Although national government has opened the door for municipalities to procure electricity from independent power producers (IPPs), a lot of “regulatory ironing out” still needs to happen before power purchase agreements (PPAs) can be signed.
In May last year, the Energy Minister gave permission for the National Energy Regulator of South Africa (Nersa) to licence 500 MW of small-scale embedded generation (SSEG) projects, sized between 1 MW and 10 MW, without the need for the Minister to sign it off.
Nersa subsequently in September this year released a list of municipalities with approved SSEG tariff structures.
Twenty-nine of South Africa’s municipal electricity utilities already have aspects or components of an SSEG tariff structure in place to incorporate SSEG generation into their electricity networks.
South African municipalities had been heavily regulated in how they could procure electricity, with the “Eskom as a single buyer” model having prohibited local government from buying electricity directly from an IPP.
Although the City of Cape Town is an example of a metro that has demonstrated its readiness to be an offtaker of IPP power, the issue remains around balancing the tariffs between baseload power and intermittent power supplied by IPPs, says South African Local Government Association (Salga) spokesperson Nhlanhla Ngidi.
Additionally, he mentions that a change in governance every five years might directly impact on the PPAs that municipalities will sign with IPPs.
Ngidi says Salga has been working with the National Treasury and other partners to prepare municipalities for what is coming, but, until then, there remain regulations that have to be gazetted around feasibility studies to determine municipalities’ financial capability to procure energy from IPPs.
Further to that, the PPAs also have to be agreed in a mutually sustainable manner, which the Municipal Finance Management Act currently does not allow for, in that it does not allow municipalities to enter into contracts of a duration of longer than five years.
Because IPPs have long-term thinking around their assets and generally sign 20-year PPAs to ensure their own sustainability, it is a tricky issue to navigate, particularly since local government undergo changes every five years after elections.
The City of Cape Town (CoCT) has long advocated for municipalities procuring their own power.
In fact, the city was involved in a court case in May, which was intended to pave the way for the city to buy at least 300 MW of power from IPPs.
The North Gauteng High Court ruled in August that the city should further engage the Minister of Mineral Resources and Energy, as well as Nersa, with a view towards resolving the dispute.
CoCT executive director for energy Kadri Nassiep says the city remains focused on an energy transition to decarbonise the local economy, building its power generation assets, alleviating energy poverty in the province and creating a marketplace for competitive energy transactions.
The city hopes to have all its buildings in Cape Town carbon neutral by 2050 and will soon publish its climate action plan, which involves a critical renewable energy generation component and procuring power from IPPs.
Notwithstanding the outcome of the court hearing, Nassiep says the city is still intent on procuring power from IPPs as soon as legally possible and will advertise a request for proposal if the Minister gives the city the go-ahead.
More than 4 000 plants, or 50 MVA, of SSEG was installed in Cape Town last year.
Renewables company Enertrag South Africa business operations director Stephen Koopman says that in light of energy security concerns and high tariffs, large power users are increasingly issuing requests for proposals to procure their own power from IPPs, or self-generate.
Sasol utilities manager Piet van Staden says large power users often have special tariff pricing agreements in other countries, reflecting the value the large user can bring to the grid, but this is not the case in South Africa, which impacts negatively on industry’s competitiveness.
He adds that, even if large power users are willing to wheel power from IPPs, or are exploring self-generation, there are a lot of risks involved, especially if 20-year PPAs have to be signed.
“We need a regulatory framework for this risk to be managed better. We are also not at a stage where banks are comfortable in taking that risk on private bilateral agreements.
“For now, South Africa has a severe energy shortage and all new generation investments must be supported and expedited, which will not bring a future cost of regret. It is always better to maintain a system perspective and leverage its synergies, versus suboptimisation such as grid defection, striving for self sufficiency or investment in uneconomic bypass.
“There is often this knee-jerk reaction in wanting to be off-grid, but instead we should make the grid work for us and start doing the right things,” Van Staden suggests.
ON THE MONEY
Rand Merchant Bank infrastructure finance transactor Siyanda Mflathelwa says more large power users have been approaching the bank to finance self-generation and banks are increasingly investigating municipal and private sector PPAs.
She says that anyone who is procuring power must consider whether it will go on the balance sheet or off the balance sheet. Given the nature of power procurement, she notes that long times are needed to amortise the initial cost.
From a speed perspective, Mflathelwa explains that it is quicker to go on balance sheet, but this often does not work for larger-scale plants that amount to large amounts. The speed, scale and number of buyers all play a part in the route to go.
The PPA-type model, that is off balance sheet, transfers the bulk of the risk to the power producer, where the buyer purchases the power, similar to what is being done in the Renewable Energy IPP Procurement Programme.
She continues that a cornerstone consideration for the bankability of a PPA from a municipal perspective is the procurement framework, which can be cumbersome at local government level.
“Some municipalities are smaller, some have constrained financial systems, but because they are all governed by the Municipal Finance Management Act, they cannot sign long-term PPAs, which are by its very nature long-term agreements.”
Another consideration speaks to guarantees by National Treasury, which also changes the bankability aspect of any offtake, thanks to the assurance of payments that it offers on the PPAs.
The banks are also looking at commodity risk in the case of mining operations that apply for financing related to energy projects, for example, and what the scenarios are if the PPA does terminate and there are payments due to the IPPs in those instances.
Looking at the total 14 GW rollout of utilityscale wind projects due to come, as per the Integrated Resource Plan 2019, Rand Merchant Bank infrastructure finance transactor Daniel Zinman explains that by taking the R4.4-billion, 140 MW Roggeveld wind farm as an example, the cost of all the wind power plants may amount to about R450-billion.
Should 80% of this amount be funded by debt, the banking industry is looking at R36-billion of debt funding a year, at that level of rollout over the next decade.