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Renewables industry challenges Gordhan on contract re-negotiation

Read time 5min 30sec
Pravin Gordhan, minister of public enterprises.
Pravin Gordhan, minister of public enterprises.

South Africa's renewable energy industry has come out strongly against public enterprises minister Pravin Gordhan's bid to "re-negotiate" contracts with companies that won the first two rounds of the country's renewable energy procurement to alleviate pressure on Eskom and electricity tariffs.

Gordhan made the remarks last week in Parliament's public enterprises committee.

Financially-challenged Eskom recently said in 2018, it purchased independent producer power (IPP) at an average cost of 222c/kWh. In the previous financial year, the power utility bought 11 529GWh of energy from IPPs at R21.7 billion, at an average cost of 188c/kWh.

According to Eskom, at 31 March 2018, total available IPP capacity of 4 779MW consisted of renewable independent power producers (IPPs) of 3 774MW and IPP gas peakers of 1 005MW. In 2017, the total was 5 027MW.

In round one, the prices for solar photovoltaic and wind power were R4.02/kWh and R1.67/kWh. By round four in 2016, prices had fallen to R0.96/kWh for solar and R0.76/kWh for wind.

Last week, government said troubled state-owned power utility Eskom, which generates more than 90% of the country's energy, was "technically insolvent". Eskom's debt is R420 billion.

Investor confidence

Responding to Gordhan's remarks, renewable energy industry body, the South African Wind Energy Association (SAWEA), says the re-negotiation of terms with successful bidders of the first two rounds of SA's Renewable Energy Independent Power Producer Procurement Programme (REI4P) would be a clear breach of contract and damaging to investor confidence.

Brenda Martin, CEO of SAWEA, says investor confidence in any public-private programme is contingent on government's consistent, assured application of procurement law.

"Re-negotiation, besides raising the spectre of breach of contract, would require extensive and careful process to ensure fairness to affected investors while also providing sufficient assurance to prospective investors," says Martin.

She adds the minister made the remarks attributed to him in passing and not as part of his formal commentary and they do not, therefore, represent government policy.

"Thus far, no formal requests for re-negotiation of contracts have been received by any round one preferred bidder," she confirms.

The REI4P was initiated by government in 2011 as a premier procurement programme with the intent that climate and energy security should be addressed.

The need to diversify SA's energy mix as well as transition away from coal-fired power were primary motivators for the launch of the programme.

SAWEA says to date, it has been one of the most successful attractors of investment to SA, raising R202 billion so far; 24% of which is foreign direct investment.

It adds the programme has contributed 26 840GWh to the national grid and created about 36 500 jobs. South Africans own, on average, 48% equity in all IPPs while black South Africans own, on average, 31% of project equity, says SAWEA.

Martin explains round one projects were bid in line with tariff ceilings offered by government, which recognised that in order to initiate the growth of a market, attractive terms needed to be offered initially.

However, she says, consistent rounds of procurement, innovation and expanding global markets have led to dramatic cost reductions and a global trend of rapidly declining tariffs to date.

"SAWEA is mindful of the national imperative to find solutions to Eskom's financial crisis. However, we question the wisdom of any move to undermine the successful public private partnership that has grown under the REIPPPP, particularly at a time when concerted efforts to attract investors to South Africa are being led by the president, and when bid prices have clearly declined consistently as a direct result of competitive bidding.

"The competitive bidding process under the REIPPPP has resulted in round four projects bid at R0.96/kWh for solar and R0.76/kWh for wind; an average drop in price of over 50% from earlier rounds."

According to recent models from the CSIR, future wind energy investments alone have the potential to realise 70 000 jobs (in construction, operations and maintenance) through the smoothed allocation of 1.5GW of wind a year between 2021 and 2030, and to make a total GDP impact of about R20 billion between 2021 and 2030. That is approximately R200 billion in total, says SAWEA.

"The renewable sector has proven its capacity to deliver built programmes on time and within budget, and that it has the capacity to take on upfront risk and debt on its own and then rely on power purchase agreements over a 20-year life span to recover that initial investment. It needs the consistent support of government if it is going to continue to deliver benefits for all South Africans," says Martin.

"We look forward to all affected ministries providing formal clarity on the off the cuff remark made by minister Gordhan."

Economic value

Meanwhile, the South African Photovoltaic Industry Association (SAPVIA) says renewable energy power projects have proven they provide substantive economic value for our struggling economy. They attract much-needed investment, drive down costs with their continually decreasing tariffs, create new jobs, mitigate climate change impacts and add significant economic value to local economies and communities that are struggling for survival.

SAPVIA chairman Davin Chown notes that extending PPAs by 10 years, to 30 years, affords SA and investors better long-term value alongside lower tariffs.

"Simply renegotiating tariffs, without a comprehensive solution, may have limited short-term gain but could dent investor confidence and potentially increase the cost of capital as financial institutions and investors price in the risk of an uncertain policy environment.

"Ultimately, this defeats the perceived short-term benefits of renegotiating tariffs. SA needs less risk, not more.

"The only way to sustainably lower power prices for SA is to consistently procure low-cost solar and wind power through a consistent, well-managed programme over an extended period," Chown concludes.

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