South Africa’s Independent Power Producer Office (IPPO) has confirmed that it is undertaking a comprehensive review of the country’s public procurement framework for independent power producers (IPPs), which has hitherto been dominated by renewable energy.

The model was once lauded internationally but is currently facing significant headwinds, with analysis by the University of Cape Town’s (UCT’s) Power Futures Lab showing that of the 14 800 MW tendered since 2020, only 7 343 MW has been awarded, while less than 20% has reached financial close.

The IPPO tells Engineering News that the review is being conducted in line with the Energy Action Plan and will guide the design of future bidding rounds for IPP generation capacity, including the Renewable Energy Independent Power Producer Procurement Programme (REIPPPP).

The IPPO has not provided details on the terms of reference, but indicates that the review will consider the lessons learnt from recent bid windows, as well as feedback from Electricity and Energy Minister Dr Kgosientsho Ramokgopa’s engagements with the market during 2024.

“Inputs into the review are also drawn from transaction advisers that have been involved in previous bid windows, and cooperating partners on international best practices,” the IPPO tells Engineering News, while noting that timelines for the next bid windows have not yet been determined.

The REIPPPP is still regarded as a success overall, having facilitated investments of R292-billion, a steep decline in tariffs since the first few bidding rounds, and the construction of over 8 000 MW across 111 wind and solar projects since 2011, with a further 21 projects with a combined capacity of more than 3 000 MW advancing toward commercial close.

However, recent bidding rounds have faced serious problems, including Bid Window 5 where several projects were unable to close having been bid at tariffs that could not be sustained as a result of the spike in energy prices associated with Covid supply disruptions and Russia’s invasion of Ukraine.

Then, Bid Windows 6 and 7 were rocked by South Africa’s grid constraints and an absence of an approved curtailment framework, which could have unlocked immediate capacity for more than 3 000 MW of mostly wind investments.

Thus, all the industry experts and practitioners canvassed by Engineering News expressed support for the review, as well as the need to sustain a public procurement mechanism. This, despite recent changes to the market, as well as still nascent moves towards the establishment of the competitive market structure.

UCT Power Futures Lab Emeritus Professor Anton Eberhard argues that all available routes to market are still required, including centrally run auctions which can mobilise large investments.

“Given the tens of gigawatts of investment needed over the next decade, as a large chuck of Eskom’s coal fleet is decommissioned, it would be prudent to keep centrally run auctions going,” Eberhard says.

“The private power purchase agreement market for large corporates will be saturated soon, the South African Wholesale Electrify Market will take time to mature, the growth of merchant greenfield investments will be cautiously slow, and we’re unlikely to see any subsidies to incentivise a large enough breakthrough in rooftop solar feeding back to the grid,” he adds.

Likewise, Mike Levington, of Navitas Holdings, describes public procurement as important to safeguard the energy system over the medium-term, as those market participants that have enjoyed dominance in a centrally planned and managed electricity sector adjust to a competitive environment.

“Also, even though the commercial customers might be content to procure their own energy and capacity needs from IPPs, ensuring grid system stability will most likely require national procurement,” Levington adds.

EE Business Intelligence MD Chris Yelland adds that the process under way is “evolutionary”.

Therefore, Yelland believes that public procurement will coexist with other procurement models for some time as the market shifts from one that was previously monopolised by Eskom to a more competitive landscape.

NO LONGER FIT-FOR-PURPOSE

Power Futures Lab director Wikus Kruger also highlights that the success of the REIPPPP in its early years demonstrated the power of public procurement.

“Its first phase achieved a 99% project realisation rate and substantial price reductions through competitive pressure.

“But a failure to evolve . . . has reversed many of those early gains,” he adds.

Thus, Kruger, who recently published an analysis of the REIPPPP, argues that the prevailing procurement structure is “no longer fit-for-purpose”.

Besides the low 20% project realisation rates for Bid Windows 5 to 7, as well as the controversial Risk Mitigation Independent Power Producer Procurement Programme (RMIPPPP), that was dominated by the now abandoned powership projects, Kruger highlights delays and a loss of institutional capacity as reasons for a loss in confidence in public procurement.

Many of the delays can be attributed to a demand for “outdated or non-binding cost estimates” for grid access, as well as the fact that budget quotations for grid access, which are received much later, often include dramatic cost escalations, which are not recoverable and make projects unbankable and cause severe delays.

“There is in general a misalignment between the REIPPPP model and Eskom’s grid access rules, which places a lot of risk on bidders that they are unable to manage.

“There is a need for a redesigned grid access rules/process that aligns with the realities of public bidding and injects much more transparency into the system,” Kruger avers.

ELEPHANT IN THE ROOM

Webber Wentzel partner and head of projects practice group Jason van der Poel, amplifies this point, describing the transmission constraint as the “elephant in the room”.

“Ability to connect to the grid, or a geographic element to project qualification, should be a fundamental aspect of IPP procurement programmes to prevent projects being bid at huge cost to project sponsors and then simply not selected because of absence of grid capacity or grid access,” Van der Poel argues.

However, he also stressed the need for continued public procurement, despite recent problems, and expressed support for continuing with the current split between qualification criteria and the price evaluation criteria.

“A broader range of project components and inputs could be indexed to avoid a situation where an unpredicted price increase in that input or component renders the project economically unviable.”

That said, Van der Poel cautions about a growing mistrust in the procurement process, which he links to prolonged delays not only with the renewables projects, but also the gas-to-power and the RMIPPPP.

He also points to recent political opposition, which arose following the award of the latest battery storage projects.

RACE TO THE BOTTOM

A persistent concern raised by some developers is that the REIPPPP framework encourages something of a “race to the bottom” on pricing, which has left projects financially vulnerable.

Cainmani regional director for Africa Frank Spencer attributed this concern to the highly competitive nature of the REIPPPP, which has recently resulted in a number of projects that secured preferred bidder status failing to reach financial close.

“This is compounded by infrequent bid rounds, long adjudication periods, and weak penalties for project failures.”

Spencer also supports continuing public procurement as a mechanism to provide equitable access to affordable power but called for faster, more regular bid rounds, larger penalties for non-performance, and structural reforms to grid access.

Levington also criticised the IPPO for failing to enforce procurement rules and adapt the REIPPPP to evolving electricity market dynamics.

He said bid costs have become prohibitive for all but a select few, resulting in concentrated ownership and deterring of new entrants.

“There is a disconnect between the energy system’s evolving needs and the current procurement instruments,” he argues.

“REIPPPP must adapt to an environment that now includes flexible generation, storage technologies, and bilateral trading.”

Levington also calls for transferring the IPPO to the Transmission System Operator under the National Transmission Company South Africa, empowering it to align procurement decisions with real-time grid and system needs.

Van der Poel concurs saying: “The IPPO should be well funded, well resourced, and possibly sustainably housed within the Central Purchasing Agency of the Transmission System Operator, to avoid process delays.”

Kruger is also proposing an overhaul that includes rebuilding IPPO capacity, adopting a staged bidding process, integrating locational signals into bid criteria, and aligning procurement timelines with realistic regulatory and financial frameworks.

He also draws comparisons to Brazil’s two-decade success with public energy auctions, which he says has been built on strong institutional foundations and flexible contract models.

Van der Poel, meanwhile, argues that thought should be given to increasing the speed of the procurement process and reducing the cost of bidding.

“When projects do not reach financial close by the agreed deadline, reserve bidders should be quickly deployed.”