making their projects Refit-ready”.

He was also worried that the latest development could further delay the deployment of projects, particularly should the DoE and the National Treasury seek to align themselves with Nersa’s proposed adjustments. The regulator would host public hearings on May 5 and would expect to receive written public comments by April 22.

Engineering News Online was unable to secure immediate comment from the National Treasury’s public-private partnership unit on the implications for the RFP and the timing of its release.

Tanton also questioned whether Eskom would not be guilty of over recovery, owing to the fact that it had received a specific allocation for renewable energy projects in the second multi-year price determination period, which runs from 2010 to 2013. This recovery, which would amount to over R8-billion for the three-year tariff period, had been based on the 2009 Refit rates.

“The burning question, therefore, is whether the procurement process will be indexed to the 2009 tariffs, as anticipated, or to the proposed 2011 Refit,” Tanton outlined.

Nersa regulatory member for electricity Thembani Bukula acknowledged that some confusion could be introduced into the procurement process as a result of the publication of the consultation paper, but said he had no insight into the RFP process.

However, he said there had always been an intention to review the Refit on a yearly basis and insisted that the intention was not to make the programme less attractive. He pointed out that the real return on equity after tax remained 17%, which incorporated the principle of “better than reasonable returns”.

“But we also have to ensure that South Africans get the best deal possible and that the Refit is not over generous,” he explained.

The consultation paper states that, once approved, the revised tariffs and rules will replace Refit phase I and II tariffs and associated guidelines, and that the process should be completed by May 26.

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

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

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

However, it has also been pointed out that the document may also misstate some of the 2009 rates, with the original Refit showing a tariff of R0,90/kWh for landfill gas projects, as opposed to the R0,65/kWh stated in the consultation paper.

The paper also puts the tariff for CSP tough (without storage) at R2,09/kWh as opposed to R3,14/kWh in the 2009 Refit. Similarly, for CSP trough (with storage) the rate quoted in the consultation paper is R3,14/kWh as opposed to R2,10/kWh in the promulgated version.

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