The head of Saudi Arabian electricity group ACWA Power says that, while the company remains a patient investor in South Africa, the outcome of the current impasse with Eskom relating to its 100 MW Redstone concentrated solar power (CSP) project will be critical to the group’s future investment stance in the country.
Speaking to Engineering News exclusively, CEO Paddy Padmanathan stresses that the company remains attracted to South Africa, where its 50 MW Bokpoort CSP plant has been operational since early 2016, and where it is leading the consortium named the preferred bidder for a 300 MW coal-fired power project.
However, he is “deeply concerned” about the recent decision by Eskom to withhold its signature from a power purchase agreement (PPA) for the Redstone project, citing affordability concerns.
The solar thermal plant is being developed by ACWA Power and SolarReserve, of the US, and Eskom was initially poised to sign the PPA in late July. However, Eskom later decided that it could not conclude the deal in light of what it described as significant cost increases associated with the project. Eskom claimed that the cost of Redstone had increased from R50-billion to over R60-billion for the PPA period and that it would be running the risk of incurring “wasteful expenditure” should it proceed.
Padmanathan argues that, in light of the fact that some equipment and services are being procured in foreign currency, the cost of any plant will fluctuate until the PPA is signed, after which a developer will be able to “lock in” all currency hedges and interest-rate swaps to fix the costs.
“As far as I am concerned, it is uncertainty like this, where Eskom holds up a procurement process that has to date been well executed, that impacts confidence in the market, impacts the economy, influences currency volatility and, in turn, ends up pushing up costs.”
The State-owned utility also argues that it needs clarity from the Department of Energy and the Department of Public Enterprises before signing any further PPAs for projects awarded during the most recent bidding rounds of the Renewable Energy Independent Power Producer Procurement Programme (REIPPPP).
It has been reported that 26 projects, with an associated investment value of R50-billion, have been placed at risk by Eskom’s refusal to sign PPAs.
Eskom argues that the associated output arising from these projects is not required in light of lower demand, improved coal plant stability and the prospect of additional supply from the Medupi and Kusile projects. In addition, it argues that the tariffs associated with the independent power producer (IPP) projects will add further upward pressure to South Africa’s electricity price path and should, thus, be scaled back.
However, Padmanathan says he stands ready to challenge, “with facts and figures”, arguments that IPPs are more expensive than State utilities, regardless of the underlying technology. He notes, for instance, that the final costs of Eskom’s Medupi and Kusile projects are not yet known.
By contrast, ACWA Power has started construction of a 2 400 MW ultra-super-critical, carbon-capture-ready coal-fired power plant in Dubai, which is required to comply with the “most stringent standards ever applied to such a project”. He says the plant has an associated net cost of $979/kW.
“Furthermore, comparing coal plants with renewable power plants, which serve a different segment of the daily load demand, is also, to put it bluntly, a red herring.”
However, the antagonism towards renewables has coincided with the tenure of Brian Molefe as the group’s CEO and it is currently unclear whether Eskom’s hostile stance will be sustained in light of Molefe’s announcement that he will be resigning as of January 1, 2017. Molefe’s resignation follows on from his prominent featuring in a potentially damning Public Protector report into so-called State capture by the influential Gupta family.
Padmanathan says he is optimistic that South Africa will return to its recent credible record in the area of IPP procurement, which has supported investments of around R200-billion since the initiation of the REIPPPP in 2011.
He, nevertheless, admits to being “concerned” about the Redstone delay. “We are puzzled by the development, but we are willing to sit it out and wait for the review being undertaken by Eskom and government,” he says, but indicates that he has received no indication as to the timeframe involved in resolving the standoff.
However, should the uncertainty fester well beyond the period where the Redstone bid remains valid, ACWA will have to reassess not only the future of the project itself, but also its future expansion plans in South Africa.
Besides Bokpoort and Redstone, the company has also bid a further 150 MW power-tower CSP project, dubbed Sollis, as part of the most recent REIPPPP bid window and is aiming to reach financial close on the Khanyisa project during the first half of 2017.
“Should Redstone not proceed, we will be more careful, as it will mean that South Africa now carries serious execution risk.”
In fact, ACWA has identified South Africa and Southern Africa, along with Morocco, Egypt and Indonesia, as key growth markets. The Saudi Arabian company indicated previously that it was aiming to develop a 5 000 MW portfolio of renewable-energy and conventional generation assets in Southern Africa by 2025.
“Redstone is a very important benchmark for us,” Padmanathan stresses.
Hitherto, the group has been “more than comfortable” investing in South Africa, owing to the supportive macroeconomic, financing and legal frameworks, as well as the country’s credible IPP procurement schemes. Apart from the renewables and coal programmes, ACWA Power is also positioning itself to participate in the future liquefied-natural-gas-to-power programme being proposed for Coega and Richards Bay.
“But, if Redstone doesn’t proceed and other renewables projects, which have also been awarded, don’t proceed, because one participant in the chain elects to act unilaterally, that would be a huge investor-confidence signal. So. we will be much more cautious in how we venture forward.”
In light of the long-term nature of IPP projects, it is essential to have “honourable counterparties”, Padmanathan adds, indicating that ACWA will weigh its legal options should the Redstone project collapse.