Contractual hurdles on South Africa’s path to acquisition …

Turbines in the Dassiesklip wind power plant project outside of Caledon. (Photo: Gallo Images / Nardus Engelbrecht)

This is the first in a series of three interviews examining the rationale, outcomes and details of the Independent Power Producer Procurement (RMIPPP) risk reduction program.

In this interview, Chris Yelland tries to clarify some of the contractual arrangements that apply to all RMIPPP projects with Deputy Director General of the Department of Natural Resources and Energy, Jacob Mbele, and Acting Chief Operating Officer of the IPP office, Maduna Ngobeni.

On the schedules for financial closure and electricity supply

Minister Gwede Mantashe stated that Preferred Bidders are required to achieve the financial closure by the end of July 2021 at the latest, that this date is non-negotiable and that the Preferred Bidder must manage all risks for achieving the financial closure. He also noted that the projects are expected to be connected to the power grid from August 2022. What are the consequences for preferred bidders, electricity customers and the general public if preferred bidders do not achieve a financial closure by July 31, 2021, and for power supply of the grids by August 2022? Are there any penalties?

Maduna Ngobeni: Yes, there are ramifications for a Preferred Bidder not reaching financial close and commercial operations by the target date. If the deadlines for the financial closure or commercial operation are not met, the offer bond can be drawn or the power purchase agreement (PPA) can be terminated.

Of course, you always have to look for the reasons why the contractually stipulated deadlines are not met. For example it is a Force majeure Situation or not? Has the Covid-19 pandemic delayed things? Was everything ready on our side? Was Eskom ready with the network infrastructure and lines to evacuate the electricity?

Depending on the reasons for the delay, the contractual deadlines may need to be adjusted. The preferred bidder must meet the contractual deadlines, and if they are not met there will be consequences. The contract contains many provisions to resolve a breach situation before it leads to termination. At the end of the day, however, the bottom line is that the PPA can be terminated.

There are financial penalties in the sense that if the preferred bidder were unable to achieve a financial shutdown or commercial operation and the PPA is either not signed or terminated, the bidder would have already lost a lot of money. In addition, we hold offer bonds guaranteed by the preferred bidders in the amount of around R 200,000 per MW of capacity offered. If a Preferred Bidder fails to meet its financial shutdown or commercial operation obligations, we would pull the tender bond.

Of course, if electricity is not delivered on time, the economy and electricity customers will suffer, and this needs to be recognized. In addition, there are companies that did not bid because they felt they were unable to meet the tight deadlines.

Hence, the legitimate interests of South Africa, the procurer, buyer, customers and end-users need to be balanced with those of preferred bidders and one cannot simply give unjustified extra time to achieve a financial shutdown or commercial operation. These things are taken into account in order to look at the project as a whole, but most of the risk lies with the bidder.

On the hurdles to financial closure by July 31, 2021

What other hurdles must preferred bidders overcome before reaching financial close? For example, do the preferred bidders already have an exemption from the Department of Commerce, Industry and Competition from the local content requirements of the RMIPPP procurement process? Do they have final environmental impact assessments and climate change studies that cannot be appealed? Do the power ship projects have all the necessary permits from the port authorities to moor the power ships and the associated fuel storage and re-evaporation systems for 20 years?

Maduna Ngobeni: Yes, there are certainly a few things that must be considered in order to achieve a financial degree. However, for most of them, it is obviously the risk and responsibility of the preferred bidders. We know and deal with a number of topics. But there is a lot more that bidders have to do that we are not getting into. The preferred bidders need to manage these to ensure they get their projects off the ground.

You mentioned environmental permits and studies on the effects of climate change and whether there may have been any legal appeals. What we needed from a commandment point of view was a scoping report, and that is what we got. Regarding actual environmental permit applications, I would assume that the preferred bidders have already started and are busy with these things as it is their responsibility to ensure that these are weeded out.

