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Renewable projects may be coming to the JSE

Significant investment in first four bid rounds.

South Africa’s renewable energy industry has attracted serious money, with approximately R191 billion being committed in the first four rounds of the Department of Energy’s (DoE) Renewable Energy Independent Power Producer Procurement Programme (REIPPPP).

Some of the early equity players are getting ready to monetise their investments and are considering listing on the JSE as one of the options available to them, says Standard Bank head of Renewable Energy, Power and Infrastructure, Rentia van Tonder.

Van Tonder says investors are locked in for a period of three years after the start of commercial operations in terms of the DoE’s rules. While these periods will start lapsing in future, government is also re-evaluating the lock-in periods, she says.

She says many international companies with equity stakes in local renewable projects are already setting up yieldco’s and may run these investments through such structures. (A yieldco is a dividend growth-oriented public company, created by a parent company that bundles renewable and/or conventional long-term contracted operating assets in order to generate predictable cash flows.)

Pension funds are also coming into the secondary market as banks sell debt in the renewable projects on to them. The structure of these projects with a predetermined, regular income over the 20 year term of the power purchase agreements (PPA) make them very suitable for pension funds.

Van Tonder says the REIPPPP has been extremely successful with regard to the speed and efficiency of the procurement process. Since the start of the programme in 2011 a total of 6 243MW has been awarded over four bid rounds.

In the first bid round bidders priced in more risk as the procurement process was still new. There was initially some discomfort with the 30% weight allocated to economic development objectives in the bid evaluation, with price only counting for 70%. The norm in government procurement is for price to weigh 90%.

Due to these factors the average contracted tariffs were close to the caps the department set. Average tariffs in Round 1 came to around R2.60/kWh for Solar Photovoltaic (PV) projects and R1.36/kWh for wind.

In the subsequent rounds tariffs have decreased significantly as a result of competitive bidding and comfort with the programme, which she says is seen as well-run and world-class. In Round 4 tariffs have decreased to an average of 61c/kWh for wind, which is a 55% reduction from the first round and 78c/kWh for Solar PV, 76% lower than in the first bid round (April 2014 values).

This reduction does not, however, mean that investors have lost their appetite.

Bid round four was about five times over-subscribed, with 77 bids amounting to 5 804MW offered for the available allocation of 1 105MW.

Van Tonder says the South African programme has benefitted from a global slowdown in renewable procurement, but debt pricing became more competitive as funders became more comfortable with the program. EPC partners also initially built in substantial risk, which has since been reduced and investors are prepared to accept lower returns on equity as the program matures.

“The parties that are now participating in the programme are mainly international utilities and companies with strong balance sheets,” she says.

As tariffs decrease it however becomes more challenging for bidders to differentiate themselves on price, Van Tonder says.

The other variables are location – better irradiation levels in the case of solar or wind speeds in the case of wind ensure a more productive plant, lower costs and grid connection also play a significant role since the best grid access points have been taken.

Van Tonder says initially Eskom would give the successful bidder a quote for the infrastructure to ensure grid connection through a cost estimate letter. The bidder had to pay for it, but Eskom did the actual construction.

The quotes Eskom provided at bidding stage were only guaranteed to be 60% accurate and in bid Round three some bidders got substantially increased revised quotes. Since their tariffs were fixed at that stage, they had to absorb the additional cost. In this respect there is now more flexibility with bidders being allowed to do the self-build option.

She says most of the solar projects are situated in the Northern Cape and wind projects in the Eastern Cape. In the fourth bid window for example, a total of eight projects at a cost of R14.5 billion was awarded in the Northern Cape, three at a cost of R7.4 billion in the Eastern Cape, one at a cost of R246 million in the Free State and one at a cost of R1.2 billion in Mpumalanga.

She suggests that bidders in future rounds consider developing renewable solar projects in regions with easy grid access like Gauteng. While they will have to sacrifice sun quality, grid connectivity will be less problematic than in the Northern Cape. Being close to the economic hub further means the electricity will require shorter transmission distances, however the tariffs may not be that competitive.

The DoE may consider regional targets in future bid rounds to ensure a more even geographic distribution of projects, supporting generation where required and spreading social investment impact through the commitments made by the various projects, Van Tonder says.

The DoE has called for expedited bids for a total of 1 800MW to be submitted in October, with the added condition that the project should be ready to connect to the grid by 2019.

This article is part of a series sponsored by Standard Bank Business Banking. Should you require further information about raising funding for a business in the energy sector please e-mail Moneyweb MD Marc Ashton with details of your project and he will connect you with an appropriate banking resource.

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