The renegotiation of early power purchase agreements (PPAs) with independent producers of renewable energy has been mooted by politicians to moderate the electricity price path, but experts are doubtful it will make much of a difference.
This follows government’s acceptance of refinancing as the mechanism for adjusting tariffs.
Whatever gains might come from refinancing will be outstripped by recent court rulings in favour of Eskom in which it sought to recover more than R100 billion in revenue denied by energy regulator Nersa in flawed decisions.
Although Nersa indicated last week that it will seek leave to appeal the latest ruling that R23 billion should be added to Eskom’s revenue annually over the next three years, it had conceded the merits of Eskom’s case and at most the decision will be remitted to Nersa for redetermination in line with the guidelines set by court, says Eskom regulations general manager Hasha Tlhotlhalemaje.
If the appeal is dismissed, electricity tariffs will increase by at least 15% in April next year, instead of the 5.22% announced earlier.
Public Enterprises Minister Pravin Gordhan set the cat among the pigeons in February last year when he announced in parliament that government will renegotiate the PPAs with independent power producers (IPPs) negotiated in 2011 and 2012.
These agreements were concluded by the department of energy’s IPP office in the first three bid rounds for renewable energy, and tariffs included risk premiums aimed at attracting investors to an industry that was new to South Africa. Furthermore, big components had to be imported, which further contributed to the high development cost.
With every consecutive bid round tariffs did, however, decrease.
The tariffs are set for 20 years with an inflation-linked escalation annually.
Eskom, as off-taker, has been complaining about the tariffs, which are higher than those it charges its customers, although the IPP tariffs are in fact passed through to customers in terms of the methodology Nersa uses to determine Eskom’s revenue and sales tariffs.
Eskom, in fact, refused to sign any further PPAs and thereby disrupted the department’s internationally acclaimed Renewable Energy Independent Power Producer Procurement (Reippp) Programme.
After further sharpening of pencils, Eskom eventually signed the outstanding 27 PPAs early in 2018.
The renewable energy industry was shaken by Gordhan’s utterances and industry leaders cautioned that investor confidence would suffer if government failed to honour its commitments.
In September last year, Gordhan and his colleague, Mineral Resources and Energy Minister Gwede Mantashe met with stakeholders in the industry and asked them to cooperate with their effort to ensure lower electricity tariffs that could assist the struggling economy.
This led to a task team comprising officials of the Department of Mineral Resources and Energy, its IPP office and the Banking Association of South Africa (Basa), which eventually recommended refinancing of the deals as the best mechanism to reduce tariffs.
According to Dr Grové Steyn, MD of Meridian Economics, refinancing is, in fact, a natural development in the life of such projects, as in public-private partnerships (PPPs).
This occurs where banks usually do the initial financing of a project according to the perceived risk at the time. After completion of the construction, when the project starts operating, the risk is lower and project owners can renegotiate the financing on better terms, including a lower interest rate.
The long-term annuity income associated with such projects linked with annual adjustments for inflation is the kind of investment appropriate for pension funds, which usually at this stage take the financing over from the banks.
The refinancing gain is what government hopes to use to lower electricity tariffs.
The Department of Mineral Resources and Energy recently announced guidelines that provide for the refinancing cost to be covered from this gain and the balance to be split equally between project owners and government.
Mark van Wyk, head of unlisted investments at Mergence, says financing is, after capital cost, the biggest cost item for IPPs. Nevertheless, he does not expect that the refinancing gains of the 64 projects due for refinancing will make a big difference to the tariffs paid by end-users.
‘Pound of flesh’
Steyn concurs, and Peter Attard Montalto, head of capital markets research at Intellidex, calls it “a political pound of flesh that is being driven by mischaracterisation around the technology curve of renewables costs but one that the industry can provide given the reduction in funding costs”.
Attard Montalto says “the headline impact from passing through these lower funding costs to the headline tariff will be minuscule – maybe only shaving a cent or so off – more than offset by higher tariffs to come from Eskom anyway”.
Another industry source who asked to remain anonymous says that in other countries such agreements were renegotiated on the basis of undue profits made by the project owners. That came as a result of overly conservative initial assumptions regarding plant efficiency, or where the owners benefitted from inflation-linked escalation clauses where projects were delayed and costs, in fact, declined as the industry matured.