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INFORMATION BRIEF
INDEPENDENT POWER PRODUCERS
Since 2011, the Renewable Energy Independent Power Producers Programme (REIPPPP) has facilitated private investment in
utility and small-scale wind, solar, hydro and waste to energy generation infrastructure, making a small but critical contribution
to the energy system (1). Independent Power Producers (IPPs) have been the subject of ongoing misinformation and confusion
in South Africa, linked to the role we want the private sector to play in the electricity sector, but there are some basic facts
that must ground this public debate.
1. WHAT ARE IPPS?
IPPs are private sector energy generators. IPPs are a common element of most
electricity sectors around the world. The legislation and policy that controls who may
“An incremental
invest, in what technology, how, and whether the state takes control of infrastructure
at the end of the IPP contract, differs by country. approach allows
decision-makers to
IPPs are a relatively new phenomenon in South Africa, but the private sector has always
played a role in the electricity sector. Currently, most of the power plants in South build consensus on one
Africa are owned by Eskom and run on coal. The coal mines that supply these power step at a time, to take a
stations are privately owned, and the suppliers that provide a range of goods and
country forward. Some
services, including construction of new power plants, such as Medupi and Kusile, are
private companies too. of the benefits of
unbundling could also
In South Africa, the IPP Office in the Department of Energy (DOE) runs several IPP
programmes that enable investment in different kinds of technology: large-scale be realised over a
renewables; small renewables; coal; cogeneration; gas; and the Solar Parks project that shorter period than if a
will focus on large solar projects, specifically. The country’s latest draft Integrated
total overhaul is
Resource Plan (IRP) 2018 does indicate plans for two coal IPPs, for which a request for
proposals (RFQ) was issued in 2014. However, these plans have run into financial issues pursued from the
and other hurdles. This note will focus on renewable energy IPPs, in line with President beginning.”
Ramaphosa’s latest announcements on South Africa’s energy future.
THE RENEWABLE ENERGY INDEPENDENT POWER PRODUCERS
PROGRAMME (REIPPPP)
Functioning since 2011, REIPPPP is the procurement vehicle that the IPP office has used to enable private sector investment
in large (larger than 5MW) and small (1MW-5MW) solar, wind, biomass, biogas, landfill gas, and hydro energy generation (1).
HOW MUCH ENERGY DO WE GET FROM REIPPPP?
Renewable energy IPPs currently contribute approximately 5% of total electricity generated in South Africa. However, given
the recent supply crisis and load-shedding, the President has announced Cabinet’s intention to increase the level of investment
in renewable energy IPPs, and therefore also their contribution to South Africa’s energy mix. More IPP investment does mean
more private sector participation in the sector, but as things stand, there are no plans to privatise any state-owned assets.
Independent Power Producers | Page 12. WHY DO WE HAVE RENEWABLE ENERGY IPPS?
The 1998 White Paper on Energy Policy was the first official national policy that proposed extensive reform of the electricity
sector, which included both the introduction of renewable energy and private sector participation in the electricity sector.
Since then, there have been other policies, programmes and legislation to drive renewable energy generation and private
sector participation.
It is important to note that renewable energy infrastructure can be state-owned or privately owned. Eskom owns the Sere
Wind Farm in the Western Cape, which was commissioned in 2015 and has a 100MW generation capacity. The rationale for
investing in publicly or privately owned renewable energy has two main components:
1. Renewable energy can replace fossil fuels that contribute to global climate change, as well as a range of risks,
including air pollution, water pollution, and human health impact for people working in coal mines, and people living
near power plants.
2. Renewable energy costs are decreasing year on year. Bids awarded in Bid Window 4, shown in Error! Reference
source not found. (awarded in 2015) are the most recent bids to have been awarded for both wind and solar
photovoltaic (PV) energy and are the cheapest to date. The latest local prices achieved are globally competitive,
coming lower than procurement in the same year in India, Brazil and Chile (2). These prices are expected to keep
decreasing.
Table 1: Average tariffs offered by solar PV and onshore wind projects over bid windows expressed in 2018 ZAR/kWh (3).
TITLE ROUND 4 ROUND 4
ROUND 1 ROUND 2 ROUND 3
(A&B) EXPEDITED
Wind (R/kWh) 1.66 1.31 0.96 0.76 0.68
Total reduction
-59%
from round 1 (%)
Solar PV (R/kWh) 4.02 2.40 1.29 0.96 0.68
Total reduction
-83%
from round 1 (%)
Introducing IPPs into South Africa’s electricity sector has introduced competition in energy generation, which was previously
dominated by Eskom, with only a few exceptions of city government ownership, including Cape Town and Johannesburg
owning their own thermal power plants . There are three main aspects to the rationale for allowing the private sector to
participate in energy generationi:
1. Cost-saving: Having more than one service provider for the same service (e.g. different generation companies)
creates an environment where companies compete with each other to provide lower prices and innovative products
(e.g. new technologies), ultimately benefiting the consumer.
