PRIVATE POWER PARALYSIS
South Africa’s multibillion-rand plan for two gaspowered private power stations could take a decade to deliver its first electricity.
Industry players are also sceptical about local banks’ ability to provide the necessary finance for a scheme roughly estimated to require R50 billion for capital expenditure.
A round table event hosted by law firm Webber Wentzel this week saw a variety of project developers and financiers complain about the massive uncertainties regarding the gas independent power producer (IPP) programme.
It follows the hugely successful, but now paralysed, renewable energy IPP programme and the less successful coal IPP, which is also facing long delays.
“It will take a while to get off the ground. In the best case, you’ll have first power in eight years,” said Erik Wandrag, head of energy investments at Harith General Partners, an asset manager involved in private power projects.
The gas IPP envisages a 1 000 megawatt station in Coega and a 2 000MW one in Richards Bay. However, bidders will be expected to establish a larger natural gas importing infrastructure that also provides gas to third parties in South Africa.
The idea is that the power stations are the basis of the market, but Wandrag said that it could work the other way around.
“Maybe the answer is to scale back and not focus on power at first. You can look at other markets. There is a massive industrial market,” he said.
The two stations are expected to cost something in the region of R25 billion each and the first step towards a bidding process was taken in October last year with the release of an information memorandum.
Since then the initial timelines have been pushed out significantly.
A request for qualifications (RFQ), which would result in a list of companies that can bid to build the stations, was planned for late last year.
The industry now only expects the RFQ in 2018 as the department of energy first attempt to finalise the contentious Integrated Resource Plan.
This plan determines the timing of new power investments and is mired in controversy due to the government’s alleged irrational attempts to limit new renewable projects.
Khwezi Tiya, Standard Bank executive for oil and gas, suggested that the gas IPP RFQ would probably only come out in 2018.
“At best you will have financial close at the end of 2020. In 2021 you start developing and in 2023 is the earliest likely gas,” he said.
Yousuf Haffejee, an Eskom veteran of 18 years now working on the other side of the IPP business, also said that there would probably not be much to do around gas for the next 18 months.
Haffejee is now regional vice-president of Marubeni – the preferred bidder for the coal IPP.
“With coal, the government took two years to evaluate two bids. Our team for gas is in place, but I think it will be 18 months before they even start,” he said.
“We are eager to do a gas IPP ... It is going to be a long drawn-out process, as we are experiencing with coal.
“The updated Integrated Resource Plan was long overdue, but the timing is bad in terms of the gas IPP.”
However, the elephant in the room is still Eskom, which is the single buyer of power produced by all IPPs.
The flagship renewable IPP programme is currently in limbo due to Eskom refusing to sign any more power purchase agreements (PPAs).
These 20-year deals guarantee the private consortiums building the power stations their income and are central to the whole scheme.
Eskom has balked at the cost of the first wave of PPAs for which it will have to pay for 20 years.
The state-owned utility now argues that it does not need any more until after 2020.
This leaves 37 groups that had been chosen as preferred bidders unable to proceed and uncertain when or even if their projects would go ahead.
A key concern with the gas IPP scheme is the ability to fund the projects in rands as opposed to dollars.
This is considered crucial because the IPPs will agree on a fixed rand tariff for 20 years and stand to lose if they take on lots of dollar debt and the exchange rate depreciates.
The department of energy has indicated that the exchange rate risk related to the actual gas imports will get passed on to Eskom and then on to consumers. It is not clear how it will work for debt related to building the stations.
Haffejee accused South Africa’s banks of compounding the problem by not offering competitive terms for power projects.
This was also a complaint in the early days of the renewables programme when funders managed to earn high returns. According to Haffejee, the coal IPP suffered as a result and the gas IPP will face the same problem.
“In South Africa you only have the South African banks to deal with to raise R25 billion.” “I think the banks will tell you there is capacity. “In the coal IPP we managed to finance our project at R11 to the dollar. The other candidate did not ... I think there is not enough rand funding available,” said Haffejee.
“I have doubts whether there is sufficient depth [in the local capital market] for both the gas ports. I think there is not enough competition between the banks.
“This is all on the basis of a single off-taker, Eskom. At some point the banks will have to look at their balance sheets and see how much Eskom risk they have,” he added.