Driving north on the N10 past what once was elephant territory of the Eastern Cape, vervet monkeys forage alongside the road, monitor lizards sun themselves. Curiously, the further away you get from the windy city of Port Elizabeth – moving closer to the small town of Cookhouse – the more rapidly the steel blades on the windmills along the road spin.
It certainly is a good day to visit a wind farm, especially Africa’s largest wind farm, with an installed capacity of 138.6 megawatts. Up high on a hilly area of the farmlands known as Patryshoogte, where Merino sheep are bred for their award-winning wool, 66 gentle giants hum as the icy wind courses through the terrain.
These wind turbines, at 80m high, are almost as tall as a rugby field and each propeller is 44m long. The foundations alone required 60 to 70 cement trucks and 26 tonnes of steel each as they stretch two metres deep and up to 22m wide.
Independent power producers
Inside each turbine a computer reads information from a wind vane, which discerns the wind direction, and an anemometer, which measures the wind speed, and adjusts the blades accordingly to run perpendicular to the wind.
Each turbine can produce a maximum of 2.1 megawatts and should the wind be strong enough to turn the enormous propellers faster than 15 revolutions per minute – which would be a rare occurrence – the system automatically shuts itself down.
Cookhouse Wind Farm is one of the first independent power producers (IPPs) selected to produce power for the national grid as part of the department of energy’s Renewable Energy Independent Power Producer Procurement (REIPPP) programme, designed to contribute to a target of 3?725MW, which the minister has determined is required to ensure the continued and uninterrupted supply of electricity.
Eskom currently has an installed capacity of 41?900MW, Medupi will have one of 4?788MW, and the nuclear build is expected to bring double that at 9?600MW.
The competitive bidding programme was launched in August 2011; Cookhouse was selected as a preferred bidder in the first round. The procurement programme opened the fourth bidding window in mid-2014.
The robust winds have caused Cookhouse to feed a full 110 gigawatts to date into the national electricity grid through the nearby Eskom substation (strangely named Poseidon, though it is located some 130km from the ocean).
The project is, however, yet to receive the full tariff as determined in the first bidding window – the power it supplies is still to reach full grid code compliance.
“Reaching [that] code compliance has been a challenge for most of the first round renewable projects,” says Cookhouse chief executive Jannie Retief. “We had to make a number of significant changes.”
Until the project complies with the rules, it cannot reach full commercial operation and cannot receive the full tariff for the energy it produces.
As determined in the first bidding window, the tariff ceiling for wind bids in the REIPPP is R1.14 a kilowatt-hour, although it has come down dramatically in the two subsequent windows and was at 74 cents a kilowatt-hour in the third window.
According to a May 2014 report by the Public-Private Infrastructure Advisory Facility, “prices have dropped over the three bidding phases, with average solar photovoltaic tariffs decreasing by 68% and wind dropping by 42%, in nominal terms”.
Eskom says changes to the code had been approved by the National Energy Regulator of South Africa, and proposed through a process that the industry forms part of. Various challenges that IPPs have encountered relate to technology, and various developers have run into some challenges along the way.
Nonetheless bid round one and two have been successful: 26 and seven projects have been connected to the grid respectively, with a combined capacity of 1?670MW and 22 projects being in full operation and four being in early operation.
But in round three, pricing has become immensely competitive, while the cost of connecting to the grid has unexpectedly arisen as a prominent concern.
On a “perfect solar day” at the SlimSun Swartland Solar Park near Malmesbury in the Western Cape, the sun shines unhindered by clouds or haze, but the ambient temperature remains relatively cool. The solar photovoltaic (solar-PV) plant was one of the first, if not the first, independent power projects to be selected under the first round of the REIPPP, according to entrepreneur and developer Anthony Corin. It is also one of the smallest, according to Corin, whose farm is home to the 5MW array.
The solar project began life as a “naive” plan to help Eskom address the reliability of the local distribution network, Corin says.
The preparation on this pet project, which was done before a request for proposals under the REIPPP had even gone out, ultimately gave SlimSun a headstart in developing what would eventually become the array of solar panels that sit carefully fenced off on Corin’s farm.
But Corin believes that a project of SlimSun’s size and make-up is unlikely to be seen again as the second and third bidding rounds of the renewables programme have grown increasingly competitive and steadily consolidated around fewer and larger multinational companies.
“In the first round there were a multitude of developers and potential investors. They were chiefly local, small and many had joined forces to develop projects, reflecting, in part, what the department of energy had set out to achieve with the programme,” Corin says.
“Although this added complexity to the landscape, there was more scope for commercial banks and private equity investors. By the second round however – after the credibility of the programme had been well established – larger conglomerates got involved and the industry has consolidated quickly.”
As the tariffs being bid have rapidly reduced – to the extent that a difference of one cent can mean a project is taken “out of the game” entirely – the development risks have increased, says Corin, notably when it comes to the capital smaller developers need to raise to develop a renewables project with no guarantee that it will be selected to supply to the grid.
Larger corporates are now able to cut the costs through funding directly off their balance sheets and although some industry players applaud the resulting competitive pricing, others have concerns.
“We have a programme geared to get the best price of the system, not necessarily the best value,” says Davin Chown, chairperson of the South African Photovoltaic Industry Association. “People see these as the same thing, but they are not.”
