South African IPP pioneer laments the ‘dampening effect’ of Eskom’s refusal to sign PPAs

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South African IPP pioneer laments the ‘dampening effect’ of Eskom’s refusal to sign PPAs

A South African developer of medium-sized hydropower projects is increasingly turning its attention to regional opportunities, largely because of the hydrological potential to the north of the border, but also because of the prevailing uncertainty domestically about the future of the country’s independent power producer (IPP) programmes.

Renewable Energy Holdings (REH) CEO Anton-Louis Olivier warns that the resistance currently being shown by State-owned electricity utility Eskom to the signing of new power purchase agreements (PPAs) with renewables IPPs, together with the protracted delays in announcing new projects, is having a “serious dampening effect” on investor sentiment. Even statements in support of IPPs from government leaders, including President Jacob Zuma and Finance Minister Pravin Gordhan, have not been sufficient to ease the anxiety, or create certainty.

Olivier is himself a South African IPP pioneer, having pursued, out of “ignorance and exuberance”, the development of two small-scale hydropower projects near Bethlehem, in the Free State, in the mid-2000s, despite the absence, at the time, of a formal IPP procurement programme, or feed-in tariffs. School fees are still being paid, with REH having to, periodically, take legal steps to force the Dihlabeng local municipality to pay for the electricity being provided to the council, with the balance of the power being sold to Eskom.

REH has subsequently also had success under the Renewable Energy Independent Power Producer Procurement Programme (REIPPPP), which, since 2011, has facilitated the development of more than 100 renewables projects, mostly wind and solar photovoltaic, along with investment of nearly R200-billion.
Following the second bid window of the REIPPPP, REH’s 4.5 MW, R190-million Stortemelk Hydro project, also in the Free State, was named a preferred bid. Stortemelk Hydro was successfully commissioned in July 2016.

As with the two earlier Bethlehem schemes, Stortemelk Hydro is a run-of-river power station located on the Ash river, near Clarens. The flow of water into the Ash river is augmented by the Lesotho Highlands Water Scheme, with the Katse dam delivering the “unintended” benefit of providing an ideal reservoir for downstream power plants and, therefore, lowering risk, which would have been heightened had such plants been built on a river that relies only on rainfall.

To date, some 16 MW of hydropower capacity have either been developed on the river, or are in the process of being developed, and Olivier says the figure will rise to 20 MW should its bid-window 4.5 Boston Hydro project eventually be confirmed. Besides, REH’s four projects, the Ash river has also attracted Building Energy, with its 4 MW Kruisvallei hydropower project having been selected as a preferred bidder in bid-window 4.

Eskom has indicated that it is not willing to sign PPAs for projects adjudicated during bid-window 4.5 and the so-called expedited round, describing the renewables programme as “exorbitant”. However, Gordhan insisted during his Medium-Term Budget Policy Statement address that, “contrary to the views of some, these are sound and sensible long-term investments”. He also indicated that Eskom would be “required” to sign offtake agreements for a further 37 projects, which would add 2 354 MW of capacity to the grid.

By continually quoting the high contract prices achieved during the first three bid windows of the REIPPPP and not mentioning the low prices in the later rounds, Olivier believes Eskom is not only distorting the perception of the value and performance of the renewables projects, but is also making it difficult for developers to assure their funding partners that the programme remains intact.
“We are in the fortunate position of having operating assets, so we can be patient. But for developers that are seeking to build their first projects, the delays could prove fatal.”

REH continues to have an appetite for the South African programme, but Olivier says many of the remaining high-potential hydro sites fall under ownership of the Department of Water Affairs and Sanitation, which does not yet have a viable framework for facilitating IPP investment on its infrastructure. The company’s three Ash river developments are located on privately owned land.
The bulk of its 50 MW project pipeline is, therefore, in the rest of Southern Africa, with Zambia being a key priority.

The company, which besides Olivier’s stake, is owned by Mertech and supported by Norwegian development financier Norfund, has identified a number of prospective sites in the Luapula province of Zambia, which are in close proximity to existing grid infrastructure.

Run-of-river projects in the range of 10 MW to 20 MW will be pursued outside of South Africa, owing to the superior hydrological resources in the region. REH is also aiming to tap either formal IPP programmes or official feed-in tariff schemes so as to mitigate the possible risk associated with standalone and bilaterally negoatiated PPAs.

Olivier believes the operational experience it has gained in the Free State will be invaluable as the company seeks to move beyond South Africa. However, he does not anticipate that the engineering, procurement and construction management model deployed at Stortemelk Hydro will be as beneficial from a cost and risk perspective for its first Zambian projects. Therefore, a more conventional engineering, procurement and construction model will be pursued.

“We are presently in a feasibility stage and plan to be in a position to move to construction with our Zambian projects by the end of 2018,” Olivier concludes.