Power sector: SA has bad rep

Cape Town - The repeated setbacks experienced by independent power producers in South Africa in their attempts to conclude electricity purchasing agreements with Eskom mean that South Africa has limited credibility among international investors in the power sector.
This note of caution comes from Paul Eardley-Taylor, Standard Bank's head of energy, utility companies and infrastructure.

This flawed credibility could negatively impact potential investors' appetites for renewable energy projects qualifying for import tariffs - until a proven transaction history is built up.

Examples of setbacks include the experience of London-listed Ipsa, which is still struggling to negotiate a power-purchase agreement with Eskom for a coal-fired power station in the Eastern Cape, the delays including power-purchase agreements with independent power producers (IPPs) in terms of Eskom's programme for wholesale power, and the inability of the developers of the Mmamabula coal-fired power station in Botswana to finalise a power-purchase agreement with Eskom.

At the Africa Energy Week Eardley-Taylor discussed the prospects for import tariffs for renewable energy, and said that uncertainty still existed over the procurement process, the number of megawatts of renewable energy required, the stipulations and conditions of the power-purchase agreements, and who should accept responsibility for the network connections.

Experience to date indicates these uncertainties are unlikely to be resolved this year, he reckons.

Import tariffs for renewable energy are by far the most popular method of promoting renewable energy. By 2007 46 countries already had import tariffs. It's a transparent system because the cost of renewable energy is clear - the level of the import tariffs, minus the ruling price of electricity.

current import tariff for wind energy is R1.24/kWh and Eskom's price is 33c/kWh, says Eardly-Taylor. Given Eskom?s capital requirements and if one accepts that electricity prices rise 25% a year, and will increasingly reflect true power-generation costs, by 2015 Eskom's price could already be R1.26/kWh.

If import tariffs rise at the current inflation rate, the gap between the tariffs will shrink every year, he reckons. Local renewable energy projects, Eardly-Taylor believes, derive benefit from the fact that, against a background of international funding deficits, they are small enough to be funded in rands by local banks which are not as exposed to the international risks.

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