Proposed IPP re-negotiations will threaten energy investments

The recent stance by public enterprises minister Pravin Gordhan, as reported in Business Day, to renegotiate contracts with companies that won the first two rounds of the Renewable Energy Procurement Programme (REIPPPP) will not afford South Africa the opportunity to create value, especially in terms of job creation.

Eskom’s load shedding costs South Africa’s economy some R5-billion daily. A renegotiation of electricity tariffs with renewable energy IPPs is the last thing we need in this current crisis, given the urgent need to stabilise power supply to our economy.

Renewable energy is already cost-effective. In fact, global prices continue to drop with the average price for solar and wind technology now at about six and 10 US cent per KWh respectively. When the first two rounds of REIPPPP were initiated, prices for  solar and wind generation were R3,84 and R 1,67/KWh respectively and, by round 4, prices had fallen to 0,96/KWh for solar and 0,76/KWh for wind. Technologies like solar PV offer even more benefits: solar’s levelised cost of electricity production is about half those of traditional energy sources. Its generation even outstrips other renewable energy sources like solar CSP.

South Africa needs a sustained price decline in electricity tariffs, particularly through the procurement of efficient renewable energy technology, to attract much-needed foreign direct investment and stimulate job creation.

Reports published recently by the Department of Energy’s IPP office show that the REIPPPP initiative has so far attracted over R201,8-billion worth of investments in South Africa. This is mainly because investors see the programme as more than just a tariff generation exercise. Over R 20,6-billion has been invested in socio-economic spend and local content. Manufacturing and procurement amount to R42-billion whereas enterprise development spend is around R6,4-billion.

These are indicators of serious commitment from renewable energy IPPs and investors. Destabilising investor confidence through sudden unplanned tariff renegotiations may therefore prove to be costly to South Africa’s economic growth prospects.

While government departments like the Department of Energy have thrown their weight behind renewables, there needs to be consistency and policy certainty from all arms of government to boost growth in our economy. A simple, blanket tariff renegotiation stands as a contradiction South Africa cannot afford.

The South African Photovoltaic Industry Association (SAPVIA) has offered alternatives to government before to avoid denting investor confidence. These included extending power purchase agreements which are currently up for “renegotiation” from ten to 30 years. This will incur less volatility and uncertainty as tariffs will be lowered over time.

In the long-run however, the only way to sustain lower electricity tariff prices is to consistently procure low-cost solar and wind power through a well-managed procurement programme.

If government proceeds with its renegotiations, there must be due consideration of risks and investments already made by old IPPs who saw the potential South Africa had to transition towards a green, viable economy that would put us on par with the rest of the world.

Contact Stephen Motseki, SAPVIA, Tel 021 200-5856, communications@sapvia.co.za

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