IHS Global Insight Perspective | |
Significance | The South African energy regulator NERSA has revised the feed-in tariffs for renewable energy (known as REFIT) downwards, reducing the tariffs for wind by 25% and for solar power by 40%. |
Implications | The downward tariff adjustment will render several key renewable energy projects unviable and some projects could be cancelled. |
Outlook | Investors in renewable energy projects in South Africa will face a lower-than-expected rate of return, and the unexpected adjustment of tariffs only adds to regulatory uncertainty in the energy industry. |
Just two weeks before the Department of Energy's request for proposals for new renewable energy projects, the South African national energy regulator, NERSA, made a surprise announcement that the tariffs applied to renewable energy projects under the REFIT programme have been revised downwards. The revised tariffs come into effect immediately and will be applied at the next licence application round.
Changes to REFIT tariffs: a 2009 and 2011 comparison* | |||
Technology | 2009 | 2011 | % change |
Wind = 1MW | 1.25 | 0.938 | -24.9 |
Landfill Gas = 1 MW | 0.90 | 0.539 | -40.1 |
Small Hydro = 1MW | 0.94 | 0.671 | -28.6 |
Concentrated solar power (CSP) = 1 MW with storage | 2.10 | 1.836 | -12.6 |
CSP = 1 MW without storage | 3.14 | 1.938 | -38.3 |
CSP = 1 MW with central receiver | 2.31 | 1.399 | -39.4 |
Photovoltaic = 1 MW (ground mounted) | 3.94 | 2.311 | -41.3 |
Biomass solid = 1 MW (direct combustion) | 1.18 | 1.060 | -10.1 |
Biogas = 1 MW | 0.96 | 0.837 | -12.9 |
*ZAR per kWh; ZAR1:USD0.15 Source: NERSA | |||
The REFIT tariffs only apply to power produced from generators connected to the National Transmission and Distribution System, excluding off-grid renewable energy power generation. The 2011 tariff for wind energy projects of less than 1MW is ZAR0.938 (USD0.14) per kWh, in comparison with the original 2009 tariff of ZAR1.25/kWh, which constitutes a decrease of 24.9%. Landfill gas tariffs have also dropped 40.1% from ZAR0.90/kWh in 2009 to ZAR0.539 /kWh in 2011. Concentrated solar power (CSP) projects without storage facilities will face a downwards revision of almost 40%, while the downward revision for CSP projects with storage has been relatively smaller in comparison, with a downwards revision of only 12.6%. The rationale behind this is that the government prefers CSP projects with a storage option as it would be better suited to reducing power shortages during peak hours than CSP technologies without storage. In addition to the downward revisions, the regulator also amended the requirements for qualifying for the REFIT tariff. A new requirement for wind energy is to have the wind towers located within one site, while the feedstock for biogas projects is specifically stipulated in the 2011 document. The revision document also limits photovoltaic (PV) projects to ground-based technologies, whereas the 2009 REFIT requirements allowed both ground and rooftop-based PV systems; however, the independent power producer (IPP) may use any proven PV panel/cell technology.
The main reason given for the tariff amendments is that the financial and economic parameters used in determining the 2009 tariffs have changed, according to Bianka Belinska, NERSA's head of electricity infrastructure planning. The published NERSA document on the tariff amendments (click here for details) indicates that changes in three key financial parameters used to calculate the tariffs have resulted in the downwards revision of the REFIT tariffs. The nominal cost of debt, the real cost of debt before tax, and the inflation rate have declined, albeit slightly, between 2009 and 2011. This prompted the government to revise the tariffs downwards in light of the changing financial environment, as the 2009 tariffs were seen as being too generous given cheaper set-up costs of new projects. The new tariffs will be finalised by 27 May, and will then be revised annually for five years, and thereafter once every three years. The forthcoming adjustments will be based on any changes in the financial and economic environments, but no longer for the cost of capital. This implies that some tariffs in the following years may rise or fall depending on economic conditions.
Outlook and Implications
The high REFIT tariffs were a key attraction for the large number of expressions of interest received since their introduction in 2007. The unexpected downwards revision will now compel investors in planned renewable energy projects to return to the drawing board to determine the future commercial potential of planned projects. Several renewable energy projects received investment based on the original higher REFIT tariffs, and the sudden downward adjustment may render some projects commercially unviable, particularly as not one renewable energy project under the REFIT programme has secured a power-purchase agreement. This will imply that investors will either require a high rate of return, which could make renewable energy too expensive for the consumer, or withdraw from the South African renewable energy market altogether. This downward adjustment will defeat the original purpose of the REFIT tariffs, namely to attract private investors in order to develop the country's infant renewable energy industry, and is a severe blow to the country's attractiveness to international investment in green energy. Furthermore, the announcement has also added to regulatory uncertainty as investors do not know how tariffs will be adjusted because of imminent changes to the financial parameters used to calculate the tariffs. Without this crucial certainty investors will be even more reluctant to invest, and will continue with their wait-and-see approach. This will render the government unlikely to achieve its target of increasing renewable energy's contribution to the energy mix to 40% by 2030.