Investec says release of updated IRP could ease IPP frustration and uncertainty

7th September 2016

By: Terence Creamer

Creamer Media Editor

  

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Banking group Investec, which has supported various renewable energy and peaking power projects in South Africa, including the Avon and Dedisa open cycle gas turbines that recently entered commercial operation, remains convinced that the country will continue with its independent power producer (IPP) plans. However, power and infrastructure finance head Mike Meeser cautions that, unless the current uncertainty brought about by Eskom’s perceived resistance to IPPs, as well as delays to approved projects, is resolved urgently, investors and financiers could lose confidence.

Meeser tells Engineering News Online that the immediate impasse could be resolved through the publication of a new Integrated Resource Plan (IRP) that is endorsed not only by the National Treasury and the Department of Energy (DoE), but also by Eskom. In the longer-term, however, the structure of the electricity sector may also need to be overhauled to level the playing field between the State-owned utility and private generators.

Eskom’s current reluctance to sign power purchase agreements (PPAs) with IPPs is arguably a “rational response”, he says, to the recovery in its plant availability and to lower demand, which has resulted in an immediate surplus. However, this surplus is unlikely to be sustained, particularly once the economy begins growing again, and IPPs, which have proved their ability to add capacity timeously and cost effectively, will have a key role to play in ensuring security of affordable supply.

Meeser questions, for instance, whether Eskom would have been able to deliver new capacity at the pace and cost achieved by IPPs over the past five years, given Eskom’s other commitments. Since the start of the country’s renewables procurement programme in 2011, 6 377 MW of renewables capacity has been procured for R194-billion. Separately, the Avon and Dedisa plants have added over 1 000 MW of private peaking capacity, in KwaZulu-Natal and Eastern Cape respectively. By contrast, Eskom’s Medupi, Kusile and Ingula projects are all years behind schedule and well over budget.

The investment value associated with the deployment of renewables is also expected to rise to beyond R255-billion should the projects selected during bid windows 4 and 4.5 of the Renewable Energy Independent Power Producer Procurement Programme reach financial close. Preferred bidders were identified in 2015, but there have been material delays in concluding PPAs with Eskom.

In addition, the ‘expedited’ bid window for an additional 1 800 MW of renewables capacity has been adjudicated by government’s IPP Office, but the preferred bidders have not been announced, neither have the first two projects adjudicated following the first bid window of the Coal Baseload IPP Procurement Programme. Eskom has also refused to sign a PPA for the Redstone concentrated solar power project in the Northern Cape, which was named as a preferred bidder during bid window 3.

“These delays are frustrating,” Meeser says. However, he argues that developers and financiers are unlikely to immediately turn their backs on South Africa, with the 92 IPP projects in operation or implementation offering a level of permanency that would not have been there had the current level of uncertainty arisen earlier in the IPP roll-out.

IPP OFFICE KEY

What would turn investors off, however, would be any attempt at undermining or closing of the IPP Office, which is held in high regard by investors and financiers.

Government has insisted that it remains committed to the IPP programmes despite Eskom’s misgivings, with the utility having argued that the IPP projects to the end of bid window 4.5 will cost R1.2-trillion for only 7 300 MW and are, thus, too expensive. Some commentators have expressed concern that the utility’s questioning of the programme, as well as adjudicated projects might be an attempt to undermine the IPP Office, which conducted the adjudication.

Meeser is more sanguine, describing Eskom’s response to IPPs as a “bump in the road”, which can be overcome with a more up-to-date IRP that has broad-based support. However, he admits the market is eager for the DoE to offer clarity as soon as possible on the way forward.

Investec is particularly keen for progress in the area of gas-to-power, with Meeser arguing that the programme is key to closing the current gap in the country’s “mid-merit” generation capacity.

Prior to recent ructions over IPPs, the DoE had indicated that it was aiming to procure 3 126 MW of gas-fired power generation from IPPs and a further 600 MW from a public-private partnership involving State-owned companies. The request for proposals is yet to be issued, however.

Meeser cautions that it will take at least 18 months from the issuance of tenders to reach financial close on any gas-fired IPP projects, noting the programme will initially rely on the creation of infrastructure to facilitate the importation of liquefied natural gas (LNG).

Government is yet to release the long-awaited Gas Utilisation Master Plan and has no yet pronounced on where the first LNG storage and regasification unit will be located, with Coega, Richards Bay and Saldanha Bay all still being considered.

Edited by Creamer Media Reporter

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