For many developing countries, a major obstacle is attracting private sector funding and support for the development of renewable energy projects. While there may be strong support for such projects, many countries have to balance limited budgets against the need to provide services and opportunities in other sectors, including health, education and housing.
Renewable energy projects, although they may be attractive to governments, often seem unaffordable due to the high up-front investments required. One way to reduce these barriers and increase investment in renewable energy projects is to involve the private sector by establishing public-private partnerships (PPPs). For inspiration, other countries might wish to look at what South Africa has achieved with its Renewable Energy Independent Power Producer Procurement Programme (REIPPP).
South Africa’s REIPPP
Described by one investor as “the most successful public-private partnership in Africa in the last 20 years”, the REIPPP has received international acclaim. The World Wildlife Foundation (WWF) claimed it “has already established a flagship public-private partnership model for South Africa, and indeed the rest of Africa, and in the process is helping alleviate Eskom’s current power crisis while also reducing greenhouse gas emissions.”
Under the programme, the private sector has been able to participate in four bidding windows to design, develop and operate renewable energy projects that meet the contracted capacity specified by South Africa’s Department of Energy. Since November 2011, more than 6,500 megawatts (MW) of renewable energy projects have been awarded to Independent Power Producers (IPPs) spanning different energy types. Onshore wind farms have contributed to more than half the capacity, followed by solar PV, solar CSP, landfill gas, biogas and small hydro projects.
Traditionally, South Africa’s energy mix has been dominated by coal; the REIPPP is helping to slowly change the landscape for the better. To date, it has attracted over ZAR 192 billion (approx. USD 13.1 billon) in funding with over a quarter of this amount (ZAR 53 billion or approx. USD 3.6 billion) coming from overseas investors and financiers. Investors benefit from having a stable policy environment in place around the programme, allowing them to build and manage IPP projects across the country for an agreed time-period (up to 20 years). They make their returns over the lifetime of the project by selling the energy they generate to Eskom, the national electricity supplier. The government and South African citizens stand to benefit from increased supply of power, diversification of the country’s energy mix and other socio-economic benefits.
Unlike the development of a new coal power plant, the benefits of REIPPP have been experienced by multiple communities across the country, as IPPs develop their projects in multiple locations.
The programme is structured so that IPPs are required to ensure that projects enable socio-economic development (SED) and enterprise development (ED) benefits for local communities. IPPs must outline how they intend to enable SED and ED benefits in their tenders; they must contribute a minimum 1 percent of project revenue towards such projects. They must also adhere to requirements that outline where beneficiaries are located, which have been implemented to support rural and remote communities. To date, SED and ED contributions have been made in the categories of Education (approx. 40% of the total), Enterprise Development (21%), Social and Welfare (14%), Management and Planning (7%), Infrastructure (7%), Health Care (3%) and ‘Other’ (8%). Local citizens have also benefited from gaining equity in projects: 47 percent of total shares were held by South Africans across bidding windows 1 to 4.
In addition, the programme has resulted in new employment opportunities. Over, 19,050 job years have been created for local citizens, with over 90 percent of these in construction, and the rest in operations. This is highly significant for a country that has battled with persistently high structural unemployment rates over recent decades. Over ZAR 20 billion (approx. USD 1.4 billion) worth of local content has been sourced for construction, which helps strengthen local industries (both energy and non-energy related) and creates other jobs downstream. Furthermore, this has helped South African industry develop skills, knowledge and expertise in complex renewable energy technologies.
Despite significant interest in the REIPPP from other developing countries (in particular, other sub-Saharan African nations), they cannot simply copy South Africa’s approach. Mike Peo, Head of Infrastructure, Energy and Telecommunications at Nedbank says, “While it’s unlikely that many African countries could simply replicate REIPPP as a way of delivering renewable energy solutions, the programme’s success can, and should, help to address the reticence by many of these countries to prioritise renewable energy because of any historic failures or shortcomings of previously attempted renewable projects.”
Peo points out reasons why REIPPP has been successful. Preparation of the programme was thorough: “The bidding process was comprehensively thought through and set out, and offered full transparency in terms of what was required of bidders and what they could expect in return.” A strong regulatory framework also exists. Processes and frameworks were established early and have largely been adhered to, thereby providing investors certainty, and allowing successful bidders to quickly begin work on their projects.
South Africa is fortunate because weather conditions are highly favourable for generating renewable energy quite reliably throughout the year. Even if other countries have agreeable weather conditions, they are likely to differ from South Africa in other ways. Their policy and regulatory environments may differ and their national treasury may not be in a strong enough position to support the development of a nation-wide programme or to cover up-front costs. Renewable energy businesses and industries within these countries may not be in a sound position to invest in, and support the development of, major IPP projects.
Recognising that the policy and regulatory environment is challenging for many developing nations, the World Bank Group has developed the Scaling Solar programme. According to its website, “Scaling Solar brings together a suite of World Bank Group services under a single engagement aimed at creating viable markets for solar power in each client country. The “one stop shop” programme aims to make privately funded grid-connect solar projects operational within two years and at competitive tariffs.”
The programme was developed in response to countries struggling to develop utility-scale solar power plants due to challenges such as limited institutional capacity, lack of scale, lack of competition, high transaction costs and/or high perceived risk for (potential) investors.
At present, Scaling Solar is involved in supporting the development of solar energy projects in Ethiopia, Madagascar, Senegal and Zambia. In these countries, the World Bank Group plays an advisory and coordinating role, bringing together and working with multiple public and private stakeholders. These include governments and utilities, project developers and investors, and international donors and development partners.
Peo notes that “While most of the renewable and alternative energy projects that will be implemented across Africa in the coming year won’t be to the same scale as the South African REIPPP programme, these basic principles that underpinned its success will be essential for the similar success of Africa’s emerging energy reality.”
In this regard, Scaling Solar realises that basic foundations should be in place to ensure higher chances of success. Its process involves following five steps: project preparation, bid preparation, tender process and award, financial close and, finally, construction and operation. While the details may differ, the same fundamental processes can be followed in many countries.
Lessons for the Future
Initiatives like REIPPP in South Africa and the World Bank Group’s Scaling Solar programme show that it is possible for developing countries to establish successful renewable energy policies and projects. They demonstrate how it is possible for governments to incentivise the private sector and attract high amounts of domestic and international funding to support the development and operation of renewable energy projects.
As the costs of renewable energy continue to decrease, the attractiveness of these programs will likely continue to increase for governments, IPPs and other stakeholders. Combined with increased public pressure to reduce fossil fuels and increase renewable energy, countries like South Africa should prioritise expanding existing programs or begin developing their own.
The potential for governments and private stakeholders to learn from existing programs – both what has worked and what hasn’t worked – is great. With each new REIPPP bidding window, South Africa’s government and other stakeholders have learnt more about what is possible, what can be done and how it can be done in a manner that is both cost-effective and able to deliver socio-economic benefits to local communities. Other countries should seek to learn from South Africa’s experiences when developing or expanding their own renewable energy programs.
Image courtesy of Flickr. Originally published by S&S on September 6, 2018.