South Africa: All oustanding solar PPAs can find a workable solution

South Africa’s Minister of Energy Mmamoloko Kubayi announced in early September that Eskom will sign the outstanding PPAs for 37 large-scale renewable energy projects on October 28. The announcement of the long-expected signing of the contracts was intended to make all these projects move forward and to restore confidence in the country’s renewable energy market. Kubayi, however, said that the PPAs will have to be renegotiated not above 77 Rand cents ($0.059)/kWh .

“This assists greatly in reducing the requirements for additional government guarantees that would impact negatively in the current economic climate and constraints in the fiscus,” the South African Department of Energy in a press release.

Over the past two years, the signing of the contracts and the development of the related projects was delayed by local state-owned power utility Eskom, which is the only entity in the country entitled to buy renewable energy power under the REIPPP program, due to its difficult financial situation.

Meanwhile, the South African Photovoltaic Industry Association (SAPVIA) said in a statement released on September 12 that the preferred bidders of round 3.5 and 4 of the REIPPPP will now need to “consider the various legal, financial and credit risk implications on their projects” resulting from the DOE’s decision before signing the PPA with Eskom.

South African consultant and PV expert Chris Ahlfeldt, however, said in a statement to pv magazine that solar may be the technology that is least affected by the renegotiation of the PPAs, and that a workable solution for all of the 12 related solar projects is possible. According to Ahlfeldt, in fact, the new price cap proposed by the DOE is approximately 20% lower than the average solar PV bid price of 96 Rand cents/kWh submitted in 2014 accounting for inflation. For other technologies such as small hydro, biomass and CSP, instead, the original bid prices all exceed the price cap by 70% or more. These projects, Ahlfeldt went on to say, will probably be hit the hardest.

Ahlfeldt added that other issues will now have to be solved before final signing of the PPAs. “IPPs have remained fairly quite since the announcement as they’ve been trying to make sense of what this could mean for their projects and not reveal too much before negotiations. Minister Kubayi also needs to answer some follow-up questions on the intended price cap to truly understand the implications for IPPs. For example, she needs to clarify that the price cap is quoted in 2017 values and whether this will compromise economic development goals of the projects”, the consultant stated.

Ahlfeldt believes that developers of the twelve projects will all be able to cut costs, as project prices globally have decreased 24% per year on average over the past 6 years. “If IPPs decide not to take legal action,” he explained, “and agree to the new negotiation terms, then I expect all 12 solar PV projects from Round 4 can find a workable solution. It may be challenging for some projects to keep their local content commitments with the closure of some local manufacturing capacity during the delay.”

In Round 3.5 of the REIPPPP program there was no preferred bidder for the PV technology, while in the Round 4, whose winners were announced in April 2015, the above-mentioned twelve solar projects, which have a combined capacity of 813 MW, were selected.

Although the impasse of the past two years has negatively impacted the credibility of the South African renewable energy market, Ahlfeldt finds that an agreement between the IPPs and the DOE may ensure a fair price for rate payers and avoid further delays. “The point of the auction, ” he concluded, “was to let IPPs decide the market rate through a competitive process. The South African government has now put themselves in a difficult position with these negotiations as IPPs are more informed on project costs, so risk also exists if government commits to prices significantly above the market rate for new projects in 2021.”