2. Risk management and resilience: Horizontal unbundling e.g. different generation companies) also increases the
resilience of an electricity sector. This is because including multiple actors allows for the diversification of power
Independent Power Producers | Page 2sources. If one power company or technology experiences challenges, others continue to operate. This reduces
electricity supply risk.
3. Eskom’s ballooning debt: Eskom is in the grip of a financial crisis, struggling to pay its increasing debt and unable to
secure lending at a reasonable cost. It is currently not financially able to finance the required additional renewable
energy generation infrastructure to support our local energy security.
3. HOW ARE RENEWABLE ENERGY IPPS SELECTED?
REIPPPP run competitive auctions, whereby local and international bidders present plans for infrastructure development that
are assessed on strict criteria. REIPPPP bids are adjudicated on the basis of a 70% weighting for the price (bid tariff), and 30%
for economic development components.
Economic development components are captured in the Balanced Scorecard Evaluation Score Sheet that measures seven
performance areas that are tailored to the renewable energy sector: job creation, local content, enterprise development (ED),
socioeconomic development (SED), ownership, management control, and preferential procurement. This replaces and
expands on Broad-Based Black Economic Empowerment (BBBEE), which usually only accounts for 20% of public procurement
evaluation, in line with the Preferential Procurement Policy Framework Act (2000), the BBBEE Act (2003), and subsequent
regulations (4,5)1. A breakdown of Balanced Scorecard criteria is provided in Table 2.
Table 2: REIPPPP economic development criteria for Round 4 (5,6)
REQUIREMENT %ECONOMIC MINIMUM THRESHOLD AND TARGET
DEVELOPMENT SCORE
1. Job creation in RSA 25% • Citizens: 50% minimum; 80% target
• Black people: 30% minimum; 50% target
• Skilled Black employees: 18% minimum; 30% target
• Citizens from local communities: 12% minimum; 20%
target
2. Local content 25% 40% of total project cost minimum; 60% target
3. Enterprise development 5% No minimum; 0.6% of revenue target
(ED) spend
4. Socioeconomic 15% 1% of total project revenues target minimum; 1.5% target
development (SED) spend
5. Ownership 15% • Shareholding by Black people and enterprises: 12%
minimum; 30% target
• Shareholding by local community: 2.5% minimum; 5%
target
1 There are six elements to BBBEE: ownership, management control, skills development, preferential procurement,
supplier development and enterprise development (ED), and socio-economic development (SED) (encompassing
corporate social investment). Some industries are subject to sector-specific requirements.
Independent Power Producers | Page 3• Shareholding by Black people and enterprises in the
construction contractor: 8% minimum; 20% target
• Shareholding by Black people and enterprises in the
operations contractor: 8% minimum; 20% target
6. Management control 5% No minimum; 60% target
7. Preferential procurement 10% • BBBEE: no minimum; 60% target
• SME and QME: no minimum; 10% target
• Women-owned businesses: no minimum; 5% target
Public procurement can be extremely challenging, as large government contracts have been attractive to corrupt interests
seeking to exploit public resources for private gain. However, to date, REIPPPP has been commended for its good governance,
which is a significant achievement, especially when contrasted with Eskom procurement of private goods and services.
4. HOW DO IPPS FIT INTO THE SOUTH AFRICAN ELECTRCITY
SECTOR?
IPPs contribute to the total amount of electrcity that
the South African government thinks we need to
support our economy. Based on how much electrcity
the DOE thinks we need, the Minister of Energy must
make a determination in terms of Section 34 (1) of
the Electricity Regulation Act, the Minister of Energy,
in consultation with NERSA, to allow for new energy
generation capacity to be built. These Ministerial
Determinations may also make other specifications,
in line with the Electricity Regulations on New
Generation Capacity (published as GNR. 399 in
Government Gazette No. 34262 dated 4 May 2011,
as amended on 19 May 2015) (New Gen Regulations).
Specifications include specifying the buyer (Eskom or
other), and the procurement mechanism, for
example, a bidding process for any new energy Figure 1: South Africa’s current electricity sector structure
capacity (7). Once the Minister makes the determination
for how much energy we need, and from which
technology, a process begins:
1. The IPP Office must arrange a bidding process meeting the Minister’s requirements.
2. Eskom is required to develop a off-take agreement (purchasing contract) with each IPP even before they are allowed
to bid for the right to generate electricity.
