An Untimely Rethink for REFIT?

Published: 26/04/11

As a law firm with a particular focus on projects in Africa, including South Africa, Trinity International has been keeping a close eye on the South African Renewable Energy Feed-in Tariff (REFIT) programme for some time. The roll-out of the programme has not been as smooth as might have been hoped and the industry has had to wait very patiently for the often-rumoured but yet-to-be-released REFIT request for proposals). This article summarises the history of the programme and looks at the latest issue to cause confusion in REFIT’s development.

Renewable Targets

The South African Government published its White Paper on Renewable Energy in November 2003, which set a modest initial target of 10,000 GWh of Renewable Energy by 2013, approximately 4 per cent  of total generation. Eskom, South Africa’s state-owned utility, has indicated that the country needs to add 50,000 MW of generation capacity by 2028. South Africa’s current generation capacity of approximately 40,000 MW is mainly coal (approximately 90 per cent of generation) with virtually no renewable generation.


The South African REFIT study resulted from the government’s renewable energy strategy and was commissioned by the National Electricity Regulator of South Africa (NERSA) in June 2007.  The programme was officially announced in 2009 as part of the Department of Energy’s Integrated Resources Plan (IRP).

Eskom Distribution is to be appointed as the Renewable Energy Purchasing Agency pursuant to the Electricity Regulation Act 2006. REPA will be obligated to purchase the power from projects awarded licences by NERSA under REFIT and will do so pursuant to bilateral power purchase agreements.

REFIT 2009 Tariffs

NERSA published the REFIT tariffs in 2009 as follows:

Table 1: REFIT Tariffs ­ 2009 (R/kWh)









Small hydro




Landfill gas




CSP trough with storage of 6 hrs per day




CSP trough without storage




Large scale grid connected PV systems (> 1 MW)




Biomass solid








CSP tower with storage of 6 hrs per day




REFIT Phases

The first phase of 1,025 MW of allocation is intended to be completed by the end of 2013 in line with the White Paper target of 10,000 GWh per annum. Thereafter, the number of MW of REFIT projects will be determined in accordance with the IRP. As well as a breakdown by each technology, as indicated above, the IRP is expected to include time frames for the phased development of projects over 20 years, with specific MW allocations for different periods. 


On 17 March 2011, a Cabinet Statement was issued stating that the Department of Energy’s Integrated Resources Plan was to be issued around 1 April 2011 and will set the generation targets for different technologies for the next 20 years. 

From the Cabinet Statement and press reports, it appears that the finalised plan contains a substantial and ambitious increase in renewable energy, up from 30 per cent of new-build, to 42 per cent.

South African press reports estimate that the increased renewable energy allocation will be 17,800 MW, of which 8,400 MW will be allocated to each of wind and solar PV, with the remaining 1,000 MW allocated to CSP solar. 

REFIT Launch

Whilst no official date has been announced for the launch of the REFIT Programme, original expectations were that the RfP for the first 1,025MW of projects would be issued in 2010 by the Department of Energy and the National Treasury.  This timeline has continually shifted with most recent expectations of early April. At least, that was the case until the release of the NERSA Consultation Paper on 22 March.

NERSA Consultation Paper

Days after it was confirmed that the role of renewable energy in South Africa’s generation mix would be increased between 2011 and 2030, NERSA issued a consultation paper that, amongst other things, proposes a material decrease in the level of renewable energy feed-in tariffs when compared with those approved and promulgated in 2009.

Proposed tariff reduction 

NERSA states that the tariffs have been revised and reduced based on 2011 market conditions, reflecting a reduction in the nominal cost of debt and inflation, and a strengthened Rand to US Dollar exchange rate, since the 2009 tariffs were set. The Consultation Paper also envisages that only the operation and maintenance and fuel (where applicable) components will be escalated annually (in line with inflation), rather than the entire tariff, as was provided for in the original approved REFIT tariffs.

The revised tariffs will apply to new REFIT projects to be commissioned after the promulgation of the tariffs, and the revised REFIT tariffs for 2011 will replace and supersede the REFIT Phase 1 and 2 tariffs and guidelines approved in 2009.

Significant Cuts

Under the proposed REFIT, wind projects with a capacity greater than 1 MW will receive a tariff of R0.938/kWh in 2011, R0.945/kWh in 2012 and R0.952 in 2013, which is 24.9 per cent lower than the 2009 tariff of R1,25/kWh.

The biggest cuts of 41.5 per centand 41.3 per cent respectively are for CSP trough (with six hour storage) and ground-mounted PV. CSP trough tariffs would fall to R1.836/kWh in 2011, R1.845/kWh in 2012 and R1.854/kWh 2013, from the 2009 level of R3.14/kWh. Solar PV could be slashed from R3.94/kWh to R2,311/kWh in 2011. Also slashed is the proposed tariff for CSP tower with six hours storage, from R2.31/kWh in 2009 to a proposed R1.399/kWh in 2011, a 39.4per cent decline.

