Financial Close Looms Large for South Africa’s REIPPPP Bid Window 5 Project Winners

The notice displayed on the DMRE’s IPP Projects website. Image credit: DMRE

  • Financial close deadline for preferred bidders in South Africa’s REIPPPP Bid window 5 is scheduled for the end of April 2022. 
  • The bid window realised record low tariffs – the average weighted price bid for solar came in at (R) 42.9c kW/h while the average bid for wind was (R) 49.5c kW/h. 
  • Much has changed in the global wind and solar markets in the last 12 months triggering speculation that some of the winning bidders may not reach financial close on their projects.

The bid winners of South Africa’s Renewable Energy Independent Power Producer Procurement Programme (REIPPPP) Bid Window 5 were announced at the end of October 2021 amidst much fanfare. The reason being Bid Window 5 was originally scheduled to open back in Q2 2016 and reach financial close by the end of that year.

It also signalled that the resumption of the country’s renewable energy programme was firmly on track after a 5 year hiatus where the ANC led government under Jacob Zuma, pursued a nuclear agenda over renewable energy. Read more 

But under the country’s current Mineral Resources and Energy Minister, Mr Gwede Mantashe, who incidentally is the sixth energy minister appointed in the last 10 years in South Africa, the country is again experiencing undue delays in the procurement of much needed new build, renewable energy capacity.

The opening of REIPPPP Bid Window 6 was scheduled to be opened 28th September 2021 but only opened at the beginning of this month while the  country’s 2000MW Risk Mitigation Independent Power Producer Programme (RMIPPPP), a programme to procure emergency power has been seemingly been rigged from the start to favour gas power which includes suspiciously specific tender criteria and the ongoing shifting of deadlines for financial close.  Read more

The country desperately needs new generation capacity to come online – Eskom currently has a capacity deficit of 4000MW and the country is vulnerable to regular bouts of load-shedding. The country also desperately needs to create jobs. The currently unemployment rate in South Africa is at a record high rate of 35.3%.

Bid window 5 is expected to inject an estimated R50 billion into the South African economy, creating around 13,912 job opportunities. The window seeks to procure a total of 2583MW of wind and solar capacity.

Related news: SAWEA on REIPPPP: Delays, Inconsistencies and Halted Bidding Windows

A notice on the DMRE’s IPP Projects website states that they are currently ‘working on the financial close of REIPPPP Bid Window 5 projects that is scheduled for end April 2022’ but the likelihood of this happening is fading fast. There are a number of reasons for this:

The global supply chain market has changed

The Covid effect and the war in Ukraine has adversely affected the cost and availability of energy through the solar and wind sector value chain making production costs higher and output inconsistent. Raw materials and transportation costs have increased plus there is a shortage of key components. Ongoing harbour congestions are making logistics and associated timelines challenging.

All this means that engineering, procurement and construction (EPC) pricing has gone up substancially in the last 12 months. This puts pressure on updated financial models in terms of bankability and decreases IRR percentage set 12 months ago.

In addition, some large global players like Siemens Gamesa are facing serious financial difficulties prompting some IPP’s to shuffle their supplier cards which have higher component price outcomes. Read more

Foreign IPP’s dominate winning bids

The outcome of Bid Window 5 reveals that a few foreign owned independent power producers (IPP’s) have been successful with multiple projects. Mainstream Renewable Power (Norway/Ireland) won 12 of the 25 projects while Scatec (Norway) and EDF (France) won three projects each. Local IPP Red Rocket own 3 projects and another French IPP, Engie, was also successful with 3 projects.

Related news: Aker Horizons of Norway aquires 75% stake in Mainstream Renewable Power

Single B-BBEE company partners with majority of winning bidders

Winning bidders are required to have a local Broad Based Black Economic Empowerment partner. It is alleged that the same broad based black economic empowerment (B-BBEE) company, H1 Holdings , is an equity partner in no less than 21 of the 25 projects, ironically with Mainstream Renewable Power (12 projects) , Scatec (3 projects) and EDF (3 projects) and local IPP Red Rocket (3 projects).

Exceptionally low tariffs

The onus is on preferred bidders to reach financial close. Bid Window 5 yielded the lowest tariffs in any bid window thus far. The average weighted price bid for solar comes in at (R) 42.9c kW/h while the average bid for wind is (R) 49.5c kW/h. Industry experts claim that the winning tariffs are too low to be realistic. Read more 

Bloomberg also cites low tariffs as the reason why projects are struggling to reach financial close. Read more 

Treasury considers withdrawing debt cover for REIPPPP Projects

The country’s Treasury currently provides debt guarantees to independent power producers (IPP’S) who are successful with projects under the programme should the off-taker, the national energy utility, Eskom, default on the power purchase agreement. The South African government is exploring alternative support for the country’s Renewable Energy Independent Power Producer Procurement Programme (REIPPPP). Read more

The DMRE has outlined a three year horizon for the various energy procurement programmes the department has implemented under the country’ Integrated Resource Plan 2019 (IRP 2019) and the Risk Mitigation Independent Power Producer Procurement Programme. A total of 14400MW wind power capacity plus 6000MW of solar PV technology is allocated for procurement leading up to 2030 in the IRP 2019.

Where the DMRE and the IPP Office lack competency and due diligence in vetting project submissions, renewable energy project investors like banks, investment fund managers and private companies pick up the slack. These project investors will be asking the hard questions and scrutinising every detail to ensure compliance with not only their internal requirements but the also the country’s laws and socio-economic needs.

As always it is the bottom line that counts and time will tell wether the likes of Mainstream Renewable Power plus the other winning bidders will be able to reach financial close by the end of this month. If not, the people of South Africa can expect further delays in the government’s procurement of much needed new power generation capacity.

Author: Bryan Groenendaal

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