RESOLVING THE IPP PROCUREMENT IMPASSE. Portfolio Committee on Energy 20 June 2017

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2 RESOLVING THE IPP PROCUREMENT IMPASSE Prtfli Cmmittee n Energy 20 June

3 Cntent 1. Plicy and Planning Cntext 2. Summary: Reasns Advanced by Cunterparts fr Nt Signing a) Eskm Summary 3. Prgress t Reslving Impasse 4. Next Steps and Timelines APPENDIX REIPPP Achievements 3

4 POLICY AND PLANNING CONTEXT OF IPP PROGRAMMES 4

5 Plicy and Planning Cntext The White Paper n the Energy Plicy f the Republic f Suth Africa (1998) cmmits t implement varius electricity market refrms, including: Encuraging private sectr participatin in the industry Independent Pwer Prducer Prcurement Prgramme (IPPPP) Encuragement f cmpetitin and the restructuring f Eskm Permitting pen, nn-discriminatry access t the transmissin system Electricity Regulatin Act, 4 f 2006 (ERA) frmalised White Paper t inter alia prvide fr: Minister f Energy t determine that new generatin capacity is needed, require private sectr participatin (IPPs) and that the electricity must be purchased by such a designated buyer (Eskm) Nn-discriminatry access t the transmissin and distributin pwer systems t third parties (sectin 21(3)), thereby enabling private sectr participatin in electricity generatin. 5

6 Plicy and Planning Cntext Implementatin received cncerted impetus with extreme security f supply cnstraints and cnsequential lad shedding in 2008/9 - Severe Eskm financial cnstraints due t its new build Medupi and Kusile prjects Inter-Ministerial Cmmittee (IMC) n Energy established in December 2009 t address electricity supply cnstraints IMC tasked a special Wrking Grup (cmprised f natinal departments f gvernment and public entities, i.e. DE, NT, Department f Public Enterprises (DPE), Eskm and NERSA) t identify the blckages preventing private sectr investment in the electricity generatin market, remve the blckages and enable private sectr investment It was recgnised by IMC that Eskm wuld be cnflicted acting as bth an energy prvider as well as the prcurer f IPPs thus, Department f Energy designated as prcurer and Eskm as buyer Integrated Resurce Plan (IRP) prmulgated in subsequent new generatin capacity determinatins have been infrmed by the MW allcatin and cmmissining dates per technlgy type 6

7 Plicy and Planning Cntext Suth African gvernment, business, labur and civil sciety entered int the Green Ecnmy Accrd in Nvember 2011 fllwed by participatin in the United Natins Climate Change Cnventin Cnference (COP17) in Durban amidst prgressive expectatins t reduce the cuntry s carbn emissins ftprint and increase the diversity f green energy mix First determinatin fr new generatin capacity under Sec34 f the Electricity Regulatin Act by the Minister f Energy, in cncurrence with the Natinal Energy Regulatr f Suth Africa (NERSA) was issued in August 2011 initiating the Renewable Independent Pwer Prducers Prcurement Prgramme (REIPPPP) 7

8 Plicy and Planning Cntext The IPPPP has and cntinues t cntribute directly t FIVE f the nine-pint plan initiatives: Reslving the energy challenge - The energy challenge remains a key cnsideratin as the draft IRP prjects a supply shrtage by 2023 IPPPP is a direct cntributr t new private sectr funded generatin capacity brught n-line timely, within budget and at predictable prices; REIPPPP already prcured 6376 MW in less than 5 years f which 3162 MW is already nline Cal-fired IPP prcurement prgramme prcured 2 cal-fired IPP prjects f 864 MW Mre effective implementatin f a higher impact Industrial Plicy Actin Plan: Thrugh lcal cntent spend f R35.5bn t date, REIPPPP has attracted new investment in lcal manufacturing, fr example slar 8 PV panels and wind twers

9 THE ROLE OF IPPs 9

10 What is an IPP? A cmpany (cnsrtium) wned by: Black Industrialists (increasing sharehlding with prjects t be signed having an average f 40% sharehlding) Other Suth African sharehlders (including institutins such as the PIC) Cmmunity Trusts representing the lcal cmmunities where the prjects are lcated Freign sharehlders bringing freign direct investment (FDI) that imprves the cuntry s balance f payments as well as expertise 10

11 The rle f IPPs The draft IRP currently in prcess f finalizatin is clear abut the requirement fr new generatin capacity frm IPPs can play an imprtant part in prviding the new capacity within the current cnstraints experienced by Eskm and the Fiscus as IPPs: Prvides ALL the funds (private sectr balance sheet) fr the cnstructin and peratin f the pwer plant thrugh debt (mstly) and equity Bears ALL the cnstructin and site risks f the prject any delays r cst verruns are fr the accunt f the IPP and nt recverable Cmmits t a specified date t start generating pwer and is penalised if late Manages at wn risk the peratin f the pwer plant fr a perid f 20 years (r mre) and ALL cst verruns (fr example increased maintenance cst) are fr the accunt f the IPP and nt recverable Only starts recvering its investment when the pwer plant starts prducing pwer and the cnsumer nly pays fr energy generated Charges pre-determined and predictable prices price adjustments CPI linked Bears ALL the risk f reduced revenues when the pwer plant is nt peratinal r prduces less pwer Cmmits upfrnt t achieving targets in respect f jb creatin, ecnmic develpment (enterprise develpment and preferential prcurement) and sci-ecnmic upliftment 11

