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Jun 01, 2012

Energy group praises SA’s renewables programme, but notes challenges

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While independent power producers (IPPs) in South Africa face many challenges not seen in other countries, the Renewable Energy Independent Power Producer Programme (REIPPP) is certainly moving in the right direction and the South African government is up to the challenge, Jonathan Hoffman, senior business develop- ment director at Globeleq has said.

Speaking to South African National Energy Association members in Cape Town ahead of the June financial close deadline for the REIPPP’s first-round bidders, Hoffman asserted: “The readiness of everyone is improving and we have a very high level of confidence in government.”

Globeleq is involved in the development of four first-round REIPPP projects, including the two largest wind energy projects (the 138 MW facility in Jeffreys Bay and 139 MW Cookhouse wind farms, in the Eastern Cape), as well as the 50 MW De Aar and 50 MW Droogfontein solar PV farms in the Northern Cape. The company is involved internationally as a power owner and operator and works exclusively in emerging markets.

The first key challenge, accord- ing, to Hoffman, is the tariff. “It’s a common thread that runs through all the challenges. Essentially, the way we look at risk is, typically, how it translates into our return; in another way, if we say we are going to keep our return the same, how does it translate into a move in the tariff?”

From an international perspective, the tariffs paid for renewable energy in South Africa are high, says Hoffman, but the rate of return for the IPP can be lower than in other countries, where there are mechanisms which support the tariff rather than inflate it, such as tax incentives and, as found in the US, capital expenditure reductions in the form of grants which tend to act as catalysts for renewable-energy projects.

In South Africa, however, rather than mechanisms to support the tariff, costs such as the National Treasury fee (a 1% fee due at financial close) and socioeconomic and enterprise development obligations, besides others, result in an increase in the tariff. While, in Hoffman’s view, these are not necessarily negative initiatives, they do, however, impact on revenue return and need to be factored in as a risk by the IPP.

Other risks which IPPs also face that affect the rate of return are the exposure to the exchange rate through the volatility of the South African rand (especially for international investors), the volatility in equipment costs and potential grid unavailability.

With four South African banks providing the bulk of the debt funding for the first-round REIPPP projects, Hoffman believes there is also “a bottleneck on the road to debt” as there are not enough lenders to successfully service the market and a lack of capacity within those lenders resulting in the slow review of financial documents.

“We’re doing our best to work together with the South African lenders to come to terms so that, hopefully, we can close by June 30, because, if we don’t close by June 30, we lose our power purchase agreement – so there’s a lot at stake,” said Hoffman.

He added that some practical challenges ahead are likely to be related to the electrical grid, with the cost and complexities of interconnection being unknown factors at this stage. Further, logistical issues, such as land- owners not fully appreciating the construction impact and the effect of transporting large equipment on the roads, resulting in traffic congestion, will have to be faced.

Even with many unique challenges facing an IPP in South Africa, Hoffman said that, in Globeleq’s experience, “this has been a Sunday at the beach”, compared with other projects in Africa the company has been involved in.

“Across four projects, we are going to be investing $140-million of equity . . . so we are going to be deep in South Africa [and] so we are very confident about our long-term presence here. “We want to build not just four projects; we want to build many more projects and build a business around them,” concluded Hoffman.

Edited by: Martin Zhuwakinyu
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