Wednesday, January 19

Myths and Truths About SA’s Recent Renewable Energy Auction

South Africa Department of Mineral Resources and Energy recently announced your choice of companies to build and operate a new “batch” of renewable energy projects. This is part of a program in which the government invites private companies to compete for contracts to produce electricity and sell it to the national utility Eskom.

In this most recent contract auction, known as “bid window 5,” 25 projects – 12 solar and 13 wind power – totaling about 2,600 MW of capacity got the go-ahead. These projects are expected to come online in the next two to three years. The contracts have a duration of 20 years.

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Electricity offers are scored mainly (90%) on the price at which they will sell the electricity. The rest of the score (10%) is based on socioeconomic development criteria.

Bid window 5 marks the end of a long gap in renewable energy procurement. South Africa started the procurement program in 2011 and over the next four years awarded 102 renewable energy projects totaling more than 6,300 MW. The program was stopped in 2015 when Eskom’s leadership at the time refused to sign more of these power purchase agreements.

Announcing the results of bid window 5 indicates a renewed engagement. The prices of the awarded projects are extremely competitive: only 34.4c / kWh (around US $ 0.02) for onshore wind energy and 37.4c / kWh for photovoltaic solar energy. The average price of projects in the previous bidding window was R1.03 / kWh (about US $ 0.07) in April 2021 terms. Prices are now competitive with Eskom’s average purchase cost of coal in the last financial year: 42c / kWh. And, of course, Eskom has the added cost of operating coal plants.

Therefore, it is now theoretically cheaper for Eskom to buy renewable energy from independent power producers than to operate its more expensive coal-fired power plants.

The problem is that the power system is severely restricted and needs a lot more capacity before this is a realistic option. More flexible resources are also needed on the network to ensure reliability, and this increases costs.

But I’ve been involved in investigate which shows that renewable energy procurement programs like this one can ensure projects that are built at a competitive cost, if they are well designed and implemented. This is the case even in difficult investment contexts in the global south.

My view is that South Africa’s renewable energy procurement program has the potential to help restore energy security and eventually lower energy prices. This despite some concerns that have arisen about the latest tender results. I will explain here why these issues are not a cause for concern.

The worries

Three main concerns have arisen in response to bid window 5:

  • the prices are too low to be realistic,
  • a few bidders will dominate the market and
  • Renewable energy rates cannot be compared to base load rates.

First, consider the statement that “these prices are too low. Projects will never be built at these costs. ”

While the advertised prices are in fact around half of those of previous rounds, they are not unrealistic. Global renewable energy auctions have regularly returned prices like these or even lower in the last two to three years. Examples can be found in Kazakhstan, Saudi Arabia, Portugal, chili, Abu dhabi, the us, Brazil and Uzbekistan. That is, of course, without the additional requirements included in the South African procurement program, which increase capital and operating costs, but the point remains that these prices are feasible.

South Africa also has one of the most expensive and expensive bidding programs in the world. This is to protect against unrealistic offers. The rate of successful offers in the country that translates into projects is more than 95% – one of the best in the world.

In short, there is no reason to believe that new projects will fail to operate commercially because of prices.

Second, there is a concern that “we are seeing projects awarded to fewer and fewer bidders. Soon, the market will be dominated by only a handful of international companies. ”

While it is true that a small number of winning bidders were awarded most of the projects in this latest auction, it is not true that this has resulted in market dominance. The fact is that competition has been fiercer in each consecutive bidding round and no company has been able to dominate the market from one round to the next.

Some degree of market concentration is unavoidable in a competitive bidding process such as that in South Africa. This is because larger and more experienced bidders can use economies of scale, financial innovation, stronger bargaining positions with suppliers and contractors, and vertical integration to reduce costs. In turn, they can offer more competitive rates. But several midsize companies have has also been successful.

And the top bidders represent only one part of the project’s value chain. Through the years, an extensive ecosystem of service providers and suppliers has grown up around these projects. Furthermore, the top bidders are not the only shareholders in these companies. South African shareholders, including black economic empowerment partners and community trusts, own 49.4%, on average, of these projects.

A third claim is: “you can’t compare the rates of these intermittent renewables with that of ‘base load’, such as coal or nuclear ”.

Let’s tackle some issues here. The renewable supply is variable, not intermittent. Power system operators have gotten good at predicting when the sun won’t shine or the wind won’t blow. That means flexible supply can be predicted to complement renewable energy.

Anyway, “Base load” is an obsolete concept. It comes from highly centralized power systems where the cheapest electricity was produced by large coal or nuclear power plants that could not be turned on or off quickly. Cheap renewables are challenging this paradigm. Future energy systems will be dominated by these variable resources backed by storage and flexible resources like gas or hydropower.

South Africa’s Integrated Resource Plan for 2019 is based on reliable power supply. its lowest cost scenarios all choose wind, solar photovoltaic and a flexible resource to meet future energy demand safely.

Going forward

There’s others worries around the auctions of the procurement program of independent energy producers of renewable energy in the country. Maximizing and expanding local benefits is important for greater acceptance of this program, which together has resulted in an investment of R250 billion (about US $ 16 billion). But concerns must be based on facts.

The latest auction has generated excellent prices for consumers and most of these projects will be built. Although a small number of international companies stand out, competition remains fierce. There is a place for local partners and smart midsize businesses.

As these renewable energy auctions are implemented, along with supplemental flexible resources, the country may leave power outages to history.The conversation

Wikus Kruger, Renewable Energy Researcher, University of Cape Town

This article is republished from The conversation under a Creative Commons license. Read the Original article.

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