Sun rises on renewable energy

2014-06-22 15:00

The Renewable Energy Independent Power Procurement Programme (REIPPP) has been a spectacular success as far as luring power investment to the country is concerned, but may not provide all the spin-offs that have been promised.

A review of the entire process to date was recently published by the World Bank Institute.

Professor Anton Eberhard from UCT’s Graduate School of Business co-authored the report and calls the REIPPP “a very good story”.

It attracted R120?billion in private investment in less than three years and the actual power plants are coming online “in record time”, he told City Press.

The bids to date represent more renewable energy investment, in terms of money and megawatts, than all other renewable power projects in Africa over the past 20 years, according to the report.

The department of energy has run three bidding rounds of the REIPPP since 2011 and plans a fourth one later this year.

In the first three rounds, 64 bids were accepted, eventually providing 3?915MW of mostly wind and solar power.

Ultimately, government aims to attract bids for another 2?808MW in future bidding rounds, making the entire programme slightly larger than the long-delayed Medupi coal-fired power station.

The total investment to build all of these projects amounts to R120?billion after round three.

The whole scheme pivots around Eskom, which is obliged to buy the power produced by the REIPPP projects at the agreed prices.

At the moment, 600MW of power from first-round bidders is already being delivered to Eskom. The rest of the first-round projects are expected to be completed by February next year.

Supporters see the REIPPP as something of a revolution in the South African tender system, largely because it has been so friendly to the private sector.

But it is hardly perfect.

Despite containing larger than usual conditions around local content, employment and local ownership, the REIPPP could miss the mark on several of its indirect developmental targets, the report cautions.

Big tenders in South Africa are usually judged according to price, which carries 90% of the weight; and BEE credentials, which carries 10%.

With the REIPPP, price accounts for 70% of a bid, but the other considerations are also different from normal tenders.

Black employment is favoured over black ownership and emphasis falls on local content.

But the plan to have the tenders spur a large new manufacturing sector producing renewable energy components could be a miscalculation because there is already an international glut in capacity, according to the report. That makes profit margins thin, if there is any profit at all.

But the successful bidders who develop the projects can expect “reasonable” profits, according to the report. This seems to apply in particular to those who bid in the earliest round when the return on equity could be close to 17%.

The REIPPP works on competitive bidding, according to a price per kilowatt-hour (kWh) of power.

The competition has already forced prices down to far below what the first round’s winners will be receiving from Eskom. The power utility has been saddled with paying, on average, R1.14/kWh of wind power to the first-round bidders. By the third round, this had fallen to R0.74/kWh.

The average solar power price fell from R2.76/kWh to R0.99/kWh. South Africa’s banking sector is also going to do well out of the REIPPP.

The projects are mostly being financed commercially by South Africa’s big four banks, with Nedbank taking the lead. Between them, they have provided more than R50?billion to REIPPP bidders.

According to the report, “some project sponsors have complained that there has not been enough competition between the banks”, meaning the cost of REIPPP project finance has not come down the way the power prices have.

The report predicts the banks will probably sell much of this debt to fund managers, which have already come to the party to provide equity funding.

On that front, subsidiaries of the Old Mutual Investment Group, like the Ideas Fund and Futuregrowth, have dominated.

The group has its fingers in the most pies with equity stakes in 16 REIPPP projects, a quarter of the total.

The Industrial Development Corporation (IDC) comes second, with stakes in nine projects.

The IDC and fellow state-owned development financier, the Development Bank of Southern Africa, are active but “have mostly funded community and BEE participation”, according to Eberhard.

The REIPPP model could be exported to some extent, but most other African countries lack South Africa’s “banking, legal and other advisory resources”, the report notes. On the other hand, that provides opportunity for South Africa’s financial and advisory industries.

The truth on jobs

Officially, the solar, concentrated solar and onshore wind projects approved so far will create 19?108 construction jobs and 34?936 operations jobs.

But the jobs are measured in “person years”, which the authors call a “simplistic” calculation. It means one job is defined as a year’s employment for one person.

As most of the REIPPP projects are being contracted to run for 20 years, the actual number of people employed would probably be closer to 1?750.

Likewise, if the construction phase of a project is assumed to last more than a year, the construction jobs start declining below the official 19?108.

Eberhard and his co-authors note the building phase might be 18 months. That would mean the publicised 19?108 construction jobs are actually closer to 13?000.

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