An apple a day might keep the doctor away, but the health of your private Power Purchase Agreements (PPA) requires more than prevention, it needs a proactive, strategic approach to crafting your Request for Proposal (RFP).
By Chanda Nxumalo, managing director of Harmattan Renewables
At Harmattan Renewables we’ve seen all too often the impact of a poorly drafted RFP for a private Power Purchase Agreement that fails to deliver the best outcomes for intensive energy users (IEUs).
This technical article is designed to address the needs of IEUs as they seek to reduce costs and drive certainty into energy prices. We will explore the current state of RFPs and outline how IEUs can better draft these documents to ensure that the surge in RFPs for private PPAs for renewable or hybrid solutions in South Africa and across the continent meet their demands and objectives.
What do IEUs want?
IEUs want a low risk, low cost solution to their energy needs with minimum disruption and maximum reliability. Developers’ aims typically align with this, but in order to align completely they need to understand the IEU’s energy consumption and what the IEU wants to achieve.
In our experience, RFPs released by IEUs focus on the financial capability and track record of the bidder (along with BBBEE criteria in South Africa). We can all agree that you want an experienced company, with an experienced team, who have the financial standing to provide the relevant capital, insurance and guarantees.
However, we consider that most RFPs are not prescriptive enough when it comes to the technical information provided and required. This leads to heavily caveated submissions and moving goalposts throughout the development & deployment process.
Traditionally, bids were screened using evaluation criteria based on the installed capacity in kWp, quality criteria on equipment (including guarantees), experience of the engineer and other user-defined specifications, with the final decision based on the total EPC price or levelized cost of energy (LCOE). This approach holds true in the private PPA market except rather than EPC price or LCOE, PPA tariff is the deciding factor.
The limitation of this approach is that contractors offer the minimum-required installed capacity at the minimum-required quality in order to keep the price down. So you need to be sure you are comparing apples with apples, as any room for interpretation in the requirements will lead to variations and potential for disappointment over the life of the project.
A good contract and a good solution, starts with a good bidding process…
In order to receive quality bids that meet the requirements of the IEU, planning is required. As they say, ‘fail to plan and plan to fail’.
IEUs should provide potential respondents with as much information as is technically and financially feasible regarding the project, ideally in the form of a project information pack containing:
- Resource type;
- Site or facility information and site assessments;
- For rooftop projects this would include information such as aerial photography, building plans, as well as shading, electrical, and structural analyses of the buildings;
- For ground mounted PV and wind this should include environmental permitting, topographic maps, any geotechnical studies and land use;
- Ideally, the energy demand profile would be provided quantified in terms of key metrics over a period over one year. This would be as follows:
- kWh demand for each hour;
- Peak demand per day;
- Total demand per day; and
- Minimum or baseload demand.
- Land availability – is the IEU offering land to locate the project? If so, what are the permitted development rights and any issues with the land? Is the land part of the facility or is a wheeling arrangement required to supply?
These requirements should then be used to inform the scoring criteria which again, should be part of the RFP. Typically, RFPs are drafted as showing the IEU is offering to pay for the electricity for a time period, but there is much more to it.
We recommend including the following as a starting point:
- What are the IEU’s motivation and goal in issuing the RFP?
- A standard format for respondents to report performance eg kWh generated per annum over the project lifetime, as well as common metrics for the other information requested to allow direct comparisons;
- Minimum installed (DC) capacity;
- Information on respondents’ proposed technical approach and further information on the system equipment to be used. For a PV system, this should include information on module type (including brand name, model numbers, and technology), inverters (brand, type, and efficiency), monitoring and data acquisition systems, and balance of system components. For storage, discussions should address the capacity peak and duration, degradation, replacement strategy and operational strategy. The RFP can state whether a certain tier of equipment is required;
- A clear responsibility matrix e.g. who is responsible for permitting, interconnection;
- A compliance table with appropriate Technical, Health & Safety & legal standards to comply with;
- Any requirements that respondents use local materials and/or labour;
- Required testing and commissioning;
- A project schedule, listing major milestones and anticipated completion dates. Such milestones might include obtaining required permits, equipment purchasing, commencement of construction/installation and system operation, and approval of interconnection requests; and
IEUs also need to evaluate how risk is allocated in each bid. Issues to take into consideration include the length of the contract. A short-term contract (typically less than three years) might offer greater flexibility in the future if technology costs continue to fall but might cost more initially. While the security of a long-term commitment can reduce risk to the supplier, allowing it to offer a lower price than under a shorter contract, and greater price stability to the buyer.
Any contract should also include penalties or liquidated damages if one or both parties fails to fulfil the requirements, termination procedures and, importantly in the current climate, Force Majeure provisions.
Construction and operation
It is important to plan for the construction and operation in the early phases of the project. IEUs should make sure that construction is closely monitored and controlled to track progress, and that all the testing requirements to deliver a fully functional plant in line with your original scope.
Often forgotten is ensuring that the plant runs as planned and that the actual energy production is in line with the original projections. Ensure that maintenance is covered in your bid (both scheduled maintenance and replacement of critical components as required), and that you can monitor and verify the system’s energy performance.
IEUs should plan for replacement of key system components (such as inverters on PV plants or replacement and oversizing of batteries) and should clarify the frequency and cost of such replacements with equipment vendors.
And finally depending on the type of buyer, IEUs should plan for equipment end-of-life removal and disposal, and, if applicable, site restoration.
Apple picking season
Once you’ve received all your proposals, you’ve got your proverbial bushel of apples, you can take the final step of the procurement process and award a winner.
Going through the ‘apples’ and checking if they meet the clear criteria outlined in the RFP makes the whole process easier as you filter and clarify. The filtering can be based on compliance tables for each category and the clarification should consider the following elements:
- Technical aspects
- Financial aspects
- Ongoing support
The filtering process is just like harvesting season, you check the colour, flavour and how easily the apple separates from the tree. By developing a robust strategy for private power procurement, IEUs can ensure that the apples harvested meet their objectives in an efficient and cost-effective way.
So many IEUs are venturing into unchartered territory when it comes to selecting the most viable solution and RFP that directly meets and even exceeds their needs.
The good news is that there are companies whose core business is to structure RFPs and can support IEUs to achieve their power procurement objectives.
Nxumalo is the Managing Director of Harmattan Renewables, one of the member organisations of the SA Photovoltaic Industry Association (SAPVIA). She wrote this piece in her capacity as a spokesperson for SAPVIA.