Uncertainties shroud renewable energy deals in short-term

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Reduced electricity demand and the price drop during the COVID-19 lockdown will hinder renewable energy power purchase agreement (PPA) negotiations in the short-term.

This is according to market research firm GlobalData, which notes that in the wake of the pandemic, offices and manufacturing plants are temporarily closed, resulting in a decline in power consumption and a drop in electricity prices.

In SA, power utility Eskom, which supplies about 95% of SA’s power needs, recently said it now has surplus capacity after the implementation of the lockdown, resulting in the parastatal taking some of its generation units offline.

The state-owned company then issued force majeure notices to the wind independent power producers (IPPs) to alert them of the possibility that it may, from time to time, curtail their supply to the grid during the national lockdown.

GlobalData says the decline in power consumption is expected to impact existing PPAs as suppliers may have to either face a liquidity crunch to honour their PPA commitments or delay payments, which may lead to legal issues in the future.

Locally, after Eskom issued its force majeure notices, the wind energy industry said it is seeking legal counsel over the power utility’s decision to curtail operational wind farms.

The industry argues it has not been given an opportunity to engage on this matter with Eskom, despite both Eskom and government confirming operational IPPs are an essential service.

For upcoming PPAs, the current uncertainties and reduced electricity prices will hinder negotiations.

Somik Das, senior power analyst at GlobalData, comments: “PPAs are a vital instrument for bankability of renewable projects, mainly during the times when government subsidies are fading out. The COVID-19 outbreak is damaging some existing PPAs and delaying new PPA negotiations.”

According GlobalData, supply chain disruptions and lack of personnel are expected to significantly hamper under-construction projects with already negotiated PPAs, leading to increased project costs and diminished developer margins.

It notes that with power prices at unreasonably low levels, most developers would remain cautious in negotiating new PPAs.

Das explains: “PPAs are typically negotiated at discounts to the wholesale electricity price and therefore drops in the wholesale prices impact the PPA pricing structure and consequently the viability of projects in the short-term. PPA negotiations have particularly slowed down due to the drop in electricity prices. With the extent of the ongoing COVID-19 restrictions unknown, it is difficult to estimate a correct pricing structure that would offer good terms for developers in the current environment.

“At the buyers’ end, companies bearing significant debt could defer from making new investments and take up a more cautious approach, as their demand for energy and other goods as well as revenues will decrease.

“This is expected to be a temporary phenomenon as major nations across the globe are starting to ensure essential industries and facilities become operational. This will lead to slightly increased demand and electricity prices will slowly and steadily rise in the future.”

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