12 The rle f IPPs/ Ctd. Gvernment s expsure which is nly t hnur Eskm s payment bligatins will nly be triggered in the event that Eskm cannt meet its bligatins as a cnsequence f Eskm s failure t recver its csts thrugh the regulatry cst pass-thrugh mechanism under the Electricity Regulatin Act, 2006 Gvernment is in cntrl f any exprpriatin r natinalisatin event and in such case will receive an asset in lieu f the payment f cmpensatin 12

13 Prjects ready t be signed at 11 April 2017 Large REIPPPP Bid windw 3.5 Large REIPPPP Bid windw 4 Small REIPPPP Bid Windw 1 TOTAL N f prjects 1 Prject 12 Prjects 6 Prjects 19 Prjects Lcatin Nrthern Cape Nrthern Cape (8) Eastern Cape (2) Western Cape (1) Mpumalanga (1) Nrthern Cape (3) Western Cape (2) Mpumalanga (1) Nrthern Cape 12 Western Cape 3 Eastern Cape 2 Mpumalanga 1 Ttal MW 100 MW MW 29 MW MW Ttal Prject cst BBEEE sharehlding (Ave) Enterprise Develpment Cntributins Sci-Ecnmic Develpment Cntributins ZAR 8.8 billin ZAR 21.8 billin ZAR 1 billin ZAR 31.6 billin 19.7% 33% 28% ZAR24.6 millin ZAR593 millin ZAR22 millin ZAR millin 542 millin ZAR2.3 billin ZAR 151 millin ZAR billin 13

14 PROGRESS TO RESOLVING IMPASSE 14

15 Eskm Psitin: Summary Since June 2016 Eskm has cmmunicated, bth publicly and in direct crrespndence t the Minister f Energy, its reluctance t cntinue its participatin in the REIPPPP - thrugh varius crrespndences and thrugh media statements Eskm claims that: REIPPPP prjects resulted in a higher cst t Eskm than it culd recver thrugh tariffs paid by its custmers and thus had an adverse impact n its balance sheet. The REIPPPP wuld cst the Suth African cnsumer mre than wuld therwise be charged fr electricity, adding 4.9% t tariffs The REIPPPP is nt needed as there is an versupply f electricity and lwer demand as a result f lw GDP grwth Shutting dwn f 5 cal-fired pwer statins is as a cnsequence f the renewable IPPs In January 2017 Eskm verbally indicated willingness t nly sign the agreements pertaining t Prjects whse price, in nminal 2016 terms, is equal t r less than 77c/kWh. It has subsequently indicated that the price fr Bid Windws 3.5 and 4 must be negtiated Eskm ntified the Ministers f Finance, Public Enterprises and Energy f its call n the Gvernment Supprt Framewrk Agreement (GSFA) fr Direct Eskm Financial Supprt as an effective measure t meet its payment bligatins under S34 IPP PPAs as they becme due and payable 15

16 Summary f Discussins t Reslve Impasse DPE/DPE/Eskm and IPP Office have engaged in rder t narrw the gap between the varius psitins Insfar as vercapacity cncerns, there is cnsensus regarding hw t address the issue Medium term utlk fr perid up t 2021 IRP Update fr perid beynd 2022 Insfar as financial impact n Eskm, a prcess has been initiated as utlined belw 16

17 Risks t Gvernment if n reslutin Gvernment expsure t litigatin risks due t the current pending prcurement. Gvernment expsure in terms f increased cntingent liabilities if Eskm defaults. Ptential svereign dwngrade. Cmmitment by Gvernment t Climate Change. Lack f clarity regarding the prgress f the prgram is creating uncertainty in the Market negatively affecting investr cnfidence. 17

18 18 NEXT STEP AND TIMELINES

19 Interventin t achieve Signing Brbet Judgment (a successful challenge by sme electricity cnsumers in the High Curt that delayed the reslutin f the RCA in 2017) has since been appealed by NERSA and Eskm, thus enabling the tabling f the RCA again. Team cmprising Natinal Treasury, Departments f Energy and Public Enterprises, IPP Office and Eskm has prgressed as fllws: Eskm t prceed with RCA applicatin Eskm t apprach NERSA regarding Eskm hardship DPE/DE/NT t develp the case fr Eskm sft supprt until tariff adjustment in 2018 DE t cnclude the update f the Integrated Resurce Plan (IRP), s as t define the pace and scale f new generatin capacity frm 2021 nwards DE/IPP Office t review the pace and scale f rllut under the circumstances f Eskm hardship and vercapacity up t 2021 Team t review the level f participatin by Black Industrialists and t increase it In the medium term the Team t cnsider brader IPP plicy issues including: Imprving the impact f IPP prgramme in relatin t gvernment bjectives (e.g. lwering the electricity price path, reducing the adverse impact n Eskm balance sheet, electricity market structure, cntributin t energy mix, Black Ecnmic Empwerment, jbs cntributin and clsure f cal mines etc.) 19

20 Steps and Timelines Interventin By When 1 Prceed with tariff and RCA applicatin Eskm May Apprach NERSA regarding Eskm hardship Eskm supprted by DE/DPE/NT July Develp the case fr Eskm sft supprt until tariff adjustment in 2018 and submit t NT, then t Eskm Bard Eskm supprted by DPE/DE/NT July Cnclude the update f the Integrated Resurce Plan (IRP), s as t define the pace and scale f new generatin capacity frm 2021 nwards DE Feb Review the pace and scale f rllut under the circumstances f Eskm hardship and vercapacity up t Review the level f participatin by Black Industrialists and develp strategy t increase it DE Aug 2017 DE Aug

21 THANK YOU

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