Arup have recently undertaken technical advisory services for over 800MW of projects submitted in Round 3 of REIPPP. Arup provided commercial and technical due diligence services, as well as Independent Sales Forecasts to Lenders, Developers and Equity Investors. Given Arup’s pre-bid experience of REIPPPP Rounds 1 and 2, where the team worked on over 1.3GW of projects, the team was well positioned for the large pipeline of technical advisory awarded to us at Round 3. As Lender’s Technical Advisor (LTA) or Owner’s Engineer (OE) for almost a third of the REIPPPP Round 1 projects currently under construction, Arup has unique foresight of the types of risks which become prevalent later in the development process and are able to advise on appropriate mitigation at the pre-bid due diligence stage.

The REIPPPP process has evolved throughout the three Rounds, and the industry has certainly learnt some lessons over the past eighteen months. Arup is seeing some key developments and changes in the projects which are coming to us at the pre-bid stage. Firstly, the structure of financing for projects - Arup were involved in a large number of technical due diligences for equity investors, with a number of projects taking ‘off balance sheet’ investments rather than the conventional project financing route.  Furthermore, the majority of equity is based overseas– demonstrating the global reach of the South African REIPPP.  Other key changes include the EPC and O&M Heads of Terms, which were much more developed than the team had previously experienced at the Rounds 1 and 2 pre-bid stage.

In some cases, accompanying Schedules and clauses were at a detailed level more fitting of Financial Close negotiation stage. This may be related to the tight pricing required to be competitive in Round 3 - where projects were keen to price all risk out of the process with tighter contracts at the pre-bid stage. Clients were also closely guarded about their bid prices. Although not a substantially different observation from previous Rounds, we noted a much more guarded approach to sharing commercial information in order to protect their positions. EPC negotiations also began and ended much later in the bid preparation process, once again testament to the sensitivities around pricing. Related to this, the Arup team experienced key changes to designs and layouts late in the bid preparation process – for example, changing from fixed to tracking system or changing module and inverter suppliers. For the first time as technical advisors, commitment to local content levels claimed by module and inverter suppliers became an area, we were asked to comment on. Previously this had been an area wholly left to Economic Development consultants to review. This proved difficult owing to suppliers’ reticence to provide binding commitments to local content at this stage, so our review focussed on track records and capabilities of technology instead.

Going forward into a possible REIPPPP Round 4, we anticipate a similar direction of travel that the industry will develop and evolve, and squeeze prices further. We anticipate procurement strategies for projects may alter so that there are more split contracts, marking a move away from fully wrapped EPC contracts which have dominated REIPPPP Rounds 1 to 3. Fully wrapped contracts are often preferred by Lenders during early development stages of a new market. In more developed wind markets such as Europe, the US and Asia, fully wrapped contracts are less common. This is because in EPC contracting, risks are put onto one entity – therefore increasing costs and price to the Employer. Furthermore, margins associated with multiple subcontracts also increase prices which Employers have to bear.  With reduced risk, and a lower price, we ask whether split Contracts for turbine/modules supply and erect and Balance of Plant works will become more commonplace in South Africa? As the first of Arup’s nine Round 1 REIPPPP projects reaches COD in two months’ time, it remains an exciting time for the renewable energy industry in South Africa. Arup are putting all our experience in South Africa and globally, to good effect. We look forward to assisting Developers, Lenders and other interested stakeholders with further Rounds going forward.