SA seeks to renegotiate old renewables projects

Power firms are reluctant to give the government big savings on solar and wind projects.
Talks are underway to get kickstart the use of renewable energy in South Africa to boost the economy amid nationwide power cuts. Image: Patrick T. Fallon, Bloomberg

South Africa has started discussions with power producers to try to get cheaper electricity from some older renewable energy projects and give the economy a boost, several participants in the talks say.

Read: SA cabinet approves power plan

But participant power firms – some of which are backed by big names such as EDF Renewables – say they can’t give the government big savings on many of the 64 solar and wind projects that are part of the discussions, because most of the money has already been spent.

Putting too much pressure on them would risk deterring renewable energy investment just as the country is suffering nationwide power cuts. Business confidence is weak after corruption scandals under former president Jacob Zuma.

Climate activists are wary of any moves that could delay the country’s sluggish transition from heavily polluting coal power, which still accounts for more than 80% of output and makes South Africa one of the world’s top-20 carbon dioxide emitters.

“80%-90% of project costs are sunk costs, so as an industry we need to manage expectations (by showing) that there isn’t that much room for savings,” said Jan Fourie, general manager for sub-Saharan Africa at Scatec Solar, another company that owns projects under discussion.

He said the government had not yet made any formal proposals.

“A unilateral tariff reduction would shake investor confidence and undermine future public-private partnership projects,” Fourie added.

Renewable energy projects are protected by more than R140 billion of state guarantees, exposing the government to huge penalties if they were to terminate or breach existing agreements.

Twelve projects, including Scatec’s, also enjoy protection from the Multilateral Investment Guarantee Agency (MIGA), part of the World Bank Group, which offers insurance against breach of contract, said Hoda Atia Moustafa, MIGA’s Africa head.

EDF Renewables did not comment in detail on the talks but said they were constructive.

‘Good citizens’

Energy Minister Gwede Mantashe and Public Enterprises Minister Pravin Gordhan have stressed the talks are voluntary, asking for firms’ cooperation as “good citizens” at an October 4 meeting, according to minutes of the meeting seen by Reuters.

They asked for “quick win” projects that could support local businesses with cheaper electricity, offering a sweetener in the form of extensions to power purchase agreements for projects bid between 2011 and 2014.

Those projects are being targeted because they had larger tariffs, as funding and technology costs were higher.

Mantashe told power firms that the “government isn’t the enemy of renewable energy” but that if administered prices such as those for electricity failed to come down then the economy would not grow, the minutes showed.

Mantashe’s spokesman Nathi Shabangu said the discussions were private and at an early stage. Gordhan’s spokesman Richard Mantu referred all questions to the energy ministry.

Lenders and lawyers said the government was being unrealistic by targeting quick reductions in power prices through a “collective bargaining” approach of the type used in wage talks with unions.

“Attempting to achieve a blanket tariff reduction is almost impossible because each project is different,” said Alastair Campbell, managing director of Vantage GreenX, a sustainable energy fund with exposure to some affected projects.

Some solar and wind projects will be unable to extend the lifespan of their equipment, power producers said.

Jason van der Poel, a partner at law firm Webber Wentzel who represents power firms, said there were competition and procurement law obstacles to overcome.

“The risk is that this becomes an enormous drain on resources for a marginal benefit in terms of the tariff reduction,” he said.

A simpler way to lower power prices could be to give the go-ahead for projects to refinance their debt. Power firms could then pass on some or all of the savings.

Fourie of Scatec said debt was the “low-hanging fruit” and that investors could give the government a lump sum from any savings.

Anton Eberhard, a member of President Cyril Ramaphosa’s task team on struggling state power utility Eskom, said any marginal gains from a tough renegotiation would be outweighed by “future investment uncertainty”.

Instead, the government could run more renewable energy bidding rounds, which could yield prices below 50 rand cents per kilowatt hour versus Eskom’s average selling price of 102 rand cents per kilowatt hour, he said.

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So after stuffing up Eskom, the ANC are now targeting the private power firms. What a farce.

Those early solar winners were given offensive contracts. Several involved politically connected persons incl former Eskom executives.

If the IPP were to publish their IRR, there would be riots. 55% IRR in first round was not uncommon. For scale, the fully loaded cost of utility scale solar is now close to R0.50/kWh. The early selling prices were close to R3/kWh. Capex Costs have come down, but not from 250c to 50c.

Many IPP got sweetheart euro funding from their governments as industrial incentives. Then our banks made out like bandits doing swaps to align debt to local revenue. I know there were deals with EU funding at Euribor plus 0.1% which is therefore now effectively zero interest. The currency has not budged much from the days PPA were signed, so imagine the profits on the swaps!

It is unfair on Eskoms side to still pay those very high agreed rates of renewals. Currently renewals pricing has dropped substantially which could make it extremely viable for Eskom to buy in renewals. Perhaps they could bring in new renewal partners to supply at the new current rate which could keep the lights on in SA.

Usually IPP should have at the old price a 5 to 7 year pay back and that means that after that period Eskom has the right to renegotiate. Eskom should only agree to a 3 to 5 year contract with IPP to protect themselves.

Why are they still not allowing the small scale domestic solar produces to push back into the grid on a net metering system.

End of comments.





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