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Kubayi: I’ll go to court if IPP renegotiations fail

Sep 17 2017 06:00
Dewald Van Rensburg

Johannesburg - Energy Minister Mmamoloko Kubayi said she would go to court to challenge independent power producers (IPPs) that do not drop their previously agreed tariffs.

“If the renegotiations fail, I will go to court. I have to,” she told City Press this week.

Kubayi said she believed that at least some of the 26 projects under the renewable energy independent power producer programme (REIPPP) would accede to her demand that they charge 77c per kilowatt-hour.

This would be anything up to 30% less than agreed for many of the projects.

“If they do not renegotiate, we are stuck. We have excess power. Some of them can sign below 77c. Some can do it,” said Kubayi.

“We can’t ignore what is happening in the country. We have to take lessons from what we’ve experienced. Are we going to fold our arms while the country gets ripped off?”

The REIPPP is South Africa’s model public-private partnership and has been responsible for more than R200 billion in private power investments in the country since 2011.

It has proceeded through “bidding windows”, where IPP developers bid against each other, to built power projects.

The preferred bidders in each round get 20-year power purchase agreements (PPAs) with Eskom, which are fully backed by Treasury.

However, after the fourth bidding window in 2015, Eskom started refusing to sign any more PPAs, which the industry says is illegal as the bidding process effectively amounts to the awarding of a tender.

On September 1, Kubayi unexpectedly announced a solution to the impasse, which affects 27 preferred bidders waiting to spend R60 billion on building mostly wind and solar power plants.

Her solution was that they drop the tariffs government had agreed to in 2015 and that, in return, Eskom will almost immediately sign the PPAs.

However, some of the projects are unviable at 77c/kWh, and even the ones that can physically be done at that price will be far less profitable than their developers and financiers had expected.

The IPP office in the department of energy has been meeting with the IPPs and will soon brief Kubayi on their willingness to renegotiate.

“My argument is that you can get cheaper,” said Kubayi.

“My responsibility is to protect the state. The facts before me show certain grounds and I cannot blindly ignore them.

“Some of [the IPPs] are ridiculous. Some of the financing deals are abhorrent,” she said.

“The ratings agencies are on our case about the guarantees.”

Treasury has put aside R200 billion in guarantees for the REIPPP, but its actual exposure is about R119 billion. This exposure decreases every year as the IPP contracts use up their 20 years of guaranteed tariffs. However, it rises as new PPAs are signed. The guarantees ensure that the IPPs do not default on their own debts if, for some reason, Eskom fails to pay them.

No problem?

Kubayi’s concern about the liabilities related to the REIPPP is disputed by the industry and its supporters.

National Treasury itself has referred to them as practically risk free because the REIPPP tariffs are automatically passed through to consumers in the Eskom tariff.

The main downside of this arrangement is that Eskom is left with relatively little room to argue for its own plans to get funded by tariff increases.

Of the 20% electricity tariff increase it is asking for for next year, it says 5.5% is directly related to IPPs.

The design of the guarantee scheme is pretty favourable to government, argues Mark Pickering, chair of the SA Wind Energy Association and managing director of Globeleq – an IPP involved in the REIPPP.

With the scale of the REIPPP, a wholesale failure of the IPPs “would almost certainly crash the country’s banking system”, he said.

“In return for settling the debt, the government will receive ownership of the power plant, which should be a healthy revenue-generating asset.”

Too fast, too big

Economic Development Minister Ebrahim Patel told City Press this week that the nature of the problem was not the unlikely eventuality that these guarantees would be called up. Instead, Eskom was right to argue that honouring the PPAs is going to turn out to be damagingly expensive, he said.

“Yes, the cost curve is going down but, on a ­like-for-like basis, coal is still cross-subsidising renewables, which in principle is not a bad idea.

“I have been a supporter of renewable energy and I encouraged the IDC [Industrial Development Corporation] to invest in the REIPPP. But there are enormous cost pressures that it puts into the system,” he said.

“The speed and the ambition of the programme must be looked at.”

The problem is not that Eskom might default and the guarantees get called up – the problem is that South Africa will honour the contracts at a time when the country does not really need the additional energy.

The early solar plants in particular are now guaranteed tariffs that are high by any standard, Patel said.

“We will pay an enormous amount for those. We are locked in.

“This is happening all over, even in Germany. People are relooking the speed of the adoption of renewables. If anyone other than Eskom was the one making this argument, people would not disbelieve it,” he said, referring to public distrust of the utility due to its series of Gupta-related scandals.

Fighting on all fronts

The IPP battle now has several fronts in addition to the renegotiations minister Kubayi has demanded.

  • At the National Energy Regulator of SA (Nersa), a meeting was held this week as part of an investigation into IPP complaints that Eskom was unlawfully refusing to sign the PPAs. It is uncertain what a Nersa ruling in favour of the IPPs would do now that Kubayi has directed that all these IPPs renegotiate their tariffs to get the PPAs.City Press understands that, at the Nersa meeting, Eskom asked for more time and was given a week to make a submission justifying its apparent strategy to simply wait until the renewable energy project developers give up.
  • In the Johannesburg High Court, the Coal Transporters’ Forum (CTF) has applied for an interdict to stop Eskom from signing any of the PPAs with renewable energy projects. The CTF case is premised on Eskom’s earlier claims that the REIPPP will force it to speed up the decommissioning of five old coal stations that are meant to be closed in the next few years. This will cost the CTF’s members their coal haulage contracts.
  • At the National Economic Development and Labour Council, unions have made section 77 applications on the same basis as the CTF’s. They object to Eskom signing on any new renewable energy when there is a surplus in power generation, and the result becomes the earlier closure of coal stations that provide work to their members in the plant and on the mines that supply them.

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