3. Companies submit their bids, in line with accepted criteria.
4. Successful bids are selected by the IPP Office.
5. Successful bidders must legally contract with Eskom’s system operator and buyer (SO buyer) at the tariff set out in
the successful bid for an agreed period.
6. When the IPP has successfully been built and commissioned, it sells electricity to Eskom, which transports this
electricity via the national transmission grid (Tx), to local distribution grids (Dx) operated by Eskom and municipal
governments.
Independent Power Producers | Page 4Within the current regulations, IPPs can only sell their electricity directly to Eskom. There are a few exceptions. In 2013, NERSA
awarded PowerX (then Amatola Green Power) an energy trader license, allowing it to buy electricity from IPPs and sell this on
to consumers. Nelson Mandela Bay Municipality (NMBM) signed a 15-year ‘wheeling' agreement with PowerX, allowing it to
play this role within its boundary, using the local distribution grid to transport this electricity (8). The City of Cape Town (CCT)
Mayor Patricia de Lille announced in January 2017 that the City would take the Minister to court over the right to purchase
energy directly from IPPs, without having to go through Eskom (9). Additionally, because Eskom serves as intermediary, the
REIPPPP's cost savings over time have been internalised in its complex accounting system, covering its many different
functions.
5. WHAT ARE THE MAIN CONCERNS ABOUT IPPS?
While REIPPPP has been successful in many ways, there are many concerns that need to be addressed in further rounds of
implementation, which President Ramaphosa has confirmed to be part of South Africa’s energy strategy.
ISSUE EXPLANATION
There is no clear, broadly supported, long-term strategy on the role we would like the private
The role of the private
sector to play in the electricity sector. The private sector is involved in South Africa’s electricity
sector
sector through:
• The provision of finance to Eskom
• The provision of goods and services to Eskom, including increasingly expensive and corrupt
coal contracts,
• Finance, construction, operation and ownership of IPPs
Ownership Because of South Africa’s unequal distribution of wealth and access to resources, there have been
concerns over foreign ownership and a lack of socio-economic transformation in REIPPPP. There
are alternative approaches in IPPs in countries, like Uganda, where IPPs hand ownership of
infrastructure back to the state after their contracts end. These policy options could also be on the
table in South Africa.
The cost of IPPs to There is a lot of misinformation about the cost of IPPs to Eskom. What is true is that the first rounds
Eskom of REIPPPP procurement were not yet competitive with Eskom’s coal-fired power prices. However,
this is not the case anymore. The reason is that the technology and market has evolved, and RE
IPPs are likely to get cheaper.
The success of the Eskom delayed signing contracts with success Round 4 IPPs between 2016 and 2018, which has
REIPPPP was hinged on had negative impacts for the sector, including local manufacturers. An important motivation for
Eskom's willingness and unbundling is to allow Eskom transmission to freely contract with independent power producers
ability to enable (IPPs) and Eskom generation without the conflict of interest that currently exists. This is seen as
connection to the critical, given recent load-shedding, which is partially caused by a shortage of electricity supply.
national transmission
grid.
The IRP is not aligned to The latest draft Integrated Resource Plan 2018 (“IRP 2018”), set to be the first official IRP since
the President’s current 2010, was published for public comment on 28 August 2018 by the Minister of Energy. Planned
position on Eskom, REIPPPP bidding rounds are scheduled for 2019 and then suspended for three years. This stop-
renewable energy and start approach is not ideal for local value chains, including any local manufacturing, and related
IPPs job creation.
Independent Power Producers | Page 5REIPPPPs local Significant funds are invested in local economic development through REIPPPP. For all projects
economic development approved from Round 1 to Round 4, ZAR 20.6 billion has been earmarked for spending on socio-
impacts can be economic development projects over the term of IPP contracts. ZAR16.5 billion is allocated to
improved local communities where projects are built (10). While this is positive, the effectiveness, impact
and monitoring and evaluation of this spending can be improved.
IPP impact on jobs Employment data in South Africa's energy sector is difficult to use because of the inconsistency of
metrics, categorisation and methodologies (11). According to the IPP Programme Office, by June
2018, REIPPPP had created 36 528 direct Job Years, which equates to 41 451 full-time equivalents
(FTEs) (12). Another issue is that the nature of employment in renewable energy value chains is
different from coal mining, in terms of stability, longevity, location, and skills requirements. If the
country is to protect and support workers in the transition from fossil fuels to renewables, many
adjustments and investments will be required.
These concerns are important and will need to be addressed with different stakeholder groups, to achieve the outcomes
that South Africa needs from REIPPPP.
