The single buyer office (SBO) within State-owned power utility Eskom expects to initiate a selection process in October or November for the 1 025 MW of renewable energy that is earmarked for entry into the South African electricity system by 2013.
SBO head Yousuf Haffejee has told potential investors that the details of the procurement strategy are still being finalised, but that a procurement plan could be announced in the coming “two to three weeks” and that invitations to bid could be issued in “either October or November” .
But he stresses that the discussions are still under way with government to finalise the mechanics of the procurement strategy and bidding process. “We may start with a request for qualifications, followed by a request for proposals (RFP) . . . or we may go directly to an RFP, with a two-envelope system . . . or we might even go the route of seeking expressions of interest to understand what is out there,” Haffejee says.
Investec Capital Markets project and infrastructure finance head Mike Meeser estimates that the projects – which could be wind, solar, biomass, or minihydro – will require equity and debt finance of between R20-billion and R30-billion.
He is convinced, though, that there will be appetite from local and foreign banks to fund the debt portion, but acknowledges that project sponsors may battle to raise the necessary equity finance and that the initial projects would probably require support from established independent power producer (IPP) market participants.
Development finance institutions will probably also need to play a role in facilitating the black economic-empowerment portion of the transactions.
Some R12,4-billion has been set aside in the second multiyear price determination (MYPD2) to facilitate the procurement of power from conventional and renewable IPPs between 2010 and 2013.
Further, the first integrated resource plan, or IRP1, which was published in late 2009, foresaw 1 025 MW of that new generation capacity arising specifically from projects falling under the renewable energy feed-in tariff (Refit) regime during the MYPD2 period.
WHO WILL BUY?
However, government is working on the creation of an independent system and market operator, or ISMO, which could eventually fall outside Eskom. This means that Eskom will probably require a Ministerial directive to proceed with the procurement through the SBO, which is currently a unit within the utility’s system operations and planning division.
Haffejee has told Investec Power Summit delegates that the creation of an “nonconflicted” buyer could take two to three years and it would, thus, be preferable to allow the SBO, which is currently the only “legal” buying entity, to proceed.
“We don’t have the luxury of time,” Haffejee warns.
In fact, Eskom is lobbying for a structure whereby the system operator remains a ring-fenced unit within the utility for some time, cautioning against a vertical separation during the current period of system tightness.
It argues that any potential conflicts of interest will alleviated by the fact that the IRP2010, rather than Eskom, will dictate the nature of the new capacity to be added, while the “take-or-pay” with the IPP would mean that there would be no financial incentive to favour Eskom capacity over private generation.
However, critics argue that the vertical separation of Eskom’s transmission business would be crucial to stimulating IPP investment, which has been slow in emerging, despite the supply/demand imbalances.
Eskom, by contrast, believes that the immediate impediment is a lack of regulatory clarity on the rules of engagement, rather than the physical location of the buying entity.
Haffejee stresses that the Refit process hinges on the publication of a standardised power purchase agreement (PPA) and on the selection criteria that should be adopted when more Refit megawatts are bid than can be funded by the approved tariff.
The IRP2010 could also provide guidance to the buying entity as to the renewable technologies that should be prioritised for the first 1 025 MW, as well as the renewable and conventional capacity to be added after March 31, 2013.
The National Energy Regulator of South Africa is expected to provide such clarity soon, while the National Treasury is reportedly considering whether it will guarantee the PPAs, which will endure for 20 years. Funding practitioners have cautioned that the absence of such a guarantee will make it difficult make Refit projects bankable.
“The challenge facing us right now, is to get clarity on the rules of the game . . . and hopefully we will get the Minister’s determination that confirms that our office is the office to procure energy from the private sector,” Haffejee states.
Edited by: Creamer Media Reporter