IPP tariff ‘renegotiations’ will threaten green energy investments


The recent stance by Public Enterprises Minister Pravin Gordhan to ‘renegotiate’ contracts with companies that won the first two rounds of renewable energy procurement programme will stunt South Africa the opportunity to create value, especially on the job creation front.

R5 billion – this is what the current Eskom load shedding crisis is costing South Africa’s economy daily.  

The last thing needed in this current crisis is a “renegotiation” of electricity tariffs with renewable energy IPPs and green energy given the urgent need to stabilize the supply of power to the South African economy.

Renewable and green energy is already cost-effective, in fact, prices globally continue to drop with the global average price for solar and wind technology now sitting at around $0,06 cents and $0,10 cents per KWh respectively.

Locally, when the first two rounds of REIPPPP / green energy were initiated, prices of solar and wind were R3.84/ KWh and R 1.67/ KWH respectively. By round 4, prices had fallen to 0.96/KWh for solar and 0.76/KWh for wind.

Solar PV has proven to have even more distinct benefits, its levelised cost of electricity (LCOE) production is about half the price of traditional energy sources and even outstrips other green energy sources such as solar CSP.

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

Reports recently published by the Department of Energy’s IPP office show that the REIPPPP initiative has so far attracted over R201,8 billion of investments into South Africa.

This is mainly because the programme is seen as more than just a tariff generation exercise by investors.

Over R20,6 billion has been invested into socio-economic spend (SED); local content manufacturing and procurement spend amounts to R42 billion while enterprise development spend sits at around R6,4 billion.

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

While, government departments like the Department of Energy have put their weight behind renewables, there needs to be consistency and policy certainty from all arms of government to boost growth in the 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 the government before to avoid denting investor confidence, such as extending power purchase agreements that are currently up for ‘renegotiation’ from 10 years to 30 years. This will offer 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 from low cost solar and wind power through a well-managed procurement programme.

If government proceeds with the ‘renegotiations’, there must be due consideration of risks and investments already made by old IPPs which 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.

This article was originally published in a slightly different form by Mining Review Africa, a Clarion brand.