Carol Paton Writer at Large
President Cyril Ramaphosa says the IPP programme will create 114,000 jobs over the 20-year generation period. Picture: 123RF
President Cyril Ramaphosa says the IPP programme will create 114,000 jobs over the 20-year generation period. Picture: 123RF

Government will "renegotiate" contracts with companies that won the first two rounds of SA’s renewable energy procurement to alleviate pressure on Eskom and electricity tariffs, public enterprises minister Pravin Gordhan said.

The renewable independent power producer (IPP) programme has become controversial politically, with trade unions, the EFF and former Eskom officials claiming that the costs are responsible for the financial collapse of Eskom, which cannot service its debt of more than R400bn.

However, the move to renegotiate contracts could be damaging for future investment as investors will be asked to forego earnings. IPP contracts have also been sold into a secondary market as their guaranteed revenue streams are attractive to institutional investors.

The programme is one of SA’s most successful attractors of investment, raising R190bn over five years. The first two rounds of procurement in 2011 and 2012 were significantly more expensive than subsequent rounds, for which prices dropped dramatically due to technological developments.

In round one the prices for solar photovoltaic and wind power were R4.02/kWh and R1.67/kWh. By round four in 2016, prices had fallen to R0.96/kWh for solar and R0.76/kWh for wind. The end result, however, is that Eskom pays an average price of R2.01/kWh for renewable energy, significantly more expensive than the cost of coal at R0.62/kWh. When energy from IPPs at "peaker stations", which use diesel-fired turbines, is included, energy cost from IPPs increases to R2.22/kWh.

Tobias Bischof-Niemz, CEO of renewable energy consultancy Enertrag, said a "renegotiation" would be bad for investor confidence as it would be asking investors to take a hit.

A more viable option would be to offer IPPs a lower rate over a longer period. Eskom’s contracts with IPPs extend over 20 years, with the costs of investments and projected returns spread over that period.

"Government could offer to extend the period of the agreement for 10 years, for example, in return for a lower price."

Gordhan made the comments to parliament’s public enterprises committee on Wednesday. On Thursday, in his reply to the state of the nation debate, President Cyril Ramaphosa praised the renewable IPP programme and gave the strongest assurance yet that government intends to embark on a transition to clean energy.

"Through the competitive bidding process, SA has benefited from rapid global technology developments and price trends, buying clean energy at lower and lower rates with every bid cycle. As a result, SA is now getting renewable energy at some of the lowest tariffs in the world," he said.

Ramaphosa said it was estimated the programme would create 114,000 jobs over the 20-year generation period, and pledged that government would work with coal-producing communities and workers to ensure that "no one is left out".

patonc@businesslive.co.za