Dhesen Moodley – an investment professional on the Ideas (Infrastructural, Developmental and Environmental Assets) Managed Fund at Old Mutual Investment Group, which provides equity funding for such projects – says tariff had dropped to become more competitive and so returns have also become “less robust”.
“In round three we saw some nontraditional financing structures, and more competitive financing, driving lower tariffs,” says Moodley.
“What has changed is that the financing of the projects has become more aggressive – if things go wrong there is less cash available, compared to round one and round two, to restructure the project – so the margin for error is much smaller.”
Moodley says Ideas had participated in round four on a limited basis and would consider participating in future rounds on a limited basis, unless the risk-adjusted return improves.
However, the department of energy’s deputy director general, Ompi Aphane, says the competitive nature of the programme is good for the country and electricity consumers. “It is not necessarily true that big companies are getting a competitive advantage, but projects with innovative funding structures are benefiting from the programme,” he says.
“Bigger companies with strong balance sheets can raise capital at competitive rates compared with smaller companies. However, the procurement rules require every project to have at least 40% South African participation.”
This, Aphane says, presents some opportunity for the small companies to partner with big foreign companies for the development of the project and thereby capitalise on their strength for purposes of raising capital at comparative rates.
He says the department is also implementing another programme targeting small projects with a maximum installed capacity of not more than 5MW, which provides an opportunity for small South African companies to participate. The department is working with developmental institutions to set up a fund for these.
“But there is also no point having [the] best price when you can’t connect,” says Chown.
Closure of projects
Grid access for projects under the REIPPP has hit the headlines recently as media reports have suggested Eskom’s inability to connect independent power producers to the grid has affected the (financial) closure of projects in the third round.
SlimSun has not been left unscathed by grid connectivity issues. Despite construction being complete, the plant is still unable to supply electricity to the grid. However, Corin believes this is no one’s fault, including Eskom’s, but that it is rather a “cumulative issue”.
Under the first round, the current distribution and transmission network could absorb projects with relative ease. But this spare capacity has filled up relatively quickly.
The importance of resource quality has also meant that solar projects have been concentrated in places such as the Northern Cape: here the solar irradiance levels are best, but it is not necessarily what suits the current load profile of the country, given that it is far from large metropolitan and industrially intensive areas.
This has created challenges for the utility, Corin says: it is now required to provide grid access in areas that would not have initially required additional transmission and distribution infrastructure; which, due to their distance from large centres, increase the difficulty of managing electricity losses through transmission.
As a result Eskom has become far more conservative in its estimation of the costs and timelines for providing grid access to IPPs, Corin says, noting that the utility has also warned renewable energy developers not to bid projects that rely on upstream works or future capital investment that cannot at this stage be guaranteed by Eskom.
As a result grid access, which in the early days of REIPPP was not a crucial factor in the success of a project, has become a key criteria. In SlimSun’s case it is waiting on the connection of a 66-kilovolt line to connect one local substation to another before it can begin to provide power to the grid and it is set to wait for between three to six months before it gets grid access, according to Corin.
“Generally from our point of view we think South Africa has a great success story, it’s one of the best programmes in the world. It’s an intense programme, competitive and well structured,” Chown says. But he notes that now grid infrastructure constraints – for them to meet financial closure – have become a problem for round three projects in particular.
The cost of connection has come as a surprise as Eskom’s initial cost-estimate letters have varied from subsequent budget quotes provided to preferred bidders by the utility. This could cause delays.
“There can be quite a big gap so it has a capacity to catch people off guard, it can throw off the financial model,” Chown says.
“It’s not a problem for all preferred bidders in round three, but in some instances it’s almost twice the amount of the cost estimate. We certainly think Eskom needs to involve the private sector and allow parties to do self-build or own build.”
Moodley says: “Grid-connection costs are not a factor preventing us from investing in further bidding windows … We expected at some point all the easy grid projects would be off the table – although we thought it would be closer to round five that we would see deep grid connection costs.
“The fact it has happened so quickly was a surprise.”
Eskom says connection costs, in general, have increased for bid round three projects as existing grid access capacity for IPPs is being taken up quickly, and viable projects were connected earlier in the process.
“As more successful bidders are being announced, subsequent projects become dependent on earlier projects, and also on other grid strengthening and refurbishment projects.
“This causes more project risk, and simple connections may become more expensive,” Eskom says, adding that it is in the process of engaging the energy department and the regulator to ensure that the process remains efficient, and that grid access capacity remains fair and transparent.
The utility says it and the IPPs agree on the most appropriate connection process, which may include the self-build option.
“In that process, which is now available for both the distribution network and transmission grid connections, Eskom and the bidder agree on the project scope and the respective accountabilities. Depending on the various project scope details, this ensures that an optimal solution is achieved at all times.”
Aphane says Eskom’s detailed studies on the preferred bidders in round four may increase or decrease the connection costs, with changes on the connection time lines.
“The department will continue to engage Eskom on this matter for better understanding of the challenges associated with grid connection.”
The utility says for all bid round three projects, and specifically for those where all the budget quote conditions have been met, “Eskom will make those connections available, and these are fully funded”.
Eskom says the raising of capital (through a support package issued by the treasury two weeks ago) will also be used for grid expansion and will assist all network customers, including the load customers.