Just a few months ago SA was grappling with stage six load-shedding as Eskom struggled to meet the country’s electricity demand due to breakdowns in their fleet of power stations and as others were taken offline for emergency maintenance.

In an incredible turn of events, this situation has been completely reversed following the devastating effect on economic activity by the forced lockdown in response to the Covid-19 pandemic. For the first time in years Eskom has a different challenge on its hands.

Ironically, instead of the usual plea to the country to reduce energy demand, Eskom has communicated its difficulty in managing up to 9GW of excess power due to plunging demand. Drastic measures have been implemented to ensure the necessary balance between supply and demand is maintained in the transmission system.

Eskom has been forced to run power stations at minimum operating levels and is using this opportunity to undertake much-needed maintenance on some offline units.

SA's independent power producers (IPPs) have not escaped the impact of these extraordinary times and many of the wind farms have been issued with an energy curtailment notice from Eskom. Using force majeure, Eskom has advised IPPs that the power they produce will at times not be utilised nor paid for by the utility until energy demand returns to normal levels. In exchange, Eskom has offered to extend the term of their power purchase agreements.

On the face of it, Eskom's stance is supported by events outside its control even though the president appealed to big business to pay suppliers and not to opt for force majeure in the interests of the economy. He announced a two-week extension to the national lockdown on April 9.

The risk to the transmission network from unbalanced demand and supply is real, though questions still abound as to why more of Eskom’s coal-fired stations are not taken offline for maintenance and repairs.

However, what may have been overlooked are the clear and detailed contractual commitments signed between Eskom and the IPPs. In short, the IPPs have rejected the force majeure approach as it fails these contractual provisions.

Investment risks

While the IPPs have acknowledged the difficulty of the prevailing electricity oversupply, they are rightly claiming recourse in terms of the underlying contracts that underpin their operations and, ultimately, their viability. Billions of rand are invested in these wind farms, including the savings of pension funds, such as those managed by Futuregrowth. The ability of the IPPs to service their loan interest and capital repayments to investors depends entirely on the revenue earned from the sale of electricity to Eskom.

Each wind farm’s investment case is underpinned by a finely tuned financial model that accounts for every cent of income and expenditure. In the same way, the overarching financial covenants that govern our clients’ investment risk in these projects are highly sensitive to any resulting leakage of income that may come from Eskom’s force majeure notice. Any curtailment of electricity produced and nonpayment of the corresponding revenue will directly impair the financial returns of these renewable energy projects.

Eskom’s proposed extension to the power purchase agreements for a period equivalent to the curtailment is arguably not an adequate quid pro quo. It is impossible to predict the wind performance on those additional days in the future, to ensure a  replacement of income, and thus it is  a binary win or lose outcome for the IPPs.

Legally binding agreements

Perhaps the biggest risk of the proposed response by Eskom to managing the imbalance in their transmission system is that it sets a precedent of circumventing legally binding agreements.

The renewable energy independent power producer procurement programme (REIPPPP)  has achieved international acclaim as an outstanding public-private partnership model for renewable energy procurement.

At the heart of this success is the robust legal framework that governs the relationship, rights, obligations and recourse of the parties to each project. As the national energy utility and the sole buyer of all electricity produced by the IPPs, Eskom is a key party to each power purchase agreement.

It is critical that investment confidence in the REIPPPP is not undermined by the dispute between the wind farms and Eskom pertaining to the proposed force majeure energy curtailment. The more than R200bn of fixed investment into the REIPPP sector to date has been underpinned by the trust that local and international investors have placed in its legal framework and, in turn, Eskom’s commitment to its obligations.

If the deadlock between the IPPs and Eskom around energy curtailment is not resolved quickly and amicably, it is likely that the reputation of the REIPPP will be compromised — and higher risk adjusted returns will be required for future investment in the sector.

This could translate to higher bid prices for new tenders at the next bid window of the REIPPPP. Sadly, this could arrest the strong downward trajectory in the cost of renewables, which, until now, has resulted in the cheapest (not to mention cleanest) form of new power for Eskom. Is this the way we want to go?

• Semple is joint head of unlisted credit and portfolio manager (Power Debt Fund) at Futuregrowth.