REIPPPP R4: SHORT TERM CHALLENGES DELAYING LONG TERM SYNERGY
Recent developments both nationally and internationally have highlighted the challenges inherent in smoothly continuing with the roll-out of renewable energy under the REIPPPP programme while considerable volatility exists in the government institutions that are the co-custodians of the process. The REIPPPP process is a great success with considerable long and also short term benefits, not only financially but also socially and macro-economically. And yet, with so much in disarray in Eskom, despite every intuition that we should forge ahead aggressively with an expanded REIPPPP, it becomes nigh impossible to avoid delays and temporary discontinuities.
Within this context, the eagerly anticipated end of March 2015 came and went. It was the backstop date on which Government, through the Department of Energy, would announce the preferred bidders in REIPPPP Round 4. All indications are that the average prices achieved for wind power would be down to 40% lower than the cost of Medupi power, on a levelised basis. More: That there are sufficient projects ready and able to proceed to construction almost immediately that the REIPPPP Round 4 allocation for wind could be doubled, with Round 5 also being expanded. The money all comes from private sources, Government only pays for the electricity. The country bears no risks of costs over runs or time over runs. Foreign Direct Investment results. Round 4 would likely increase the commitment into socio-economic investment and enterprise development from ZAR 5 billion over the next twenty years to ZAR 7 or 8 billion. Construction companies would be busy, jobs would be created, the entire value chain would be strengthened and fed.
And yet, despite all the benefits, 31 March came and went with neither a roar nor a whimper. This has led to considerable nervousness amongst investors, wondering what to make of Government’s intentions, especially given that no communication whatsoever ensued. This was abundantly clear at the first Intercontinental Wind Power Conference in Istanbul last week, where delegates were most interested in the evolving good news story that is the community development around wind farms in South Africa. I presented during a session on dynamic, new world markets hosted by the Global Wind Energy Council. Other featured markets were Brazil and Poland.
The International Energy Agency was in attendance also, and very interested. I stressed that wind power in South Africa is about people and sustainable development and explained the structure of our procurement process that asks winning bidders into the Renewable Energy Independent Power Producer Procurement Programme (“REIPPPP”) to reinvest approximately 2% of revenue into socio-economic development and enterprise development.
The South African model is unique in its ambition to combine rural development with renewable energy development, and delegates were most interested. There were many questions from the floor. But ultimately, these questions inexorably moved to the situation at Eskom. There was an inquiry into what the likely impact of the financial challenges of Eskom and the suspension of top management was to be on the REIPPP programme. And this question, given the coming and going of 31 March, remains the elephant in the room.
Two other events of very recent times complete the context and enable a more complete reading of the situation. The first was the extension (at almost literally the eleventh hour) of the 840 MW’s of Short Term Power Purchase Programme (“STPPPP”) agreements - some six hours before they were due to lapse at the end of March. These are agreements that enable Eskom to buy power from various entities around the country for a “short term” period. The potential lapse of these agreements and the prospect of months of delay in renegotiating them with multiple parties, in the context of a severely constrained grid, would have been catastrophic. STPPPP suppliers asked for a 5 year extension, but only twelve months were granted, with the mutual desire being expressed to further extend - subject to funding availability. Government support for Eskom was initially a Condition Precedent (“CP”) and seemed set to remain an open CP after signature, effectively giving Eskom the right to terminate unilaterally. The STPPPP suppliers were able to insist that the CP be met before signature, thus creating a binding agreement on the day. This implies that Eskom were able, behind the scenes, to secure Government support for the agreements they were signing. Those close to the process say that the influence of the War Room and especially the Deputy-President was evident in the last crucial days and played a defining role in getting process across the line. We will return to the significance of these events below.
The third source of valuable information was a panel discussion on energy that took place at Oudtshoorn on 7 April 2015, at the national arts festival. In attendance were Freek Robinson, TV personality, Minister Brown of DPE, Barry Bredenkamp of SANEDI and myself.
Energy discussion panel at Oudtshoorn arts festival (from left): Freek Robinson (host), Barry Bredenkamp SANEDI, The Honourable Minster Lynn Brown (Public Enterprises)& Johan van den Berg (SAWEA – CEO)
The panel discussion shed valuable light on what is happening inside Eskom. There were questions about the suspension of the four top executives and the resignation of the Chair of the Board. At all times, Minister Brown answered questions with admirable candour. What became clear was that she has a sincere and profound desire to objectively establish the state of play in Eskom on various fronts, ranging from its financial position to the reasons for the delay in the new build to the prognosis of availability in the existing fleet. For present purposes the most pertinent message was that there is considerable uncertainty about the degree to which present information about the financial status of Eskom can be relied upon.
If all these strands are joined together, the lack of REIPPPP communication on 31 March starts to make more sense:
- The electricity crisis has been growing and was not expected to be this severe when REIPPPP dates were set
- The STPPPP process took almost all “bandwidth” in these last days
- Already, in that process, agreements had to be signed urgently, without complete assurance that Eskom can indeed fulfil its obligations as undertaken
- The REIPPPP will place further obligations on Eskom that ultimately impact on the Treasury as the under-writer.
All these factors explain why the REIPPPP target date may have been missed. However, REIPPPP projects:
- Are the major source of new electricity that is to carry us through the electricity crisis;
- Come at negative cost, according the recent CSIR research, through saving liquid fuels and preventing some load-shedding (http://ntww1.csir.co.za/plsql/ptl0002/PTL0002_PGE157_MEDIA_REL?MEDIA_RELEASE_NO=7526622;)
- Send a message about the health of the broader IPP programme that is one of the pillars of the so-called “five point plan” to resolve the electricity crisis. We need REIPPPP to proceed with vigour or else interest in the Cogen and Coal IPP Programmes will dwindle.
For all these reasons, REIPPPP must continue and must, if anything, be expanded. The present situation means that decisions have to be taken in a broader context of uncertainty. This inevitably equates with delay. But the ultimate outcome seems to be reasonably certain – it will happen.