Further requirements, as you have already mentioned, are approval from the port authorities and Nersa production licenses [National Energy Regulator of South Africa]. It is the responsibility of the Preferred Bidders to arrange these matters. There are risks and preferred bidders have to manage them. We have told them what it takes to be eligible for their works to be licensed for the duration of the PPA. You know this, and I suppose they are working on it.

We don’t necessarily have to really worry about complaints and things that are the responsibility and control of the preferred bidders.

About government guarantees for the RMIPPP projects

Minister Mantashe has previously indicated that the provision of government guarantees for the funding of future IPP projects goes beyond REIPPP’s Bid Window 4 [Renewable Energy Independent Power Producer] The program was problematic given the fiscal constraints of the government and South Africa. Do projects announced for the RMIPPP program and / or its PPAs with Eskom require government guarantees, and if so, can you please detail the scope and nature of those guarantees?

Jacob Forward: Chris, that’s the easiest question today!

As you know, Eskom is the energy buyer. We had talks with the National Treasury and, in order to keep investors safe, it was agreed to continue the same government support regime that we had for Bid Windows 1 through 4 of the IPP renewable energy procurement program.

Yes, there are discussions about what might be required for future supply windows in the implementation of the Integrated Resource Plan IRP 2019 and how we can deal with government guarantees differently.

For the RMIPPP program, however, the same setup applies as for Bid Windows 1 to 4 of the REIPPP program.

For the 20-year term of the emergency RMIPPP power purchase agreements

The RMIPPP program should be an emergency procurement with fast delivery and a short duration of around five years. Why did it take so long to get this emergency power supply? Why are you continuing with 20 year PPAs now? [power purchase agreements] with IPPs [independent power producers] with gas-to-power, wind, solar PV [photovoltaic] and battery storage, including imported power ships that have been moored in South African ports for 20 years and run on imported LNG, which seems to be some kind of world record for emergency power? Wouldn’t it have been better to just implement the IRP? [Integrated Resource Plan]?

Jacob Forward: Firstly, I can say that gas is in the IRP, battery storage is in the IRP, renewables are in the IRP, and so far we have been procuring exactly those things. From the beginning we said that the RMIPPP program must be aligned with the direction of the 2019 IRP, and we believe it has to some extent.

The 2,000 MW of the RMIPPP program are intended to help close the generation capacity gap identified in the 2019 IRP. The IRP decision speaks in favor of the lead time. It’s an emergency in the sense that we’re looking at projects that can go online in no time. I think this is how we use the word “emergency”. That is why we also call it “risk reduction” when we refer to it. We did not call it an “emergency program” because we discovered that the word “emergency” creates confusion in the marketplace.

The question of how long to keep a contract for does not depend on whether you have a loophole today, but on what you are willing to pay. If we forgive the capacity that we have now procured over a five-year period, we know what would happen. These PV, wind, and battery storage projects would likely be three to four times the tariff we are currently offered.

This is different with the Eskom Short-Term Power Purchase Program. These projects already exist and capacity has been built. So sellers are willing to contract cheaply for three to five years as the system will likely pay off or they will sell electricity when they don’t need it themselves.

You ask the question why did it take so long.

It took so long because we had to work intensively with the Eskom system operator on the specification in advance. We even had to involve the regulator because of the different views on the characteristics and nature of the capacity gap.

In addition, Eskom is currently not in the same financial position as the Bid Window 1, 2 and 3 of the REIPPP program. By the time we ran Bid Window 4, Eskom’s financial position was changing and Eskom was starting to pose issues related to risk allocation. So we had to deal with these issues.

I have to say Eskom made compromises. In some cases they had very difficult positions that if they had stayed with them we would not have the RMIPPP program today. So we had to have these discussions.

Because of this, it took me some time to get the RMIPPP program off the ground. DM

Chris Yelland is the managing director of EE Business Intelligence.

Copyright 2021 – EE Business Intelligence (Pty) Ltd. All rights reserved. This article may not be published without the written permission of EE Business Intelligence.

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