South Africa: PIM for LNG-to-power IPP procurement programme
The recent release of a preliminary information memorandum (“PIM”) by the South African Department of Energy (“DoE”) provides some helpful guidance on the proposed parameters and policy framework that will be implemented by the DoE in its proposed procurement process for LNG-to-power. Given the significant challenges that any LNG-to-power programme would face in South Africa, many different models and options were suggested prior to the release of the PIM.
Given the foreseen challenges and bankability concerns, the PIM does, helpfully, suggest a multi-staged procurement involving an engagement process between DoE and pre-qualified bidders (pre-qualification appears to be a fairly straightforward pass / fail process at RFQ stage) following the release of the initial RFP containing the proposed project agreements in order to consider comments with a view to releasing a final RFP.
At a minimum, the PIM attempts to give some clarity on what basis, broadly, the DoE will look to implement its proposed LNG-to-power IPP procurement programme.
Whilst a number of risk allocation aspects appear to remain of concern to proposed developers and lenders, with key aspects remaining unanswered at this stage and therefore subject to further detailed information from DoE, the following is however of interest:
- It is anticipated that the focus will be on two sites: (i) Coega Industrial Development Zone (“Coega IDZ”), which is adjacent to the deepwater port of Ngqura in the Eastern Cape Province of South Africa; and (ii) the Port of Richards Bay (“Richards Bay”) in the KwaZulu-Natal Province of South Africa. Both sites have been identified by the DoE as having sufficient existing infrastructure (port, existing grid infrastructure, pipelines, etc.) to support the first phase of the procurement programme. Site development risk will however be assumed by the bidders, who are not precluded from proposing their own sites.
- 1000 MW allocated to Coega IDZ.
- 2000 MW allocated to Richards Bay.
- Separate procurement processes for Coega IDZ and Richards Bay.
- At this time, it is envisaged that the plants will operate effectively as mid-merit. DoE has indicated that the RFQ will outline a minimum annual dispatch level expressed as an annual average plant capacity factor and a maximum monthly dispatch factor and these will be reflected in the PPA(s).
- Projects to be fully integrated. Bidders are responsible for design and development of marine / land-based infrastructure, financing and supply of LNG. Responsibilities of successful bidders will include the development of:
o The LNG berth, including the loading platform, with associated
topside infrastructure, mooring and berthing dolphins – design
working life of marine structure must be at least 40 years;
o Dredged modifications necessary to the berth pocket;
o Terminal access and services trestle; and
o Gas transmission pipelines.
- Minimum South African entity participation of 35%, inclusive of potential equity by State owned companies and BEE (being South African black people and broad-based black entities meeting certain criteria). There may be a requirement by DoE to grow this shareholding over the term of the project.
- PPA term of 20 years. National utility, Eskom being anchor offtaker. An Implementation Agreement guaranteeing Eskom’s payment obligations will be provided by DoE.
- Requirement for third party access is a key aspect for DoE. Capacity of LNG receiving, storage and re-gasification elements of the project assets, as well gas pipeline must be suitably sized to accommodate this key DoE requirement (i.e. requirement to oversize capacity of the LNG receiving, storage and re-gasification elements beyond capacity requirements of power plant).
- DoE looking for successful bidder to make available approximately 5% of LNG volumes procured for use by potential third party gas users.
- Tariff structure will be Rand (ZAR) based with a fixed capacity payment and variable energy charge. Fuel will be treated as a pass through cost. DoE has indicated that it is in consultation with the national energy regulator (NERSA) to provide a mechanism for gas regulation which reduces electricity price volatility in the short – to medium –term and further reduces foreign currency exposure whilst ensuring bankability of the project. The price competition in the RFP will include the pricing of the fuel costs.
- Bidders should highlight experience in use of CCGT, OCGT and/or gas-engine technologies to balance renewables.
- Formal procurement process follows two stages: (i) RFQ (assesses on a pass/fail basis on ability to carry out project; and (ii) RFP (The RFP, inclusive of the suite of project agreements will be issued allowing for engagement with DoE following review of written comments provided by pre-qualified bidders; it is anticpated that this process may take some time, following which, a second and final version of the RFP will be issued and used to solicit final bid responses – NOTE: Project documents will not be subject to negotiations following issue of final RFP).
- Anticipated procurement timetable:
o Issue of RFQ – November 2016;
o RFQ response submission date – February 2017;
o Announcement of pre-qualified bidders – April 2017;
o Issue of draft RFP – April 2017;
o Engagement process between pre-qualified bidders and DoE – May 2017;
o Release of final RFP – August 2017.