IPP signatures are costing jobs

Eskom delays on IPP signatures are costing jobs


The credibility of the renewable energy independent power producers (IPP) program which has received international acclaim is being threatened by ongoing delays within government departments. The delays are directly affecting the viability of projects in an advanced stage of development and are turning away foreign investors and causing the shutdown of local manufacturing plants resulting in the loss of hundreds of jobs and potentially thousands more.

This comes at a time when employment is a vital factor in lifting South Africa's economic growth rate which is projected to be marginally above 0% this year.

The three areas of the IPP programme being affected are

(i) Round 4 projects in preferred bidder status,

(ii) the Expedited Round where projects are  awaiting announcement and

(iii) projects in the Small Projects IPP awaiting financial close.

In all these cases the private sector has outlaid significant capital to bring the projects to advanced stages of permitting, licensing and design but the government has missed several key deadlines to execute the required agreements or make announcements. The dates were originally communicated to the industry by the IPP office on behalf of the Department of Energy. Although the IPP program adjusts the tariff by inflation annually, delays impose costs for projects and other industry players for which there is no compensation. Project developers, manufacturers and financiers are all affected.

For projects and developers, the added burden is made up of

(i) salaries for the development staff

(ii) increased legal fees

(iii) interest on the capital already spent to date and

(iv) upward movements in project construction and supply costs where quotations have expired.

These costs create problems especially for smaller projects where salaries and legal fees make up a larger portion of the total project costs.

The delays make planning very difficult for our members and we are concerned that this may result in projects being abandoned.

Projects in preferred bidder status have spent up to R15m on securing land, legal fees, bidding and design. Abandoning a project means this money is wasted and thousands of jobs may never materialize.

There are currently 49 projects in preferred bidder status, equivalent to 2,254MW. At the current average (based on operational projects) of 11.63 jobs per MW if Eskom were not to execute the Power Purchase Agreements over 26,000 jobs would not materialize.

Delays are also causing factories to shut down. Equipment manufacturers who have already invested hundreds of millions of Rands setting up factories, have had to incur operational costs with no revenue and no foresight as to when revenue and orders may be generated. Two leading international inverter manufacturers, SMA and AEG that invested in factories in South Africa have closed their doors, one of which cited the "lack of the South African government adhering to communicated timelines" as a reason.

At least one solar module manufacturer has also shut up operations within the last three years.

Lenders who provide up to 75% of the funds to build projects as debt are also suffering. Delays cause costs in commitment fees and having to ring fence money that is not deployed builds interest.

The reasons for the delays are not clear, but it appears from sources within the energy sector that the issue lies in Eskom refusing to execute further PPAs even for projects in preferred bidder status. According to one source Eskom is refusing to spend any money on purchasing independent power despite NERSA's instruction that a certain proportion of the increases granted to Eskom must be ring-fenced and spent on IPPs.

Eskom was granted a multi-year price determination increase (MYPD3) of 8% per year from 2013-2018; this included provisions of 1.1% on average per year for IPPs. Eskom is not financially burdened by executing power purchase agreements with IPPs because all expenses are seen as a pass through cost. On the contrary, estimations are that in 2015/16 Eskom are collecting R1.6bn more from consumers than what they are paying for Renewable IPP power.

NERSA approval was granted for the Rounds 1-3 of the REIPPP program. Round 4 onwards is to be covered by MYPD4 which is yet to be approved, however an inter-governmental agreement ensures that the pass through of costs will not leave Eskom in a position of risk.

Money from energy sales continues to be collected by Eskom meaning delays in executing PPAs leaves more revenue in Eskom hands.

Despite Eskom's media statements, renewable energy has already brought huge benefits to South Africa. Through the competitive nature of the IPP program and the learning within industry, renewable energy prices are now cheaper than Eskom's average selling price. The IPP office quoted the average price of all renewable in bid window 4 as being "77c per kWh". Eskom have stated their average selling price is 83c per kWh, and this is likely to increase by more than inflation.

Eskom are correct in stating that the currently contracted IPP projects from Round 1 and 2 are expensive, however this was necessary to attract major energy participants and to create a competitive and stable environment. It would be nonsensical to discontinue the program when South Africa is about to reap the rewards of having invested in the first expensive rounds. Renewable energy IPP projects have already created 24,965 full time equivalent jobs and attracted a total foreign investment of R194.1bn.

It appears as if Eskom is holding up a strategic government initiative to protect their own financial vulnerability and that Eskom's actions may result in a lost opportunity for thousands of workers.

The Presidency and the Department of Energy have recently confirmed their support for the IPP program. However the ongoing delays, coupled with the recent comments from Eskom's Chief Executive indicating they would not enter into future power purchase agreements with IPPs, creates uncertainty and casts a shadow over what up to now has been one of government's most successful public/private sector initiatives.

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This edition

Issue 39