IPP procurement programmes a powerful tool and investor confidence cannot be understated
A number of factors are causing international investors concern and need to be clearly addressed
I was privileged to have been a part of the team advising the independent power production (IPP) office back in 2011 before the renewable energy independent power producer procurement programme (REIPPPP) was launched, and I remember the anxiety that existed around whether many bidders would sign up to participate in the programme.
Since then, we have witnessed in excess of 100 large scale renewable energy projects successfully procured under five bidding rounds of REIPPPP (including bid window 3.5) featuring significant tariff reductions from round to round.
How did this happen? In my view, it was because SA created a clear procurement plan in the form of the integrated resource plan 2010, making provision for the procurement of 17,800MW of electricity from renewable energy sources by 2030.
Second, government created a well-designed and transparent procurement process with key risks mitigated and third, the forces of a competitive market exerted on the sponsors of and lenders to these projects and on providers of key inputs into these projects have led to significant price reductions as the bidding rounds have progressed.
IPP procurement programmes enable government to achieve its policy objectives of job creation and energy security for the people of SA, assuming we create the right conditions for a just transition from a coal-based economy to one with a diversified energy mix.
There have been strong expressions of opposition to renewable energy IPPs from various quarters in SA. But the need for a flourishing IPP sector is underpinned by the latest round of rolling Eskom power black-outs and the prospects of further supply-side constraints with approximately 12GW of Eskom’s coal-fired power plants due for decommissioning between now and 2030. In addition, more than ever, SA needs to consider its commitment to the reduction of green-house gas and carbon emissions.
After a nearly three-year hiatus in the programme, in April 2018 Eskom entered into the power purchase agreements for 27 large-scale renewable energy projects procured in round 4 of REIPPPP. President Cyril Ramaphosa has stated that he aims to create $100bn of inward investment during his term of office, and energy minister Jeff Radebe aims for a quarter of that to be in the energy sector. These are powerful and positive signals to international investors in the programme and in SA.
But there remain a number of factors that are causing international investors concern and which need to be clearly addressed.
Top of mind is Eskom’s sustainability. S&P Global Ratings has revised its outlook on Eskom’s CCC+ rating from negative to stable off the back of the minister of finance’s recent budget speech in which he announced a R69bn funding support package over three years. This package is designed to help stabilise Eskom’s excessive debt-service burden, in conjunction with aggressive cost-cutting commitments and the appointment of a chief reorganisation officer.
Ramaphosa also announced in his state of the nation address that Eskom is to be unbundled into three separate businesses — generation, transmission and distribution, to allow for greater transparency and competition in the electricity market. SA would, in my view, need broader market reform in order to realise these objectives, including having an entity other than Eskom as the purchaser of privately produced power.
Trade unions have strongly opposed the restructuring of Eskom, and this opposition will need to be carefully addressed. Key to addressing trade union concerns will be a well thought-out and widely adopted strategy to achieving a just transition from a coal-intensive economy to a low-carbon, climate-resilient economy and society. This means adopting policies, possibly involving financial and tax incentives and coordinated education and training programmes, that will meaningfully protect the livelihoods of workers through the transition.
A second important consideration for investors underpinning their need for policy certainty would be the timing and content of the updated integrated resource plan, the long-term plan for SA's electricity procurement which is meant to be updated every two years. The current version of the plan is dated 2010.
After years of debate around this updated plan, in August 2018 the department of energy published the integrated resource plan 2018 for comment. IPPs will be looking to see whether the commissioning date for new renewables will be brought forward from 2025 and whether the annual allocation for large scale corporate power purchase agreements will be increased. Municipalities are also lobbying to be allowed to procure power directly from IPPs.
The minister of energy has indicated that the final version will be adopted soon after processes at the National Economic and Labour Council (Nedlac) and the cabinet have been completed. These processes are already quite delayed. Once the updated integrated resource plan has been published, the investor community will be keenly awaiting the request for proposals for round 5 of REIPPPP.
It is widely expected that the department of energy will amend the provisions of the request for proposals relating to economic development and co-benefits, while investors have expressed the hope that the government will take care not entirely to reinvent the wheel in relation to a highly successful programme.
Investors in the coal baseload IPP procurement programme will also be keenly awaiting confirmation of an allocation in the updated integrated resource plan for their projects — two projects were awarded to preferred bidders in October 2016 but have failed to reach financial close because of a combination of factors including pressure from environmental groups and lender attrition.
A third important consideration for investors will be whether government will seek to renegotiate power purchase agreements with IPPs from the first two rounds of REIPPPP, as minister of public enterprises Pravin Gordhan indicated in a recent parliamentary portfolio committee meeting.
Minster Radebe has subsequently indicated that the government has no intention of renegotiating these power purchase agreements but indicated that refinancing the projects to reduce the cost of the plants would be welcome. Providing policy certainty to investors through reinforcing Radebe’s message will be key to encouraging investors to look to SA.
The importance of the new integrated resource plan to investor confidence cannot be understated. It goes back to the lessons learned through the hiatus in the IPP programmes in the past three years.
Investors will be looking for policy certainty in the new integrated resource plan and the optimal lowest cost energy procurement trajectory for the country in order to invest in projects, in the manufacture of inputs and in the provision of services that go into these projects.
Investors will want a clear request for proposals for round 5 that does not re-invent the wheel and breach the boundaries of bankability but creates a path that all interested parties can travel together. Investors also have a keen interest in the just transition to a low-carbon, climate-resilient economy and society and should be prepared to partner with the government and labour in achieving this.
• Van der Poel, a partner at Allen and Overy, acted for project sponsors, lenders and contractors in each round of procurement under the REIPPP.