London, 1 August 2011

South Africa's much anticipated renewables programme was officially launched on Sunday, 31 July with the issue of a formal invitation for proposals by the Department of Energy ( DoE).

The renewables programme started to take shape in 2009, when the energy regulator, NERSA, published plans for a feed-in tariff programme (REFIT) and proposed tariffs for various renewable technologies, including wind, PV, and CSP.

The published tariffs led to huge investor interest from developers and sponsors in South Africa and around the world. Amounts estimated as well in excess of ZAR 500 million have been spent by investors in preparing for the launch of the programme.

Earlier this year, the 20-year plan for generation, known as IRP 2010, was officially promulgated. This calls for 42% of new generation capacity to come from renewables. South Africa is currently suffering a power crisis with an estimated need for some 50,000 MW of new generation capacity by 2030.

Investor concerns were raised earlier this year when NERSA announced a consultation on plans to reduce its published REFIT tariffs by as much as 42%.

However, before NERSA finalised and published the results of this consultation, DoE announced in June that procurement would involve price competition, apparently signalling the end of plans for a REFIT programme.

This led to further investor uncertainty, speculation and rumours circulating on a daily basis as to when the programme would be launched, how it would be structured, and what the selection criteria for successful projects would be. It appears that these and other outstanding questions in relation to the programme are about to be answered.

Key points to highlight from DoE's announcement include:

It appears that, as expected, the Request for Qualification (RFQ) and Request for Proposals (RFP) will be issued simultaneously under a so-called "two envelope structure". This will likely involve DoE considering the qualifications submitted by bidders first, and only opening the proposals of those that pass the minimum qualification requirements.

The technologies included in the procurement process are onshore wind, solar thermal, solar photovoltaic, biomass, biogas, landfill gas and small hydro.

The initial procurement is expected to be for up to 3825 MW of renewable capacity, for projects that are able to achieve commercial operations by 2016.

The deadline for proposals has not been announced but the initial bid period is expected to be up to three months, with further bidding windows thereafter.

Bids will be required to be accompanied by a Bid Guarantee in the form of a bank guarantee in an amount equal to ZAR 100,000 per MW of the proposed installed capacity of the relevant facility.

Bids will be required to remain open and capable of acceptance for 300 days from submission; this will cause issues for bidders, given possible exchange rate movements over such a period and the difficulty of obtaining EPC price bids that are valid for such an extended period.

The DoE announcement states that successful bidders will enter into an Impementation Agreement with the DoE. The announcement is silent on the identity of the counterparty to the Power Purchase Agreement (PPA), but the initial PPA buyer is expected to be Eskom Holdings Limited (Eskom). It is expected that National Treasury will provide support for Eskom's obligations; no details have been confirmed but this may not be as strong as a full guarantee.

It is expected that the bidding rules, when published in the RFP, will involve a two-stage process. The first stage is anticipated to include a number of "gatekeepers", including minimum requirements for localisation and job creation. Other such gatekeepers may include minimum Black Economic Empowerment (BEE) qualifications and requirements relating to the status of a project's environmental approvals and financing arrangements. Only those projects that pass the minimum criteria will enter the second stage of the process, when price is expected to be a factor. Although the weighting to be given to price compared to other criteria has not yet been confirmed, the original tariffs published by NERSA in 2009 are expected to be a ceiling price for bids.

The RFP will be available for download from 12 noon on Wednesday 3 August. In order to download the RFP, prospective bidders will be required to register at www.ipp-renewables.co.za and to pay a non-refundable fee of ZAR 15,000.

The RFP is expected to include the draft PPA and other key documents. It is not yet known whether the PPA and other documents will be issued on a take-it-or-leave-it basis or whether bidders will be able to provide comments and/or mark-ups.

A mandatory briefing session for bidders will be held on 14 September.

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