Investec mulls SA power projects, but warns of pricing and policy obstacles

13/03/2008

South African financial services group Investec says it is willing to invest directly into both renewable and conventional power generation projects in South Africa, but says a far more transparent pricing formula, backed by clear market rules for independent power producers (IPPs), is needed to facilitate such investments.

Speaking at a media briefing in Johannesburg on Thursday, Investec Capital Markets project and infrastructure finance head Michael Meeser noted that the company had already taken direct equity in renewable-energy projects in Australia, Greece, as well as in biofuels facilities in North America. It had also been a key debt arranger for projects in Scotland, Wales and Italy.

The group was developing a A$380-million wind farm in Australia, was a 50% partner in the Greece facility, and was seriously studying a wind-energy project in South Africa, which could be between 10 MW and 30 MW in size.

Meeser refused to be draw on where the plant could be sited, saying only that it had raised the concept with the Department of Minerals and Energy.

In addition, the group had direct experience with conventional IPPs, where it had also had experience in taking direct equity. For instance, until recently it was a part-equity holder in the Kelvin power station, east of Johannesburg, which has since been sold to a consortium, which includes Aldwych International, a UK power company. The group had also taken a 40% equity stake in an IPP facility in Ireland.

Meeser said that the group was considering both renewable and conventional power facilities, indicating that the conventional facilities would most likely arise as large mining and process industries sought ways of sustaining production in the context of 5% to 10% power rationing.

ESKOM MUST BE ALLOWED TO PASS THROUGH COSTS

However, he stressed that these projects could only be made viable if the regulatory environment was such that it allowed Eskom (which would be the single conduit to the grid for IPPs, cogenerated or private renewables) to pass through the higher prices associated with these projects to the consumer. In addition, the regime should allow private companies to buy private power directly in cases where it could help sustain production, with the higher prices possibly being offset by power buy back arrangements, currently under investigation at Eskom.

"The key thing here is understanding the tariff, because without a facilitative tariff the project falls flat," Meeser explained, stressing this was particularly true for renewable ventures.

Under the current multiyear tariff dispensation, Eskom was disallowed from passing through costs arising from its primary energy, as well as, probably, from higher-priced private producers of power, which would place untenable financial pressure on the utility. Such regulatory limitations were also deployed in California and helped precipitate the power crisis in that US state back in 2001.

The only alternative was for the government to come in and recapitalise Eskom on an ongoing basis.

It had emerged recently that Eskom had indeed approached the National Energy Regulator of South Africa for another ‘reopener' in a bid to persuade the regulator to allow it to pass through its rising primary energy costs. It is not clear, however, whether it would also be requesting the right to do the same with the new cogenerated and IPP power.

The tender for Eskom's ‘Pilot National Cogeneration Programme' closes at the end of May and the utility has also issued a medium-term cogeneration tender, where cogeneration of IPP projects of between 5 MW and 1 000 MW, up to a combined capacity of 3 000 MW, will be assessed. It is also understood that the utility plans to issue a base load tender for an additional 4 000 MW in the not-too-distant future.

SHOOTING IN THE DARK

Investec's Adam Gordon says that this demand is creating a significant amount of interest among potential private power producers, but he says the lack of a clear pricing signal from Eskom and tariff-structure certainty from the regulator, was dampening that appetite.

Gordon acknowledges that it is difficult for Eskom to send out a clear pricing signal, given that it is not yet clear whether it will be able to recover those prices. However, he says the unofficial signals that the utility is offering are sowing some confusion as it appears to be based on outdated information.

That means that the bidders for the May 31 cogeneration tender were more or less "shooting in the dark", and it was anticipated that Eskom saw the auction as a way of helping to define both its and the market's pricing appetite, and would probably contract with those that offer the lowest prices.

"That is making it quite difficult for the bidders," Gordon said.

He also warned that the prospect of meeting the stated renewable-energy targets were dim, unless the policymakers agreed to some type of ‘feed-in tariff' formula for such technologies.

Feed-in tariffs were used in other jurisdictions as an incentive to boosts the adoption of renewable energy, whereby regional or national electricity utilities are obligated to buy renewable electricity at above market rates.

Meeser noted that had it not been for such incentives in Greece and Australia, those two wind-energy projects would not have been viable.

South Africa had set itself a renewable target of 10 000 GWh of power from renewable sources by 2012, but there had been very little done to meet that goal.

In 2002/3, Eskom erected three wind turbines at an experimental wind energy farm at Klipheuwel, on the West Coast near Cape Town, and was now likely to pursue a larger 100-MW facility.

The City of Cape Town, the Central Energy Fund, the Development Bank of Southern Africa and the Danish government were also supporting the development of the Darling IPP, which would be South Africa's first commercial wind farm. Further, Eskom was likely to pursue a concentrating solar plant in Upington, in the Northern Cape, while considering other renewable options.

"We believe there are real opportunities emerging in the domestic energy market, but there are still a number of obstacles in the way of truly unlocking the potential for private power. Processes have to be streamlines and clarified, and the Eskom, as the single buyer, has to be allowed to pass through these higher prices to the consumer, or it is simply not going to be viable," Meeser concluded.