6. WHAT OUTCOMES DO WE WANT IN SOUTH AFRICA?
Whatever the role that the private sector plays in South Africa’s just and sustainable energy transition, it must:
• Allow for least-cost power procurement
• Enable fast-tracking the procurement of additional renewable energy generation capacity being added to the system
within the next two years
• Diversify generation and reduce risks associated with overdependence on Eskom’s current aging coal-fired
generation
• Increase transparency and accountability in the sector
There is an opportunity to look to other countries that have already introduced various forms of private sector energy
generation for innovative solutions that fit our local context.
References
1. Eberhard A, Leigland J, Kolker J. South Africa’s Renewable Energy IPP Procurement Program: Success Factors and Lessons
[Internet]. 2014. Available from: http://www.ee.co.za/article/south-africas-reippp-programme-success-factors-
lessons.html
2. Dobrotkova Z, Surana K, Audinet P. The price of solar energy: Comparing competitive auctions for utility-scale solar PV in
developing countries. Energy Policy [Internet]. 2018;118(January):133–48. Available from:
https://doi.org/10.1016/j.enpol.2018.03.036
3. CSIR. Formal comments on the South African Integrated Resource Plan ( IRP ) Update Assumptions, Base Case and
Observations 2016 [Internet]. Pretoria: CSIR; 2017. Available from:
https://www.csir.co.za/sites/default/files/Documents/CSIR_IRP2016_Comments_1.1.pdf
4. Turley L, Perera O. Implementing Sustainable Public Procurement in South Africa: Where to start [Internet]. Geneva; 2014.
Available from: www.iisd.org/sites/default/files/publications/implementing_spp_south_africa.pdf
5. Eberhard A, Naude R. The South African Renewable Energy IPP Procurement Programme: Review, Lessons Learned and
Proposals to Reduce Transaction Costs [Internet]. 2016. Available from:
https://www.gsb.uct.ac.za/files/EberhardNaude_REIPPPPReview_2017_1_1.pdf
6. Department of Energy, National Treasury, Development Bank of Southern Africa. Independent Power Producers
Procurement Programme (IPPPP): An Overview as at 30 September 2016. 2016.
7. Republic of South Africa Department of Energy. Electricy Regulation Act, 2006 Amendment of the Electricty Regulations on
Independent Power Producers | Page 6New Generation Capacity, 2011. Gov Gaz. 2015;419(38801).
8. ICLEI. Embedded energy generation experience in a South African metropolitan municipality [Internet]. Vol. February, ICLEI
Case Studies. 2015. Available from:
http://www.iclei.org/fileadmin/PUBLICATIONS/Case_Studies/ICLEI_cs_174_NMBM_UrbanLEDS_2014.pdf
9. Evans J. Cape Town draws battle lines over right to buy alternative energy from IPPs. News24 [Internet]. 2016 Jan 26 [cited
2017 Jan 26]; Available from: http://www.news24.com/SouthAfrica/News/cape-town-draws-battle-lines-over-right-to-
buy-alternative-energy-from-ipps-20170126
10. Independent Power Producer Office. Independent Power Producers Procurement Programme (IPPPP): An Overview, as at
March 2018 [Internet]. Pretoria; 2018. Available from: https://www.ipp-
projects.co.za/Publications/GetPublicationFile?fileid=9f9536ed-56e3-e811-9491-2c59e59ac9cd&fileName=20181024_IPP
Office Q1_2018-19 Overview.pdf
11. Tyler E. Briefing paper: An overview of the employment implications of the South African power sector transition
[Internet]. Vol. 2040. Cape Town; 2018. Available from: https://sawea.org.za/wp-content/uploads/2018/07/Employment-
implications-SA-power-sector-transition_final.pdf
12. South African National Department of Energy. Independent Power Producers Procurement Programme (IPPPP): An
Overview, as at 30 June 2018 [Internet]. Pretoria; 2018. Available from: https://www.ipp-
projects.co.za/Publications/GetPublicationFile?fileid=9f9536ed-56e3-e811-9491-2c59e59ac9cd&fileName=20181024_IPP
Office Q1_2018-19 Overview.pdf
Power Futures SA is a platform for inclusive, evidence-based, discussion for a just and transformed South African Energy Sector. For more
information, visit powerfutures.org or email us at info@powerfutures.org. Join the discussion on Twitter by following @PowerFuturesZA and
weighing in on the #NationalGrid #EskomUnbundling #PowerFutures conversation.
iEnergy icon sources: Factory by Creative Stall from the Noun Project ; Biomass Energy by ProSymbols from the Noun Project; solar by Creative
Mahira from the Noun Project; Wind Energy Generation by Symbolon from the Noun Project.
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