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Big development-finance backing for R40bn coal IPP programme

10th October 2016

By: Terence Creamer

Creamer Media Editor

  

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Energy Minister Tina Joemat-Pettersson confirmed on Monday that the 557.3 MW Thabametsi and the 306 MW Khanyisa coal-fired power station projects have been selected as preferred bidders following the first bid window of South Africa’s Coal Baseload Independent Power Producer Procurement Programme (CBIPPPP).

The projects have a combined investment value of R40.2-billion, with the Khanyisa project, located in Mpumalanga, expected to enter into commercial operation in December 2020, followed later by Thabametsi, which is situated in Limpopo.

The much-delayed coal announcement comes soon after the release of a project information memorandum for a proposed liquefied natural gas independent power producer (IPP) procurement programme and, thus, helps reaffirm government’s stated policy of integrating private generators into an electricity mix still dominated by State-owned electricity utility Eskom.

The policy has come under intense scrutiny in recent months after Eskom expressed a reluctance to sign new power purchase agreements (PPAs) with IPPs, until it received guidance from the Department of Energy (DoE) on the future of IPP programmes. Eskom has argued that its more stable operating position has resulted in surplus capacity and it has also questioned the costs associated with the IPP programmes, in particular the renewable energy programme.

Both Thabametsi and Khanyisa have been bid at prices below the R820/MWh cap set by government in the request for proposals (RFP), released in December 2014. The prices bid by the two projects are R797/MWh and R809/MWh respectively.

However, the final PPA prices will be fixed only at financial close, which the DoE is targeting to achieve by April. The prevailing exchange rate on the date of signature, as well as the final grid connection budget quotes will be key to determining the settlement price for the PPAs. The tariff payable by the buyer, or Eskom, will be fixed for the duration of the PPA and will escalate only at the consumer price index for all components other than the fuel-charge rate, which will be determined with reference to a basket of indices.

The risks of capital-cost overruns or delays during construction, as well as operating cost overruns, including for coal, limestone and water, all reside with the project owners.

Thabametsi and Khanyisa were the only two projects to participate in the first bid window that closed on November 2, 2015, with a second bid window to follow at a later stage for the balance of the 2 500 MW allocated to the CBIPPPP through a Ministerial determination.

Joemat-Pettersson said the projects had been reviewed and evaluated by government’s IPP Office and had met the “stringent requirements” of the first bid-submission phase, where a capacity allocation of 1 000 MW was made available.

A key requirement was for a minimum South African entity participation of 51%, including black ownership of 30%. The projects both met the criteria, notwithstanding the leading role being played by foreign energy companies in the development consortiums.

Marubeni, of Japan, holds 24.5% of the Thabametsi project and is leading its development. However, the consortium also includes Kepco (24.5%), of South Korea, Royal Bafokeng Holdings, KDI, Tirasano and the Public Investment Corporation (PIC).

The Khanyisa project, meanwhile is led by a consortium led by ACWA Power, of Saudi Arabia, and also includes Thebe Investments, Pele Natural Energy, Mazi Capital and Palace Group.

The Development Bank of Southern Africa (DBSA) and the PIC have committed to providing funding of R1.2-billion and R575-million, respectively, to the broad-based black economic–empowerment (BBBEE) equity members in Thabametsi, in which the PIC also has direct equity exposure of R1.3-billion.

The Industrial Development Corporation (IDC) has committed to providing R1.2-billion to the BBBEE equity members of the Khanyisa project. In total the DBSA, IDC and PIC exposure to the two projects is R10.2-billion, which represents 25.3% of the total project cost.

MILESTONE ANNOUNCEMENT

Marubeni Middle East and Africa Power director Kazuaki Shibuya expressed enthusiasm about the fact that Thabametsi had been named as a preferred project and said he was confident that the development would reach financial close.

“We see South Africa and Africa as important new markets,” Shibuya told Engineering News Online, reporting that it was also close to achieving financial close on the 300 MW Marupule 5 and 6 project, in Botswana.

Marubeni Middle East and Africa Power VP Yousuf Haffejee added that the project was also associated with the development of a new Exxaro coal mine in Limpopo, which would increase employment in the area.

In addition, the company would consider a bid during the second CBIPPPP bid window given that its site had secured environmental approvals for 1 200 MW. However, Haffejee expects the second bid window to include stipulations for cleaner-coal technologies.

The projects will incorporate proven technology, but not the latest-generation solutions – Thabametsi is a mouth-of-mine project, while Khanyisa will produce electricity from discard coal.

Joemat-Pettersson said the RFP for the second bid window was being reviewed to give consideration to the inclusion of “clean-coal technologies”.

She also reaffirmed South Africa’s commitment to a lower-carbon electricity mix, which would result in an increase in the contribution of renewable energy, from 0% in 2010 to 21% over the 20-year planning horizon to 2030. "Our Renewal Energy Independent Power Producer Procurement Programme is effecting this commitment. As at the end of June 2016, 6 376 MW of electricity capacity has been procured from 102 renewable-energy IPPs in six bid rounds. Of this, 2 200 MW of electrical generation capacity, from 44 IPP projects, has been connected to the national grid."

ACWA Power said the Khanyisa project would be the first South African power plant to feature circulating fluidised-bed technology, making use of the discard coal abundantly available as waste piles in the nearby Anglo American collieries.

ACWA Power president and CEO Paddy Padmanathan said the investment reconfirmed the company’s commitment to increasing its investment in South Africa's power sector. “ACWA Power has been fortunate to participate in both the Renewable Energy IPP and the coal base-load IPP programmes both of which are well structured and professionally managed, providing us confidence to invest for the long term in the South African energy sector,” Padmanathan said.

Khanyisa consortium member Pele Natural Energy, described the Minister’s coal announcement as “very positive”.

Pele Natural Energy’s Obakeng Moloabi told Engineering News Online that the priority was to progress the Khanyisa project to financial close, with the finalisation of the funding and the securing of budget quotes from Eskom viewed as important future milestones.

He also described it as a “positive signal” of government's commitment not only to the IPP programmes, but also to broadening private participation in the electricity sector beyond renewable energy.

Edited by Creamer Media Reporter

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