Fight or flight as Eskom 'squashes' renewable IPP programme

The nascent private power industry and its substantial financial backers are reeling from Energy Minister Mmamoloko Kubayi’s recent apparent hit-and-run attack on them.

Last week, the industry was shocked to hear Kubayi announce they must all renegotiate their previously-agreed tariffs down to 77c/kilowatt-hour.

This would get them their long-delayed power purchase agreements with Eskom by November.

Looking for clarity, they learnt that Kubayi had left for the Brics summit in China and would take leave afterwards, said Mark Pickering, chair of the South African Wind Energy Association (Sawea). His company, Globeleq, is a member of solar industry lobby group Sapvia.

“The minister drops this massive bombshell, then promptly leaves for China. After that, we are told, she is on leave for two weeks,” he told City Press.

The department and the minister’s spokespeople said they could not confirm the minister’s itinerary.

“The lawyers are really clear – there is no legal basis for this,” Pickering told City Press.

The department of energy simply endorsed Eskom’s attempt to “squash” South Africa’s flagship public-private partnership initiative – the renewable energy independent power producer (IPP) purchase programme – he said.

Kubayi’s announcement affects 27 projects representing at least R60 billion in capital expenditure.

“By setting a date and a price, you contradict the idea of a negotiation,” said Pickering.

“What is left to negotiate? It is absolutely clear that it is Eskom trying to squash the IPP office. To our astonishment, the minister has bought Eskom’s line hook, line and sinker,” he told City Press.

Eskom seems to be winning the battle on other fronts as well.

Coincidentally, the National Energy Regulator of SA (Nersa) is this week holding a hearing on complaints that the renewables sector lodged against Eskom months ago.

Despite the industry’s objections, it would be a closed hearing, said Pickering.

Nersa had not provided the industry with its investigation report into their complaint – the very thing the hearing is about.

Brenda Martin, CEO of wind energy lobby group Sawea, said they were “going in blind and have had to prepare on the basis of guesswork”.

They want Nersa to rule that Eskom cannot simply refuse to sign the power purchase agreements or provide so-called budget quotes.

These quotes are the cost of connecting to the grid and, like the agreements, they are a precondition for breaking ground on the projects.

At Nersa, the industry will argue that the minister’s announcement has no legal effect.

“The understanding is that, once a tender gets awarded, you can only renegotiate under narrow circumstances. The minister has not cited any of these circumstances,” said Pickering. There was absolutely no consultation. Only the department of public enterprises and Eskom were consulted.”

City Press contacted a number of the affected independent power producers this week.

All of them declined to comment outside the common position being formulated by their associations Sapvia and Sawea.

Andrew Johnson of Terraform, which has six renewable energy projects totalling about 400 megawatts in limbo, said they were “still drawing their conclusions” about last Friday’s announcement.

Another affected preferred bidder is Scatec Solar, which has three solar projects totaling 225MW waiting for power purchase agreements from Eskom.

The company said that, if its projects were online this year, the agreed tariff would be R1.05/kWh, meaning that Kubayi’s directive amounts to a 27% revenue cut.

The project that is the least likely to survive the “renegotiation” is the Redstone concentrated solar project in Postmasburg, Northern Cape.

Like all the other developers contacted, Redstone’s owner, Solar Reserve, said it could not comment.

Even Eskom spokesperson Khulu Phasiwe readily admits that Redstone is dead in the water at 77c/kWh.

“We’ve heard its tariffs can go as high as R5/kWh. It is way too high,” he said.

No one in the industry seems to know why 77c became the target.

Phasiwe said the 77c was essentially the level at which Eskom could “absorb” the cost if all the IPPs came on line.

“It has to be 77c or lower. Government understands where we are coming from. Some [independent power producers] may accept it and some may not,” he told City Press.

“It will be for the industry to say whether they will build or not.”

ENEMIES IN RICH PLACES

The renewable energy purchase programme, announced in 2011, has been celebrated as a spectacular success at directing private capital into public infrastructure – and a model for attempts to lure private investment into other projects.

The largest funder of such projects has been Old Mutual. However, commercial banks, foreign private equity firms, power utilities and development financiers have also piled into the projects.

To these institutional investors, independent power producers represent an attractive asset.

Once agreements with Eskom are signed, the producers are guaranteed their income for 20 years.

Their tariffs automatically get passed on into the Eskom tariff and, if Eskom should fail to pay them, Treasury would have to cough up.

National Treasury has R200 billion in renewable energy purchase programme guarantees on its books, even before the still unbuilt projects now being fought over enter the picture.

The projects are given a generous accelerated depreciation allowance, which amounts to a tax holiday for their first few years of operation.

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Mark Pickering was initially incorrectly labelled as MD of Sapvia, when he is in fact the chair of Sawea. We apologise for this error and any inconvenience it may have caused.

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