Despite intense interest, financial closure eluding power deals in South Africa.

The pipeline of South African private power projects is already significant and is continuing to expand. But a leading South African corporate and investment bank says that these will remain in a “holding pattern” until South Africa closes the critical legislative and regulatory gaps that continue to afflict investment progress.
Standard Bank’s director of investment banking coverage for South Africa and Africa, Paul Eardley-Taylor, tells Engineering News that it is aware of more than 30 identified projects and a further 20 developers keen to pursue South African power projects, as well as cross-border supply initiatives.
However, the bank’s project finance director, Alastair Campbell, says that none of these developments are likely to reach financial close during the 2010 calendar year owing to the prevailing uncertainties, which prevent the projects from being “bankable”.
A key impediment is the absence of clarity on the identity, composition and mandate of the entity that will eventually buy power from independent power producers (IPPs).
Government is pursuing the development of a so-called independent system and market operator (ISMO) outside of cash-strapped Eskom, which has hitherto played the role of the single buyer of IPP power.
But even if an ISMO were to emerge later this year, it would only stimulate IPP investment once certainty about the role that the National Treasury will play in backing the buying entity and/or in providing guarantees for power projects has been provided by government.
Work is reported to be accelerating around securing such guarantees, as well as on the legislative and regulatory frameworks that would allow for the creation of the ISMO.
There is widespread belief that the ISMO will be developed in phases, and could well remain a wholly owned subsidiary of Eskom until such time as government has legislated for the creation of an independent ISMO.
But there are also a number of other lingering gaps in the legislative, policy and regulatory frameworks that will, in the view of Eardley-Taylor and Campbell, also have to be plugged before the project playing field can be considered level.
The absence of a finalised second inte- grated resource plan, or IRP2, which would offer a road map for South Africa’s genera- tion mix for the next 20 years, is another constraint.
Further, uncertainty on the rules governing power purchase agreements (PPAs) for both renewable and conventional projects continues to linger, including the vital issue of termination provisions. There is also no clarity on how much power South Africa is willing to import from its neighbours and whether the developers of such projects will be free from the provisions of the Public Finance Management Act. 
Campbell stresses, though, that there does appear to be a new sense of urgency within government to deal with these impediments, and that a number of the key hurdles could well be tackled over the coming months.
The Department of Energy has initiated a public consultation process around the IRP2 and has promised finality for the second half of 2010, while the National Energy Regulator of South Africa is expected to finalise its work on the PPA guidelines by the third quarter.
Campbell describes the current reality as being akin to airplanes in a holding pattern over Heathrow Airport in thick fog.
“The planes, in this case the IPPs, are unable to land until the mist clears. And some, particularly the foreign investors, are wondering whether or not it might be better to divert to another airport,” Campbell concludes.
However, Eardley-Taylor is convinced that, given the country’s low reserve margin, which is likely to remain well below the 15% desired level for many years, the space will open for IPP investment. Further, he points out that much of the Eskom fleet is between 25 and 30 years old, which means that there is not only a market for additional capacity, but also for replacement projects.
In the short term, the bank is particularly keen that renewables lead the initial charge, owing mainly to the fact that the turnaound times from financial close to first production is far shorter than would be the case with conventional power projects.
The initial projects in which Standard Bank is likely to be involved are wind energy and photovoltaic related, owing to the low technology risk associated with both. But the bank will also involve itself with coal and nuclear projects, which have far longer lead times.
“Despite the uncertainties, we are not sitting idle. We have an appetite for power, we have set up capacity in this area, with particular emphasis on renewables, and we are ready to partner with developers,” Campbell concludes, noting that he is confident that the bank could close at least three large wind farm projects in the coming year once the obstacles to investment have been cleared.
Engineering News

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