SAPVIA’s 19 th Networking Event: Early connection as a ... · Advisory Committee) to NERSA RSA Grid Code secretariat for an exemption from the Network code 2(2) for the issue of

© Allen & Overy 2015 1

SAPVIA’s 19th Networking Event: Early connection as

a selection criteria under REIPPP

Jason van der Poel

Partner

Allen & Overy (South Africa) LLP

9 December 2015


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© Allen & Overy 2015

Selected relevant awards

RENEWABLE ENERGY LAW FIRM OF THE YEAR – UK 2014Finance Monthly 2015

AFRICAN RENEWABLES DEAL OF THE YEAR

LAKE TURKANAPFI Thomson Reuters 2014

AFRICAN RENEWABLES DEAL OF THE YEAR

LAKE TURKANAIJ Global 2014

EUROPEAN SOLAR DEAL OF THE YEAR

MEGALIMIJ Global 2014

INTERNATIONAL LAW FIRM OF THE YEAR

IFLR 2014

4


Our South African team

Lionel Shawe

Partner

Mike Duncan

Partner

Jason van der Poel

Partner

Lisa Botha

Partner

Khurshid Fazel

Partner

Sibusiso Zungu

Director

Lindani Mthembu

Director

Allen Leuta

Director

Anthony Colegrave

Director

Kathleen Wong

Counsel

Supported by 5 senior associates, 11 associates, 2 trainees

All working across:Projects and project financing, Banking and financial services, Asset management, Financial services regulation,

Derivatives, Restructuring, Securitisation, Trade finance, Tax, Corporate/M&A

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What are we seeing from behind our desks?

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Successful closure of REIPPPP Round 3 Projects, although in some

instances, there was a large cost variance between the Cost Estimate

Letters and the Budget Quote.

The delay in commencement of work, the slowing down and the suspension

of work on our REIPPPP Round 4 preferred bidder projects.

Expedited Bid Phase bid submission date postponed to 11 November 2015

but large number of bids were submitted. Some Cost Estimate Letters had

not been issued before the previous 2 November deadline but all appeared

to have Cost Estimate Letters by 11 November.

Potential new IPP investors are jittery and adopting a wait and see attitude.

.


Why are we seeing this?

7

Application on 26 September 2015 by Eskom Transmission (Grid Code

Advisory Committee) to NERSA RSA Grid Code secretariat for an exemption

from the Network code 2(2) for the issue of budget quotes to customers until

the end of the MYPD3 period (31 March 2018) on account of Eskom’s

“serious liquidity issues”.

NERSA statement that it cannot issue guarantees to Eskom outside the

regulatory process and that Eskom must follow the prescribed process by

submitting either an adjustment in terms of the Regulatory Clearing Account

or an early tariff Application. Eskom board expressed willingness to engage

on this basis and made a MYPD3 RCA submission in November 2015, which

NERSA is now considering.

IPP Office establishment of a strategic grid connection committee to examine

the way forward; ongoing engagement – very helpfully reported on at this

year’s Windaba.

Market eagerly awaiting clarity.


Connection as a Qualification Criterion under the

RFP

8

Bidder must submit a Project Schedule, which must include the anticipated

time for completion of the Transmission/Distribution Works (Part B clause

2.6.1.7 (Project Schedule)).

Bidder must liaise with relevant Grid Provider (Part A), and provide cost

estimate letter for indicative cost and indicative timeline for grid connection

(Part B clause 2.6.1.8.2 (Time and Cost of Grid Connection)).

Bidder must clarify which parts of the grid connection works will be

implemented by the Bidder, any element defined as self-build or own build –

it seems that Eskom build is no longer applicable.

Bidder must be capable of complying with Codes by Scheduled COD.

Earliest connection comparative to others is not a specific

technical requirement for qualification, nor is it one of the

evaluation criteria.


