Photovoltaics

Some teething problems were perhaps to have been expected in South Africa’s renewable energy programme. But current delays are a cause for concern. Is a risk averse approach to project and PPA due diligence a saving grace or a burden?

Right now PV developments in South Africa should be charging ahead at full steam. But that is not happening. The current round of renewable energy contracts were due to reach financial close by the middle of July.

But last-minute permitting hiccups have led to delays that are still ongoing. At the time of writing, the industry was anticipating the close might happen in the third week of August but was still awaiting formal confirmation of a date from the South African Department of Energy. 

So what has gone wrong? One of the issues, at least, was probably a worthwhile exercise in due diligence. In South Africa, mineral exploitation rights generally take precedence over other forms of land use.

And one of the recent hold-ups has been due to a well-founded requirement to check whether landowners in the mineral-rich north of the country, where many of the new solar projects are located, might have a claim over land being dedicated to PV development. 

This problem has now largely been resolved, with most developers having ascertained that no mineral rights apply on their land, or if they do then negotiations had taken place to clarify that PV developments could go ahead. 

Troubling issue

A second issue, with power-purchase agreements (PPAs), is potentially more troubling.  As part of its internal approvals processes, the state-owned utility Eskom “needs to satisfy itself that the PPAs are completely covering all the issues, and that the risk is completely taken out,” says Davin Chown, chairman of the South African Photovoltaic Industry Association.  

This is essentially a debate between Eskom and the Department of Energy, and the latest news is encouraging. “As of last week the Eskom guys had signed off on this, so the PPAs are all good,” says Chown. “That enables Treasury to submit what is known as the Section 54 Applications, in terms of the Public Finance Management Act. That is the final signoff from senior government, from both the Minister of Public Enterprises, which is essentially Eskom’s owner, and the Ministry of Finance.”

So everything is OK then. The only problem is that the process has had a knock-on effect on the financial close schedules… and that is starting to hurt developers. 

Far too long

Says Chown: “A delay in one of those permitting issues means that things can’t be presented to the Eskom committee in time, and then they don’t go onto the cabinet committee in time. So we have to reschedule everything, and that has taken far too long.”

Developers are now in a situation where contracts are beginning to be affected, which could cost a lot of money. And there is growing unease over the fact that Eskom really has no incentive to speed things up. In fact, it has good reasons to proceed with utmost caution. 

Until now, energy generation in South Africa has been relatively cheap, but that is changing, and not only because of renewable power. 

To meet South Africa’s booming energy demands, the utility is also looking to use new nuclear and coal-fired plants, but both of these sources of generation are looking increasingly expensive, giving Eskom little room to manoeuvre without government help. 

Hence, says Chown: “If I was in Eskom’s shoes, I would be sitting there saying, ‘Well, I’ve now got PPAs for 20 years; am I going to be able to afford them? Eskom is in a tricky position. It has got obligations already for two big coal-fired power plants.”

Eskom has already gone to the South African regulator to secure tariff increases over a five-year rather than three-year cycle, in order to make sure it can cover the cost of renewable energy, Chown notes. 

Tariff increases

“Eskom is saying that if the regulator does not agree to increase these tariffs, it may end up being in a situation where it has to default,” he says. “So can Treasury step into the breach so no-one is exposed?”

Nevertheless it is important to note that so far there is no suggestion Eskom is dragging its feet on purpose. On the contrary, in mid-July the reserve margin in the power system was just 1%, and wind power, which is already close to grid parity in South Africa, arguably provides one of the quickest and easiest ways to combat this problem. 

As a result, says Ajay Lalu, managing director of Black Lite, a renewable energy firm that aims to create one of South Africa’s first thin-film PV manufacturing plants: “I think [the issues] will be readily overcome. I don’t think this is going to be a significant deterrent going forward.

“There is a very clear indication from the South African government that we need 19GW online pretty soon, so I think that will overcome teething problems.” 

Project developers will be hoping so, too. But the next few weeks will be critical.