Procurement models applied to IPPP’s in South Africa.

National Treasury has announced that Base Load independent power producer bidding will commence soon (Baseload coal bidding to begin this year, cogen to follow). At the end of August 2014, ERC published a research paper by Brenda Martin and Harald Winkler – “Procurement models applied to independent power producer programmes in South Africa”.

The paper raises the questions – What is the procurement model in South Africa as it applies to renewable energy (RE) and base load (BL) independent power producer procurement programmes (IPPPP) and how might these be improved? What lessons have been learned in the RE IPPPP? What challenges might the emerging BL IPPP programme face and how might these challenges be addressed? The paper shares research findings, highlights remaining critical questions, and provides recommendations for the future. You will find specific base load recommendations under sections 6 and 10. The paper also includes a brief look at how nuclear power procurement is treated differently. You can find the full paper on the ERC’s main site http://www.erc.uct.ac.za/

Recommendations from the report

Based on the analysis of the existing RE and emergent BL IPPPP, the following recommendations are offered:

  1. The successes of the RE IPPPP should be built upon, as they seem transferable to a significant degree to BL IPPPP.
  2. It is worth investing in the development of a clear procurement framework in advance of the process being launched. Ideally, there should be one procurement model for all electricity-generating technologies. Bid windows in the REIPPPP programme allowed for continued additional learning and application in subsequent bid windows. At a minimum, transparent processes must apply in all procurement, as a matter of good energy governance.
  3. In time, it would be wise if the Minister of Energy’s role was limited to the highest level of policy development and guidelines which can lead to the creation of a space in which role players can apply developmental values and prove their capacities.
  4. Procurement should be flexible, indicative of plans, the regulator active and procurement more vibrantly competitive in order to achieve lower tariffs. Lower tariffs should not be achieved at the cost of SED and ED criteria.
  5. Large-scale investment and increased accountability are recognised as wise partners. The emergent BL IPPPP provides a good opportunity to add even more features of transparency and accountability to those which emerged with the REIPPPP.
  6. Big investment of any kind is prone to being politicised. Procurement models for BL IPPPP and nuclear need to be designed in order to proactively deal with this reality. The challenges of Eskom’s financial health and strains of sovereign debt place further stresses on these dynamics.
  7. It is critical to design a BL IPP procurement model that can manage and even avoid rent-seeking. At the very least, this risk should be explicitly considered and a procurement process designed to manage the risk of rent-seeking.
  8. Procurement of BL IPPs presents an opportunity to expand co-generation in particular, and thereby meeting both local energy security and emissions reduction targets.
  9. Power purchase agreements for BL IPPs need to be watertight and not be solely subject to the priorities of the Eskom system operator.
  10. The socio-economic and local enterprise criteria applied in the REIPPPP is innovative and appropriate in our development context. These should be included in the BL IPPPP and indeed all procurement, including nuclear.