A specter is haunting South Africa, renegotiation of PPAs signed between 2011 and 2012

As national utility Eskom faces a financial and operational crisis, rumors are spreading that the government may ask independent power producers to renegotiate the tariffs of PPAs awarded in the first two rounds of its renewable energy program. South African solar association SAPVIA has already given short shrift to the idea.

If media reports are borne out, the plan by Cyril Ramaphosa’s government to renegotiate solar power price tariffs could see the industry grind to a halt in South Africa.

Image: Scatec Solar

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With that tweet, the South African Photovoltaic Industry Association (SAPVIA) announced its verdict on the possibility Cyril Ramaphosa’s government could be planning to renegotiate PPA tariffs.

Rumors are circulating that the government wants to revise down energy prices associated with the 20-year PPAs awarded in the first two rounds of the national Renewable Energy Independent Power Producer Procurement Program (REIPPPP) for large-scale renewables projects, which were held between 2011 and 2012.

Local media have reported the proposal was mooted by public enterprises minister Pravin Gordhan. According to the Engineering News website, Gordhan said renegotiation of PPAs was necessary to “alleviate pressure on [national utility] Eskom and the electricity tariff.”

Tariff change unlikely

Although that report raised concerns among PV sector operators, Chris Ahlfeldt – an energy specialist at Blue Horizon Energy Consulting Services – told pv magazine he feels a renegotiation is unlikely. “Only the bid prices and commitments for some projects in Round 4 and 3.5 were renegotiated previously, but this was before the PPAs had been signed,” said the analyst.

Any attempted renegotiation with independent power producers, said Ahlfeldt, could have legal repercussions. “IPPs absorb a lot of risk during the bidding process and depend on reliable PPAs to be bankable,” he said. “IPP costs are a direct pass-through to consumers approved by the regulator, so it’s misleading for Eskom to blame IPPs for its financial trouble.”

Ahlfeldt said more than half of Eskom’s debt relates to the construction of two large coal plants, the Medupi and Kusile projects, which are over budget and delayed. “If Eskom wants to cut costs and improve efficiency then [it] should consider abandoning future construction and buy lower-cost renewable energy,” he added.

Solar power is getting cheaper

As the analyst pointed out, the South African government in April signed off all 27 outstanding PPAs that had been awarded in rounds 3.5 and 4 of the REIPPPP in 2015. Closure of the contracts had been held up by the financial travails of Eskom. Of those contracts, 12 were for large-scale solar plants with 813 MW of capacity selected in round 4 alone. The price for solar power in REIPPPP rounds decreased from ZAR3.65 ($0.25)/kWh in November 2011 to ZAR0.62 in November 2015.

To address the long-standing financial and operational crisis at Eskom – which has again resorted to load shedding to ensure power supply – the South African government recently announced plans to privatize the utility.

Retroactive tariff changes seen elsewhere in the world have only ever led to a complete halt of renewable energy markets, often for several years. That is a scenario energy-hungry South Africa cannot afford, especially now more, and cheaper, power generation capacity is needed.

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