Don’t get your hopes up for relief on power prices

Eskom
What happens is that the projects are initially financed by banks, which means that the financing costs are determined according to the risk associated with it.

BUSINESS


Consumers can forget about government’s “renegotiation” of contracts with independent power producers (IPPs) leading to lower electricity tariffs, say experts.

This comes after Mineral Resources and Energy Minister Gwede Mantashe accepted a recommendation to use refinancing as a mechanism to lower electricity tariffs.

The slight benefit this could bring will be overshadowed by the massive increases that could come after Eskom’s success in various court battles against the National Energy Regulator of SA (Nersa) over various decisions by the regulator that limited tariff increases.

In February last year, Public Enterprises Minister Pravin Gordhan caused an upheaval when he announced in Parliament that government wanted to renegotiate the power purchase agreements (PPA) that were concluded in 2011 and 2012 with the IPPs because the tariffs were too high.

This led to repeated complaints from Eskom about the tariffs, which even led to the power utility refusing to sign any new PPA contracts from 2015. This brought the department of energy’s highly successful Renewable Energy Independent Power Producer Procurement Programme to a halt.

The tariffs agreed to in 2011 and 2012 are relatively high, particularly when compared with later agreements, because they were intended to attract new investors

Under the programme, the department negotiates tariffs with IPPs, but Eskom is the eventual party that buys and pays for the electricity.

Eskom’s cost of buying the electricity is passed on to the consumer.

The power utility eventually, after pressure to lower the tariffs, signed those outstanding contracts.

The tariffs agreed to in 2011 and 2012 are relatively high, particularly when compared with later agreements, because they were intended to attract new investors.

The agreements provided for a risk premium because there were many unknown factors, and developers incurred extra costs because components for power stations had to be imported.

The tariffs were set for the 20 years over which the projects were intended to run, with an inflation-related increase every year.

Gordhan’s comments sparked fears in the industry that government would go back on its word, and industry leaders warned that this would undermine investor confidence.

Last September, Gordhan and Mantashe met with role-players and asked them to agree to voluntarily lower electricity tariffs for end consumers.

Read: The ANC is gambling with the worker’s piggy bank

A task team comprising representatives from the department of mineral resources, the Banking Association of SA and the department’s office for independent power producers recommended a refinancing of the deals as the best mechanism to bring electricity tariffs down.

This, according to Grové Steyn, the managing director of Meridian Economics, is a natural development in the life cycle of this project, and quite common in other partnerships between government and the private sector.

What happens is that the projects are initially financed by banks, which means that the financing costs are determined according to the risk associated with it.

Once the construction work is completed and the power production and purchasing is going smoothly, the risk becomes lower and the owners of the project could try to have it refinanced on better terms – for example, a lower interest rate.

Usually, the banks then stand aside and institutional investors such as pension funds, which prefer stable, inflation-linked investments over a longer period, take over.

In the process, the owners gain and it is this benefit that government now hopes to use to lower electricity tariffs.

According to the guidelines for refinancing that government published last week, the cost of refinancing – that is, the cost for bankers, legal experts and consultants – has to be deducted from the refinancing gain.

Last September, Gordhan and Mantashe met with role-players and asked them to agree to voluntarily lower electricity tariffs for end consumers

The balance is then divided equally between the owners of the project and government. The refinancing is, accordingly, a voluntary process.

To date, about 70% of the 64 independent power producers in round one have indicated that they were interested.

Government now has to negotiate with every one of them individually.

According to Mark van Wyk, head of the unlisted investments at Mergence, financing, after capital expenditure, is the biggest expense for independent power producers.

Nevertheless, he believes that refinancing the 64 projects will not make a material difference to what the end consumers pay.

Steyn agrees, and Peter Attard Montalto, head of capital market investments at Intellidex, said it could come down to as little as 1c per kWh on the average Eskom tariff of R1.09/kWh.

Montalto calls the renegotiation of renewable energy agreements a “pound of political flesh”, driven by the mischaractarisation of the technology curve of renewable costs. However, the industry can provide given the reduced financing costs.

Nevertheless, the effect thereof would be minimal.

“Maybe shaving a cent or so – more than offset by higher tariffs to come from Eskom anyway,” said Montalto.


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