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South Africa’s renewable energy Power Purchase Agreement (PPA) delays and price renegotiations, damage credibility for future government procurement.

This is according to energy specialist  Chris Ahlfeldt, who believes that the new price caps will hurt some independent power producers (IPPs) more than others, while price renegotiations create new risks and challenges.

Earlier this month South Africa’s energy minister, Mmamoloko Kubayi, set a new deadline for the 2.3GW of delayed renewable energy PPAs from Round 4 power projects including a CSP project from Round 3.5.

The 27 utility-scale renewable energy projects consisting mainly of solar photovoltaic (PV) and wind projects, have been waiting for over two years on the national utility to sign the PPAs after being selected through a competitive auction process. As the sole off-taker of electricity from these projects, Eskom has been the main source of these delays.

PPA price caps

In addition to setting a new timeline for Eskom to cooperate, the government is going back on the rules it created by opening-up the prices for renegotiation with a new price cap of 77 Rand ¢/kWh (~5.9US¢/kWh assuming 2017 currency). The price cap is lower than what many projects bid at a couple of years ago, and may be an unbankable level for some.

In particular, the small hydro (5MW), biomass (25MW), and CSP (100MW) projects included in this determination will be hit hardest as their original bid prices all exceed the price cap by 70% or more.

The price cap also doesn’t account for the other benefits the projects from the initial bids, such as local content, job creation, and socio-economic development in local communities. These enterprise development commitments are at risk of now being cut by IPPs if they are forced to squeeze project costs.

Renegotiating prices creates new risks and challenges

The drop in technology costs for some solar PV and wind project components during the programme’s delay is a major driving factor for the price renegotiation.

Solar PV projects, for example, have experienced an average energy price decrease of ~24%/yr from 2010-2016. While these trends suggest future solar PV costs will continue to fall below the price cap, it’s difficult to estimate at what rate since fluctuations in global supply/demand of solar PV modules (the largest cost component) may change by the time the equipment is purchased by IPPs.

Likewise, the average energy prices for new wind projects globally has fallen ~11%/yr from 2010-2016, implying future prices will also decrease.

This decrease, however, is largely the result of bigger turbines both in rotor diameter and hub heights, which creates additional challenges for wind IPPs to take advantage of these improvements with existing environmental impact assessments (EIA) terms and engineering plans for smaller sized turbines. EIA and size amendments along with some re-engineering may therefore be required for some projects to meet the new price caps.

The point of an auction is to enable fair price competition between qualified IPPs that understand the true cost of building these projects.

While the delay was costly for the industry, this renegotiation also creates a risk for ratepayers if the Ministry of Energy locks in prices that significantly exceed the future market rate for new projects by COD in 2021.

 

Assumes Minister Kubayi’s price cap quoted in Apr. 2017 Rand values and projects bid prices forward from Apr. 2014 with inflation.

 

IPPs are the most informed on past and future cost changes, so hopefully they’ll find a way to work with government on an approach that ensures a fair price for ratepayers, while getting the PPAs signed soon to prevent further delays.

A fair renegotiation should also take holistic account of other project costs that may have changed during the delay such as wages, EPC, local content premiums, and procurement delays while weighing this against other project benefits like job creation and enterprise development.

Even if the price renegotiation is legally possible and IPPs cooperate, it will be complicated and challenging to get it right by the end of next month.

The long-term effects will be damaging

South Africa’s transparent and credible auction design initially made it a poster child for renewable auctions and helped it dramatically reduce prices from Rounds 1 to 4 by attracting global competition.

There have been no updates on the expedited Round 4.75 of ~1.8 GW or the 10 additional small-scale projects already selected (2 biomass, 2 wind, & 6 solar PV of ~5MW each), suggesting there won’t be progress here until after the new IRP is updated along with other IPP procurement for coal, nuclear, and gas projects.

Several solar PV manufacturers have also closed South African manufacturing facilities during this delay including an inverter assembly plant by AEG and a c-Si solar PV assembly plant by SunPower.

These recent price renegotiations, hiring/firing of multiple Energy Ministers, and multi-year delays damage government credibility and ultimately increase risks for future investment in South Africa.

 

About the author

Chris Ahlfeldt, founder, Blue Horizon Energy Consulting

Chris Ahlfeldt is an energy specialist and founder of Blue Horizon Energy Consulting Services which provides advisory related to the clean energy sector.

A qualified energy engineer, Ahlfeldt also worked as a management consultant in California (US) prior to his move to South Africa, and now assists public and private sector clients to navigate complexity and realise opportunities in the evolving global energy sector.

His focus areas include clean-tech/energy efficiency, distributed energy access, power markets, and customer-centric energy solutions.