The proposal cuts tariffs for landfill gas from R0.65/kWh by 17.1 per cent to R0,539/kWh and reduces by 28.6 per cent the R0,94/kWh granted for small hydro projects to R0.671/kWh. CSP trough without storage could fall 7.3 per cent to R1.938/kWh from R2.09/kWh, while the tariffs for biomass and biogas respectively could be cut by 10.1 per cent to R1.06/kWh from RR1.18/kWh and by 12.9 per cent to R0,837/kWh from R0.96/kWh.

Reaction to the Consultation Paper

Comments from the NERSA regulatory member for electricity, Thembani Bukula, acknowledge that some confusion could be introduced into the procurement process as a result of the Consultation Paper.  He also comments that it was always the intention to review the REFIT on a yearly basis NERSA notes that such a revision is in line with NERSA’s decision to review REFIT tariffs (every year for the first five years and every three years thereafter (with such revised tariffs to apply only to new projects) but this had not occurred during 2010 primarily because there was a view that the first PPAs would be signed.

Although stakeholders in the South African power sector have been talking about the REFIT tariffs being revised at some point, NERSA’s timing has come as something of a shock. "The NERSA revision documents came as a surprise to the industry as they were published a week before the procurement of renewable energy was widely expected to commence" said Dr Chris Haw, a Director of Aurora Power Solutions, a renewable energy and energy efficiency project management company based in Cape Town.

Daniel Zinman, a Senior Transactor at Rand Merchant Bank, was similarly surprised. "While the decision by NERSA to review the REFIT tariffs is certainly one of the key responsibilities of the regulator, the timing of the Consultation Paper was unfortunate ­ just as the DoE’s Request for Proposal documents were about to be disseminated to the market" he said. 

However, changes in the pricing structure are not entirely unexpected. "Exchange rates used in prior pricing models were high; also old tariffs were calculated before taking into account some expected cost savings due to a general improvement in current renewable technologies," said Rui de Bastos, Director and Head, Corporate Finance South Africa, Corporate & Investment Bank, Citibank South Africa.  

Bukula insists that the intention is not to make the programme less attractive, pointing out that the real return on equity after tax has remained 17 per cent, which is better than returns received in other countries. "The principle of better than reasonable returns remains, but we also have to ensure that South Africans get the best deal possible and that the REFIT is not over-generous" he said. 

However, some stakeholders remain concerned that the revisions will scare off developers. "In the event that the consultation paper results in new tariffs at the levels proposed, a number of the developers that have to date been participating in the process will simply disappear as their projects will no longer make economic sense," said Alastair Campbell, Head of Power, Power and Infrastructure Finance, Corporate and Investment Banking division, Standard Bank. 

"The downward revision of the tariff at such a late stage in the process is not very positive for the nascent renewable energy industry in South Africa. Renewable Energy developers anticipated that at least the first 1025MW would be purchased at the 2009 REFIT tariffs" said Elzette Gaigher, Compliance Director of Biotherm Energy (Pty) Ltd, a South African independent power producer focusing on renewable energy generation projects primarily in Southern Africa. "They developed their projects aggressively to be ready to bid in the first round of the procurement process which was expected to kick start soon after 31 March 2011. The lower tariffs definitely impact the IRR particularly for foreign developers with non-Rand based return expectations."

The Next Steps

Once approved, the revised tariffs and rules would replace REFIT phase I and II tariffs and associated guidelines ­ a process NERSA anticipates completing by 26 May 2011. 

However, with the RfP yet to be released and the consultation process in respect of the proposed lower tariffs still to be completed, the future is far from clear. The market is certainly anticipating some attrition amongst the number of projects and developers that have been lining up to bid but the extent of that attrition is not yet known.  

"A decrease in REFIT tariffs will impact the financial projections and returns on renewable projects. The cost of renewable project technologies is generally agreed as a US$ cost per MW generated. Thus a fairly fixed capex project cost now with a reduction in revenues has an impact on project profitability ", said de Bastos; "To counteract this, projects may require higher levels of equity capital from developers and/or more structured debt profiles, such as longer tenors on bank debt funding."

Given South Africa’s chequered past in terms of successfully tendering and closing independent power projects (the 2007 peaking power IPP tender and ongoing negotiation process bears witness to this) and the approaching COP 17 in Durban in November, the market will be watching how well the authorities manage the REFIT process.  

"On the positive side it will result in only those players who have both a long-term investment horizon and a good project remaining in play, while on the negative side, the attrition could be so significant that in the short to medium term South Africa battles to fill its renewable energy quota as communicated in the recently released Integrated Resource Plan" said Campbell. 

The resounding message from banks and developers alike is that they want to see an end to uncertainty in the markets. "Our hope, and surely that of equity investors as well, is that the resultant confusion in the market is cleared as soon as possible to re-instil confidence in the industry" said Zinman. 

"We urge the government to continue with the REFIT program in the form of a fixed tariff and would now like to see the NERSA review process run its course as quickly as possible" said Dr Haw "We are confident that the NERSA process will take into account the wide-spread comments expected on the current feed-in tariff for PV, and that this number and its escalation will be adjusted to reflect realistic market returns."

Whatever the next steps might be in the REFIT process, the developers, banks and advisers will be hoping that Dr Haw’s confidence in NERSA comes to fruition.

This article was published on IJ Online on 14th April 2011.

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