Benefits of early connection: CSIR study

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As the diesel, mid

merit coal and LNG fuel saving value of

wind and PV declines

as the South African system becomes less

constrained, bringing

such projects online

early maximises NPV for the system

According to CSIR study each month

earlier grid connection adds an NPV of 0.5 r-ct/kWh

during the entire PPA

Projects with early connection capability could be favoured by:

• adjusting proposed tariffs upwards for evaluation purposes by 0.5r-

ct/kWh for every month of committed COD after base month; and

• increasing penalties for late COD.

Source: CSIR Report: Value of earlier grid connection of renewable projects: a power system and macroeconomic cost-benefit analysis, 17 August 2015


Geographical blindness in the REIPPP bid process

10

Out of 8400 MW of IPP solar farms, 6400 MW is

allocated to the Northern Cape, whilst only 2000 MW is

dispersed elsewhere in the country

2000

6400

Levelised cost of renewable energy (RE) supplied at the

point of connection to the grid is weighted at 70% for bid

evaluation. Solar PV bidders generally opt for areas with

the highest irradiation and thus the best energy yields -

typically in the Solar Corridor.

Source: Analysis: SA renewable energy bid process flawed, Pierre Potgieter and Chris Yelland, EE Publishers; GIZ Study Report: Analysis of options for the future allocation of PV farms in South Africa



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Solar irradiation in South AfricaSource: GIZ Study Report: Analysis of options for the future allocation of PV farms in South Africa



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Cost

Socio-economic

Development

IGNORED: the costs of additional

grid infrastructure and upgrades,

and transmission losses to the point

of consumption.

RESULT: grid congestion, time

delays and importantly, additional

real delivered costs when the

transmission grid upgrades and

transmission losses are included

Source: Analysis: SA renewable energy bid process flawed, Pierre Potgieter and Chris Yelland, EE Publishers


Renewable Energy Development Zones

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GIZ study: 3 options, one of which the allocation of facilities is predominantly

within defined Renewable Energy Development Zones (REDZ)

REDZ:

• considers transmission losses, municipalities with high social need and

development potential, priority areas for renewable energy manufacturing

and import activities, and existing transmission infrastructure

• integrates environmental, economic and social factors to identify

geographical areas where in the medium to long-term wind and solar PV

development will have the lowest impact on the environment while

yielding the highest possible social and economic benefit

Source: GIZ Study Report: Analysis of options for the future allocation of PV farms in South Africa


Renewable Energy Development Zones

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Scenario A: Current allocation strategy predominantly in the Solar Corridor (maximum energy yield)

Scenario B: Allocation predominantly close to load centres (minimum grid reinforcements)

Scenario C: REDZ

Total levelized cost of electricity of PV generationSource: GIZ Study Report: Analysis of options for the future allocation of PV farms in South Africa

Total levelised costs for all three scenarios – very similar.


Rethinking bid selection

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• Unfairly favours projects with low levelised cost at

the point of connection

• Alternative strategies:

• Choose projects that can connect quicker to

maximise diesel, coal and gas cost offset

• better distribution allowing for much needed

generation capacity to be connected faster

• Minimisation of transmission grid upgrades and

transmission losses

Proposed PV allocation in REDZSource: GIZ Study Report: Analysis of options for the future allocation of PV farms in South Africa


Key Allen & Overy contacts

Jason van der Poel

Partner

+27 (0)10 597 9850

+27 76 123 5323

[email protected]


These are presentation slides only. The information within these slides does not constitute definitive advice and should not be used as the basis for giving definitive advice without checking the primary sources.

Allen & Overy means Allen & Overy LLP and/or its affiliated undertakings. The term partner is used to refer to a member of Allen & Overy LLP or an employee or consultant with equivalent standing and qualifications or an individual with equivalent status in one of Allen & Overy LLP’s affiliated undertakings.

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Documents

SAPVIA’s 19 th Networking Event: Early connection as a ... · Advisory Committee) to NERSA RSA Grid Code secretariat for an exemption from the Network code 2(2) for the issue of