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IPP signing postponed, no new date set

Key issues not resolved says Eskom.

The renewable energy sector was notified in a short note at 16:25 on Friday that the financial close of 37 outstanding independent power projects (IPPs) would not take place on Tuesday April 11 as planned.

No new date has been set and the only reason forwarded by the Department of Energy’s IPP office was “to allow the new Minister of Energy to consult with stakeholders including the Minister of Public Enterprises.”

This follows President Jacob Zuma’s removal of former energy minister Tina Joemat-Pettersson from cabinet on March 31. She was replaced by Mmamoloko Kubayi. Former finance minister Pravin Gordhan was replaced by Malusi Gigaba.

Eskom spokesperson Khulu Phasiwe, however, told Moneyweb on Monday night that the utility cannot sign the power purchase agreements that are a prerequisite for financial close unless it gets assurances from the government and the energy regulator Nersa about the source of money to pay for the renewable energy.

Moneyweb earlier reported that Joemat-Pettersson set the April 11 deadline for finalising the IPPs. This follows an assurance from Zuma in his state of the nation address that the reluctant Eskom will sign the agreements in line with government policy.

Eskom has publicly ciriticised government’s highly acclaimed IPP programme that has brought investment totaling almost R200 billion, saying it is forced to buy expensive renewable energy while it has a surplus from its own generation that comes at a much lower cost.

Mark van Wyk, head of unlisted investments at Mergence Investment Managers told Moneyweb on Monday night that he doesn’t know what to tell investors lined up to fund the five outstanding small renewable projects his firms supports.

He says Mergence has successfully financed 12 projects in bid rounds one and two. These went well and the projects are all operational.

Five of the ten bids they supported in the programme for small renewable projects with generation capacity of less than 5MW were selected as preferred bidders. The five projects have a total value of R700 million and Mergence has a funding commitment of R350 million.

Financial close on these projects has now been delayed by at least a year due to Eskom’s reluctance, he says. “It is a concern, because we have committed investors who reserved their capital on good faith. They are earning 5% interest on the reserved funds, while they could have earned 8-9% if the programme went according to schedule,” he says.

“The question is how long do you wait?” he asks. If an investor withdraws now and the issues are resolved tomorrow, he loses all the money, effort and expertise invested to get the project to this point.

He says it is however clear that investors’ patience is running out, especially since there is no clear timeline to financial close.

Van Wyk says the cabinet reshuffle has really had an impact, since Joemat-Pettersson was pushing for the signing on April 11, with the support of Gordhan. 

Initially the industry expected full financial close on Tuesday. Early last week they were informed that only some preliminary agreements would be signed, but not the power purchase agreements. On Friday after close of business they learnt that the whole signing has been postponed, but not until when.

“It is not clear what the new ministers of energy and finance’s positions are on renewables or what their mandates from the president are,” he says.

“I don’t know what to tell investors. If they withdraw, it will expose the projects,” he says.

Phasiwe told Moneyweb Eskom has refrained from talking about a deadline for signing the agreements, since it first needs assurances about the source of funds to pay for the renewable energy.

He said Eskom’s ability to recover the money spent on buying renewable energy is restricted due to the court challenge to Nersa’s earlier decision to grant it an interim tariff hike. All interim adjustment applications have been shelved until Eskom and Nersa’s appeals have been finalised.

He said if Eskom spent the same amount on renewables in this financial year as in the previous one, it would be left with a deficit of R10 billion for the year. Signing further commitments would amount to reckless trading, he stated.

Nersa has allowed Eskom R19.6 billion in the current financial year for renewable energy purchases.

According to Mike Levington, CEO of the South African Photovoltaic Industry Association (SAPVIA), that should be more than enough for the cost Eskom will incur in 2017/18 and therefore interim increases are irrelevant.

He said if Eskom signed the agreements relating to the outstanding 37 projects now, the first power purchases would take place at the end of 2018 only. That would be in a new tariff period and Eskom would still be able to make provision for the cost, which is a pass-through in terms of the tariff methodology.

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Eskom nukes IPP’s. Two reasons, obviously. One – they are lining up a deal with kleptocrats in Russia (for our own kleptocracy). Two – Koko’s daughter was not made a director of the IPP’s.

My understanding is that NERSA has made provision for the IPP projects in its Eskom increases and has been doing so since the first projects came online.

I am guessing that NERSA factored in projects closing last year and therefore if these projects are not closed then whatever increase in tariff was allocated to that should be clawed back.

The % of total generation from these IPP’s is probably less than 5% of Eskom’s total generation (I am guessing) and therefore Eskom is not going to get a 10% increase because 5% of their generation is expensive (what about Medupi being expensive?). The IPP tariffs increase by inflation and the tariffs have become progressively cheaper, I would be surprised if the round 3 projects cost more than R0.80c/kWh on average.

Bottom line is Eskom clearly has no interest in closing these projects, and I can understand why, they don’t want competition or to give away big capital projects to the private sector but they do want big tariff increases every year to pay for Nuclear.

The downside here is the IPP programme is bringing in huge FDI which is now seriously at risk, can’t see investors waiting beyond this year, any manufacturing that was being done in SA is now dead as they had to carry fixed costs with no projects and there is now no competition in the market for energy generation which is always a bad thing.

Overall, this situation is pretty much in line with how government kills any business with potential in SA. Time for investors to back cheap tariff projects in other countries.

On a side note, I saw a article on here from a politician in the UK backing Nuclear. Pretty funny to see those projects slowly collapsing after a decade of development, going to be fun watching SA try to pull it off with junk status debt.

