While South Africa’s energy security has been up in the air since the power crisis of late 2007 and early 2008, renewable energy will soon have its day in the sun. After next month’s key deadline in government’s bidding process for independent power producers, South Africans will have a better idea which way the wind is blowing.

First financial close in the renewable energy independent power producers (REIPP) procurement programme is due on 19 June, and is a milestone worth watching, say Happy Masondo and Richard Roothman, directors at Werksmans Attorneys.

“The June deadline is significant because every South African wants to know about the security of our power supply,” says Masondo. “The preferred bidders will be making concrete financial commitments to build real power generation facilities that will actually produce power for sale to Eskom. Independent power production has been in the pipeline for more than seven years and is finally at the point of becoming a practical reality.”

Her colleague Richard Roothman agrees. “To be ready for 19 June, all the funding documents and underlying contracts must be finalised and signed. This entails all agreements with senior funders, mezzanine funders and BEE partners.  The bidders must literally be in a position to go to the banks and other funding partners and draw the funds to start construction.”

Renewable energy boost

The financial commitments that the bidders are being asked to make should result in the first large-scale generation of energy from renewable sources, mainly wind and photovoltaic solar. “It is important for us as South Africans to know that a certain portion of our power will be made up of renewable energy in the not-too-distant future,” says Masondo.

The 19 June deadline for financial close is the first of five such deadlines in the REIPP programme, and is linked specifically to the first bidding ‘window’ of the REIPP procurement programme.

Under the REIPP, government wants independent power producers to generate a total of 3 725 Megawatts of renewable energy for the period from 2010 to 2016 as set out in the Integrated Resource Plan 2010-2030. In December last year, it announced the selection of 28 preferred window 1 bidders to generate 1 415 MW.

These bidders must now finalise their funding and contractual agreements by 19 June.  In each case, this entails signing an implementation agreement with the Department of Energy, a power purchase agreement and connection agreement with Eskom and achieving financial close.

Roothman says a massive amount of work is being done behind the scenes as bidders race to finalise their funding documents and underlying contracts.

“Before they commit themselves, all funders must go through their internal credit committees to get approval,” he says. “For that to happen, they must be happy with all the bidders’ underlying documentation. This includes the engineering, procurement and construction contracts, shareholders agreements, operations and maintenance contracts, various performance bonds,  standby equity agreements and, of course, the funding agreements.”

So the bidders have their work cut out for them in the last few weeks before the deadline.

Pricing will be worth watching

“What will be interesting to see is the pricing that window 1 bidders submit,” says Masondo.

Although the bidders had to include prices per MW in their initial bids, the prices were all close to the ceiling of R2 850 per MW in respect of solar photovoltaic, for instance. At a subsequent meeting with the bidders, the Department of Energy made it clear that they needed to revisit their pricing to be more competitive.

Following the announcement of the next round of successful preferred bidders on 21 May 2012, the current average price is closer to R1550 per MW.

“As the programme progresses, we expect competition among potential bidders to become more and more intense,” Masondo says. “There will be more bidders vying for less, and their bids are likely to become increasingly robust and sophisticated.”

She says it will also be illuminating to see how Eskom deals with the new challenges presented by renewable energy generation.

“Many of the bidders have been involved in renewable energy projects elsewhere in the world and we know the technology works,” she says. “The project financing principles that apply to these projects are also not new and have been used before for infrastructure projects such as the 2010 World Cup stadia. This is not a leap into the unknown. What is unknown is how the renewable energy to be generated will be put into the grid and sold to you and me. At that point, all eyes will certainly be on Eskom.”