Renewables delay a 'concern' as connection risks rise
The anxiety arises primarily from the fact that financial close has been delayed for the third-bid-window projects, owing primarily to “grid connection issues”.
The preferred bidders were identified in October last year and financial close was initially scheduled for July 30, 2014, ahead of the August 18 closing date for submissions under the fourth bid window.
It appears that the grid implications of the third-window projects had not been fully comprehended, which led to Eskom raising concerns about the cost of connection. It is also understood that, from the fourth bid window onwards, Eskom will provide input prior to the selection of preferred bidders in an effort to mitigate the problem.
In a recent presentation to Parliament, Eskom indicated that the “low-hanging fruit” had been exhausted and that a strengthening of the network was now required to facilitate the introduction of additional independent power producer (IPP) connections.
The utility also warned that the system impact had not been fully factored into plans, flagging in particular the “need for back-up and minimum generation” as renewables began playing a larger role in the mix.
As of September, over 863 MW of renewables capacity had entered into commercial operation. But Eskom also used its presentation to highlight the variable nature of the supply, which it claimed had resulted in it incurring back-up expenses.
It said a Renewable Energy Technical Evaluation Committee, comprising representatives from Eskom, the National Energy Regulator of South Africa and the Association of Municipal Electricity Utilities, had been established to certify future IPPs for grid code compliance.
Without question, therefore, grid connection has emerged as a key immediate risk for REIPPPP bidders, with some discussions now taking place on the future framework for self provisioning, with Eskom currently responsible for the so-called ‘deep connections’ and the IPPs for ‘shallow connections’.
Nevertheless, the appetite for the South African programme remains, with prices, which have fallen materially since the first bid window, having reportedly fallen again during the fourth window.
South African Wind Energy Association CEO Johan van den Berg says the delays were “not totally unexpected” in light of the rapid growth of the industry, which has stimulated private investment of over R120-billion.
However, he stresses that the wind industry wants predictability to build investor confidence and that the delay, together with concerns about the financial position of Eskom, which could cause delays to work on substations, is concerning.
South African Photovoltaic Industry Association chairperson Davin Chown says its members are confident they will reach financial close, but he admits that they have been “dismayed” at the delays.
“The delays mean more costs incurred by bidders and this is unfortunate as it always has a negative impact on projects. We are confident that the solar projects will close, and will be built and operational on time and on budget as has been the case in other rounds.”
The delays are also “not acceptable” in light of the constrained power network and the fact that only renewables and cogeneration IPPs are realistically in a position to fill the generation supply gap ahead of the introduction of large-scale baseload capacity.
Similarly, Southern Africa Solar Thermal and Electricity Association CEO Ntombikanina Malinga cautions that delays are having financial, social and economic impacts. “We can live with a delay of three months, [but] if we go beyond that, it starts to become a big issue.”
“The bid-window-three bidders are working with Eskom and the IPP office to ensure that any bottlenecks are dealt with and resolved before close,” Malinga adds.
However, Chown believes that the process and methodology behind the cost estimate letters (CELs) relating to grid connection need to be “totally revisited”.
“The variances between CELs and budget quotes also need to be dealt with in order to avoid any negative impacts on projects with respect to the connection timelines.
“Eskom needs to be a lot clearer when it issues CELs whether these are in congested areas so as to deal with this and not end up in a situation where projects may end up being preferred bidders yet unable to connect without significant additional connection costs.”
Chown is also concerned that the fourth bid window may confront similar problems as the evaluation criteria remain weighted towards price, which could mean that the lowest-tariff project wins even when the project faces significant connection constraints.
“This is not a desirable situation for the REIPPPP or the bidders, or in fact the economy,” he says, arguing that projects facing severe connection concerns should not be awarded preferred-bidder status.
“The procurement process should ensure that Eskom is mandated and incentivised to ensure connections are available and made in time. Eskom must allow bidders to go the self-build or own-build routes as a matter of course, not as a matter of exception to the current rule.”