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Caution creeps in as renewables industry digests implications of 77c/kWh tariff cap

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Caution creeps in as renewables industry digests implications of 77c/kWh tariff cap

Photo by Duane Daws
Energy Minister Mmamoloko Kubayi (in the centre) at the September 1 renewables IPP announcement in Pretoria

4th September 2017

By: Terence Creamer
Creamer Media Editor

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South Africa’s solar photovoltaic (PV) and wind industry bodies have added a degree of caution to their initial positive reactions to an announcement by Energy Minister Mmamoloko Kubayi regarding the signing of power purchase agreements (PPAs) for 26 renewable-energy projects that have been on hold since their formal procurement in late 2015.

Kubayi said the projects, which were procured during bid windows 3.5 and 4 of the Renewable Energy Independent Power Producer Procurement Programme (REIPPPP), would be signed by October 28. However she also announced that there would be a renegotiation of tariffs, with a cap of 77c/KWh placed on all projects, regardless of technology type.

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The South African Photovoltaic Industry Association (SAPVIA) and the South African Wind Energy Association (SAWEA) both still welcomed Kubayi’s September 1 announcement, which they described as a positive signal in the wake of nearly two years of uncertainty, which arose after Eskom refused to sign new PPAs with renewable-energy independent power producers (IPPs). The State-owned utility questioned the need for the additional 2 200 MW of capacity, in light of the country’s return to an electricity surplus.

The decision to proceed, Kubayi said, was binding on Eskom and had been fully canvassed with the utility’s shareholder department, the Department of Public Enterprises, as well as the National Treasury. Eskom spokesperson Khulu Phasiwe subsequently tweeted that Eskom would “sign power purchase agreements with renewable-energy IPPs next month”.

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SAWEA told Engineering News Online that the “movement” provided by Kubayi was positive, but admitted that various issues still had to be unpacked. Likewise SAPVIA indicated that the implications of the Minister’s announcement were currently being “appraised” by its members.

“Whilst the announcement provides much needed policy certainty SAWEA, however, is concerned that the Energy Minister has imposed a condition, stating that tariffs for the unsigned projects in bid window 3.5 and 4 should be renegotiated to under 77 cents per KWh.  This condition, which requires tariff negotiating, is illegal under the REIPPPP’s rules,” the wind body said.

SAWEA CEO Brenda Martin said that the organisation would be looking to the Minster for guidance as to how the condition would be imposed. The organisation had, thus, called for an urgent meeting with Kubayi.

SAPVIA chairperson Davin Chown told Engineering News Online that, while the announcement broke what had become a destructive “logjam”, it was now important for stakeholders to be given an opportunity to interrogate the details to assess whether or not the proposed way forward was “implementable”.

Kubayi indicated that she would be meeting with all participants in the bid windows ahead of the signing to discuss issues of concern from the IPPs and for government to give feedback on its concerns.

The 77c/KWh cap and how the figures had been arrived at would be high on the agenda of the IPPs, particularly as it was below many of the project tariffs bid for a number of the solar PV and wind projects identified as preferred bids following bid window 4. The figure was also materially below any tariff achieved, domestically and globally, for a concentrated solar power plant.

Chown expressed optimism that there would be a level of flexibility and that it would not be a case of “take it, or leave it”.

The IPPs would also likely point out that the cost of PV panels and wind turbines were not the only expenses included in the tariff, which also catered for the cost of finance, grid connection, engineering contractors, operations and maintenance, permitting and environmental approvals, localisation and socioeconomic development.

In other words, while the cost of PV panels may have fallen since 2015, other project components could well have increased over the period. There was particular concern about escalations in grid-connection bid quotations (BQs) received from Eskom as well as a clause in the quotations, which indicated that the BQs would only remain valid for six months.

In addition, it could prove difficult to meet previously stated local-content commitments in light of the fact that some solar PV- and wind-link manufacturing capacity had closed or relocated amid the uncertainty that followed the initial procurement announcement.

“The issue that has to be considered now is whether projects remain viable at 77c/kWh and who will take the knock if they are developed,” Chown said, noting that tariffs for the solar PV projects bid during bid window 4 stood at between 79c/kWh and 86c/kWh.

The industry is also likely to raise questions about the future of the small-scale renewables IPP programme, which was excluded from Kubayi’s announcement.

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