South Africa’s Department of Energy recently announced it will sign outstanding PPAs for multiple large-scale renewable energy projects on October 28, following a prolonged delay.
While the South African government’s new deadline for the 2.3 gigawatts of delayed renewable energy PPAs raised hopes for some, the conditions placed on the projects will harm some independent power producers (IPPs) more than others, and damage the credibility of future government procurement programs.
The 27 utility-scale renewable energy projects consisting mainly of solar 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. The parastatal’s disincentive to buy electricity from IPPs is rooted in its monopolistic structure, competing procurement interests, and the recent decrease in electricity demand from customers.
In addition to setting a new timeline for Eskom to cooperate, the government is reversing rules it created for itself by opening up the prices for renegotiation with a new price cap of 77 Rand cents per kilowatt-hour (~5.9 U.S. cents per kilowatt-hour). The price cap is lower than what many projects bid at a couple years ago, and may be at an unbankable level for some.
The concentrated solar power (100 megawatts), small hydro (5 megawatts), and biomass (25 megawatts) projects included in this determination will have the most difficulty if held to the same price cap.
The price cap also doesn’t account for the other benefits from the initial bids, such as local content, job creation and socio-economic development in local communities. These enterprise development commitments are now at risk of being cut by IPPs if they are forced to squeeze project costs.
The drop in technology costs for some solar PV and wind project components during the program’s delay is a major driving factor for the price renegotiation. Since most of these projects are now likely to come online by 2021, rather than the end of 2017 as originally scheduled, IPPs will also project ahead their costs for major components like solar PV modules and wind turbines — both of which will likely continue to decrease.
A fair renegotiation, however, 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 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 one to four by attracting global competition. There have been no updates on the expedited round of approximately 1.8 gigawatts, or the 10 additional small-scale projects already selected (two biomass, two wind and six solar PV of around 5 megawatts each). That suggests 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 crystalline silicon solar PV assembly plant by SunPower.
These recent price renegotiations, the hiring and firing of multiple energy ministers, and a multi-year delay, damage government credibility and ultimately increase risks for future investment in South Africa.
While government challenges have hurt industry locally, changes in technology costs for renewables and the rise in energy efficiency have also played a role in disrupting the electricity sector in South Africa and elsewhere. This trend will likely continue in the coming years, so while delays in procurement are challenging, it does give more time for renewable technologies to achieve further cost reductions and demonstrate viability in the regional market.
Chris Ahlfeldt has over 10 years of in-depth work experience in the energy industry, primarily in the North American, Asian and African energy sectors. Since founding Blue Horizon ECS, he has independently and collaboratively sold, managed and implemented various energy consulting projects ranging from investor/developer market entry strategies to government renewable energy policy.