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Eskom to sign up IPPs, but at what cost?

On the 1st of September 2017, the Minister of Energy, Mmamoloko Kubayi held a press conference to indicate that Eskom had until the end of October 2017 to sign all outstanding PPAs with REI4P preferred bidders from bid windows 3.5 and 4.

Author: Dustin Lawrence – Energy Engineer at GCX Carbon & Energy

[Glossary: PPA – Power Purchase Agreement; IPP – Independent Power Producer; REI4P – Renewable Energy Independent Power Producers Procurement Programme; CSP – Concentrated Solar Power]

Eventually, Eskom has to sign….wait, what?! – These were my thoughts when reading about the Minister of Energy’s decision on the IPP/Eskom PPA signing impasse.

On the 1st of September 2017, the Minister of Energy, Mmamoloko Kubayi held a press conference to indicate that Eskom had until the end of October 2017 to sign all outstanding PPAs with REI4P preferred bidders from bid windows 3.5 and 4. With one caveat, all projects would need to renegotiate their prices to below R0.77/kWh. Hang on a second there, let us consider that again:

Winning bidders, in a globally acclaimed renewable energy auction, need to renegotiate their bid prices, 2 years after being selected as preferred bidders.

Is that even legal…? What signal does this send to future investors? When rating agencies talk about policy uncertainty, this would be a perfect example. Award a contract at a set price that has been guaranteed by the government for 20 years, then refuse to sign the PPA, later decide to sign the PPA’s but cap the prices across all generation types.

On the day of the announcement, not much was said about the price cap. Most of the statements released by renewable groups were positive in terms of policy direction. A set date for PPA contracts establishes a path towards job creation and local economic development. (After all, some local companies had to virtually shutter their businesses amongst the uncertainty created by Eskom not signing the PPA’s).

A few days later and several authors have voiced their concerns about the price cap. As ignorant as I am, I have some concerns of my own. Surely, effectively being forced to change the price at which you sell your product, 2 years after signing a contract at a set price (adjusted by inflation), has some serious implications for your business plan and to your investors’ return on investment.

Apart from this, the price cap also has not been adequately defined, at least in the minister’s statement. Is the cap of R0.77/kWh in 2015 Rands or in 2017 Rands? REI4P prices are adjusted annually by inflation and thus this could have a substantial effect. Regardless of this, based on the winning bid prices, some projects will end up being excluded. CSP and biogas projects in particular are expected to be affected as their prices are generally over R1.00/kWh. They are however more valuable in high demand times as they are dispatchable during these periods (as opposed to solar and wind).

Why R0.77/kWh? Although this is higher than the R0.62/kWh that Eskom previously stated would be their cut-off point, no explanation has been given to indicate as to how this figure was decided.

Can projects reduce their prices to below the cap?

Some projects are likely; Solar panel and wind turbine prices have reduced significantly in recent years due to technology advancements and supply. This would result in a reduction in initial set up costs and thus a reduction in total financing costs that could result in lower prices.

Others are potentially likely; Bidders have most likely already cut the profit margins significantly to ensure that they ended up being preferred bidders. Reducing revenue further would mean asking investors for reduction which is unlikely to happen. Again the, “but we agreed to x and now you want y” principle applies.

While others could definitely not; CSP and biogas will find it very hard and most likely impossible to reduce their prices any further than their agreed prices. The winning bids for these technologies were above R1.00/kWh.

What about Round 5, Coal IPP and Gas IPP?

All suspended for now, at least until the Integrated Energy Plan and Integrated Resource Plan has been updated. A decision on these rounds will be made after these are completed in February 2018.

Are we going to see something similar happen to these project in 2018? This will likely depend on the actions taken by the Projects affected by this latest decision.

In Conclusion:

While some projects may be able to reduce their prices with a small effect on their business plans, others will find it hard and in some cases impossible to match the minister’s price cap.

Renegotiating the contracted price cap is probably illegal, and in fact, at least one renewable organisation has obtained legal advice that it is. So litigation on this aspect is likely.

Government and by extension SOE’s have again become their own worst enemies. At the same time as providing policy clarity, they have again stoked investor mistrust by effectively breaching their contracts with IPPs.

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