How ridiculous is this situation. Eskom does not want to purchase renewable electricity as it does not know where the money is coming from to pay for it (source of funds). Surely the source of funds would be the entity to whom Eskom onsells the energy. This could be a farmer or a municipality, for example. The capital outlay is essentially the IPP’s responsibility, hence they need to cover their capital cost.

Let me guess. In ANC Cookuckland the price Eskom will pay is more than the price they can sell it- hence their reluctance to engage in such things. The shareholders of these IPP thus line their pockets at the expense of the electricity consumer and/or the taxpayer.

Antoinette let me say it is now time to do your job properly. We are not interested in the value of the investment, what butthurt IPP wannabees think or who is doing what in the cabinet after Zumamadering has taken place. What we want to know is what prices the IPPs are offering their energy, where they will be situated, what capital costs will be incurred to connect them to the grid, what Eskom is prepared to pay, what Eskom can do on its own and if the whole caboodle makes a modicum of financial sense by presenting a cost benefit analysis.

Capital is scarce in SA – we would not want to waste it on something with a negative NPV.

Now go for it.

Capital for these projects is coming from private investors who are happy with the returns, if returns were negative then no one would fund them.

The only thing that matters to us as the public is what is the tariff. Your request to know what capital costs are does make much sense because you say you don’t care about investment value? Those two are inherently interlinked.

I’m surprised you are not interested in the value of investment, you previously said you have some sort of qualification in economics. Investment into any industry in SA is what we need, firstly to grow GDP which leads to higher tax revenues for social projects and less unemployment. Anyone with a basic knowledge of the economy should understand the value of long term capital investment into a country, especially if that is foreign capital.

From what I have seen, the tariff for new projects is around the R0.60-R0.70/kWh mark. That is less than what we pay for electricity so I can’t see how Eskom can be making a loss. In the previous rounds my understanding is NERSA built in a increase for Eskom tariffs to pay for those projects, hence we have already taken the hit for setting up the industry and now are stalling on getting the benefit of lower tariffs? I am only going on what I have read in the media, not sure how accurate that data is but its all I can go on.

Eskom, based on recent experience, has shown that it can do nothing on it’s own and it has a aging coal fleet that will require heavy capital investment to maintain, never mind the cost of complying with emission laws to be introduced. If the plan is to build according to current depressed energy demand then the first thing we should shut down is the gigawatts of nuclear they want to build.

I’d also be interested to understand what % renewables are of our entire generation capacity. My understanding is that it is quite a small amount of <5%, such a small % can't be driving above inflation increases overall surely?

I think the last thing we should be doing is chasing away IPP's or anyone who is wanting to bring skills, manufacturing and long term capital into the country. Especially if the tariffs are as cheap as has been mentioned.

Negative. The return in investment is the issue of the suppliers of the capital and is peripheral to my argument. It is their business. “The only thing that matters to the public is the tariff”. Your words. How correct is your statement? Very correct, I think. Everyone has an agenda. Everyone has a bias. My agenda is exposing statism and economic distortions. When someone holds a gun against my head and forces me to buy electricity at an elevated cost, I have a right to know why and by how much.

Economic distortions arise very easily when you have a small group of big potential gainers who benefit from a larger group of small potential losers. EU farm subsidies/ import tariffs are a case in point. A small number of farmers gain massively at the expense of the population who all pay extra for food to keep these inefficient sub economic farmers in business. Contrary to what many idiots (PCE) on this site think, I am not against renewable power, only the lies, false benefits, agendas, economic distortions and hype that is used to promote it.

The fact is we simply don’t have the figures, they are not forthcoming and investigative journalists such as Antoinette are not doing their job seeking them out. Instead they bleat on about peripheral issues of less consequence.

As I have said before: the only way one can supply electricity to the masses at an affordable price is to let the market sort it out. Break up Eskom and allow competition. All the renewable power proponents are shouting the odds about affordability and low costs, so let’s have the figures. Let’s have the business case for Eskom to buy their electricity. Let us see how the price of electricity for the consumer will be lower over the long term by taking this route rather than other routes. Lower energy prices mean lower taxes which mean better economic growth.

Is everyone left in SA incapable of raising a business case or even a logical argument?

Eskom’s arguments:
(1) Generation capacity is more than what it’s currently selling
(2) Large running costs
(3) Job losses with less coal usage
(4) Nuclear will cost less per kWH than other methods

Of course the above points can be debated……..

There’s no way Eskom will settle for renewable unless they are forced to (by whom…..?)

I think Eskom is going to have to close down older coal plants in any case or spend a fair chunk on refurbing them.

I think renewables is a very small % of Eskoms total capacity and whether there is renewables or not is not going to really impact how many plants they shut down I don’t think.

There is also the pollution element, these older coal plants will not meet emission standards unless they spend huge capex, it does therefore make sense to shut them down and switch to newer plants.

If Eskom has a surplus, then why chase nuclear? How does the cost of renewables projects compare to the cost of nuclear? Anyone able to figure that out? What happens to the nuclear waste material and where is it stored in the long term – are these costs taken into account? All very confusing to the man in the street while having to listen to the competing lobby groups. Who is really independent?

Well then sign private power supply agreements with businesses that allows them from “cutting” with eskom, most have property and big roof space for the IPP equipment. Give us the opportunity to disconnect, please in doing so there’s even less money for corruption in soe’s

I smell a Russian.

End of comments.

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