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Development of Regulatory guidelines and qualifying principles for co-generation projects November 2006 FIELDSTONE Confidential NERSA Co-generation Document Important Notice This document has been prepared by Fieldstone Africa (Pty) Ltd (“Fieldstone”) to assist the National Electricity Regulator of South Africa (“NERSA”) develop Regulatory guidelines and qualifying principles for co-generation projects. None of the information contained in this document has been independently verified by Fieldstone or any of its connected persons. Neither Fieldstone nor any of their respective connected persons accept any liability or responsibility for the accuracy or completeness of, nor make any representation or warranty, express or implied, with respect to, the information contained in this document or on which this document is based or any other information or representations supplied or made in connection with any negotiations in respect of the Project or as to the reasonableness of any projections which this document contains. No representation, warranty or undertaking, express or implied is made by Fieldstone or any of their respective connected parties with respect to the completeness, accuracy, or proper computational functioning of the financial model referred to in this memorandum. Fieldstone makes no representation as to the reasonableness of any assumptions made in preparing the financial model. Nothing contained in the financial model is or should be relied upon as a promise or representation as to future results or events. The information contained in this document is confidential and the property of Fieldstone. It is made available to the Recipient strictly on the basis of the undertaking as to confidentiality given by the Recipient. It and any further confidential information made available to the Recipient must be held in complete confidence and documents containing such information may not be used or disclosed other than in accordance with the confidentiality undertaking without the prior written consent of Fieldstone. Should any Recipient decline participation or not be selected to participate in the Project, the Recipient agrees that, at the request of Fieldstone, it will return this Document (regardless of the form in which it is maintained) and any notes, analyses and memoranda prepared by the Recipient or any of its advisors or representatives and all copies thereof to Fieldstone within any reasonable time stipulated by Fieldstone. i Confidential NERSA Co-generation Document Table of Contents 1. Executive summary ................................................................................................................5 1.1. Why cogeneration? ...................................................................................................................5 1.2. Need for Support.......................................................................................................................6 1.3. Cogeneration Markets...............................................................................................................6 1.4. What should be done in support of cogeneration? ....................................................................7 1.5. Implementation issues...............................................................................................................8 1.6. Conclusion and recommendation..............................................................................................9 2. Introduction and scope of work ..........................................................................................12 3. Why cogeneration.................................................................................................................14 3.1. Benefits from cogeneration.....................................................................................................14 3.2. Need for support .....................................................................................................................15 4. Cogeneration markets ..........................................................................................................19 4.1. The international experience...................................................................................................19 4.1.1. The European Union ..................................................................................................20 4.1.2. The United States of America (“USA”).....................................................................23 4.1.3. Brazil..........................................................................................................................24 4.2. The South African market.......................................................................................................24 4.2.1. The electricity market ................................................................................................24 4.2.2. Cogeneration ..............................................................................................................25 5. What should be done in support of cogeneration? ............................................................26 5.1. Policy framework....................................................................................................................26 5.2. Determination of Qualifying Cogeneration Technologies ......................................................26 5.2.1. Projects Meeting Cogeneration Definition.................................................................27 5.2.2 Determining Project Eligibility for Proposed Financial Support Structures – Qualification Criteria ..............................................................................................................29 6. Financial support mechanisms............................................................................................36 6.1. Small Scale Projects................................................................................................................36 6.2. Large Scale Projects................................................................................................................36 6.2.1. Determining the supported price level .......................................................................36 6.2.2. Suggested structures...................................................................................................39 6.2.3. Contractual structures for price support .....................................................................41 7. Implementation issues..........................................................................................................44 7.1. Regulatory issues ....................................................................................................................44 7.2. Carbon credits.........................................................................................................................46 7.3. Project ownership....................................................................................................................48 7.4. Applications, licensing and permitting ...................................................................................50 7.5. Evaluation Methodology.........................................................................................................52 8. Conclusions and recommendation ......................................................................................53 2 Confidential NERSA Co-generation Document Glossary Avoided cost The expected cost of providing new electricity at a particular point. This cost is based on the expected unit cost of the next power plant on the system and may also include the cost of transmission, distribution and losses up to that point. BEE Black Economic Empowerment CCL Climate Change Levy CDM Clean Development Mechanism CER Certified Emissions Reduction CHCP Combined Heat Cooling and Power CHP Combined Heat and Power DEFRA The UK’s Department for Environment, Food & Rural Affairs EIA Environmental Impact Assessment EIUG Energy Intensive Users Group EPC Engineer, Procure and Construct ERPA Emission Reduction Purchase Agreement Eskom The national regulated electricity utility in South Africa EU The European Union GHG Greenhouse Gas IPP Independent Power Producer LTSA Long Term Service Agreement MWe Mega Watt electrical 3 Confidential NERSA Co-generation Document MWth Mega Watt thermal NCS National Cogeneration Standard NERSA The National Energy Regulator of South Africa NIRP National Integrated Resource Plan O&M Operations and Maintenance PPA Power Purchase Agreement PURPA Public Utility Regulatory Policy Act of 1978, enacted in the USA QI Quality Index Type “I” Project A generation project meeting the definition supplied under section 5.2.1.2.a Type “II” Project A generation project meeting the definition supplied under section 5.2.1.2.b Type “III” Project A generation project meeting the definition supplied under section 5.2.1.2.c UK United Kingdom USA United States of America WHRS Waste Heat Recovery System 4 Confidential NERSA Co-generation Document 1. Executive summary Following growing interest in increasing the amount of cogeneration on the South African system, the National Energy Regulator of South Africa (“NERSA”) has sought to develop guidelines for developing Regulatory policy which could allow for: • Simplification of the process for developing, evaluating and implementing cogeneration projects • Development of a workable financial structure for qualifying cogeneration projects 1.1.