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Controversial plan to renegotiate IPP tariffs is proceeding, De Ruyter confirms

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Controversial plan to renegotiate IPP tariffs is proceeding, De Ruyter confirms

Photo by Creamer Media's Donna Slater
Eskom CEO Andre de Ruyter

21st May 2020

By: Terence Creamer
Creamer Media Editor

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Eskom CEO Andre de Ruyter has confirmed that the State-owned electricity utility is pushing ahead with a controversial move to renegotiate power purchase agreements (PPAs) with renewable independent power producers (IPPs).

Speaking during a briefing on May 21, De Ruyter said that the renegotiation of IPP contracts had emerged as a key priority for organised labour at Eskom and that, following an analysis of the contracts, he believed that “there are opportunities for us to engage with those IPPs with a view to reducing the net cost to the South African electricity consumer”.

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The renegotiation of the IPP contracts had also been mooted by Public Enterprises Minister Pravin Gordhan and Mineral Resources and Energy Minister Gwede Mantashe, who  both indicated in 2019 that they saw scope for a reduction in tariffs, particularly those associated with projects procured under the first two bid windows of South Africa’s renewables procurement programme.

The proposal was controversial as the 20-year PPAs were the outcome of a competitive bidding processes and any move to renegotiate the terms would raise serious questions about government’s commitment to honouring contracts.

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There was also uncertainty on how a renegotiation would improve Eskom’s financial position, owing to the fact that the PPAs were treated as a pass-through cost in Eskom’s allowable revenue by the National Energy Regulator of South Africa, making them revenue and cost neutral to the utility.

Nevertheless, De Ruyter suggested that the impact on Eskom was “complex” and that the allowance in the tariff for the recovery of IPP costs was, at times, “inadequate” when compared with the cost of Eskom’s own generation.

“I think that there is an opportunity for us to request IPPs to look at potentially refinancing – we think that some of the financing arrangements are potentially suboptimal and that there are opportunities to lower the financial cost and thereby also reduce the costs paid by Eskom to those IPPs.”

The first engagements had taken place and De Ruyter said he was “cautiously optimistic” that an acceptable outcome would be secured - an outcome “that serves the needs of the country, but also serves the needs of the investment community by allowing adequate investment certainty on these projects”.

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