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The South African government was scheduled to close on R50 billion ($6 billion) of financing for the first round of its renewable energy independent power project programme in June. Three months later and the 28 projects remain in limbo, with sponsors, lenders and advisers all uncertain when they will close. These participants are preparing for final approvals to sign by the end of September, but with no official announcements from the Department of Energy as Project Finance went to press, this estimate is still largely guesswork.

The sheer scale of the programme has been the source of many of its problems. The eight wind, two concentrating solar and 18 solar photovoltaic developments will have a combined capacity of 1,416MW. A government guarantee underpins the 25-year power purchase agreements, and all payments will go through a single buyer office, initially housed in state utility Eskom. The deals have debt equity splits of 70:30, loan tenors of 15 to 17 years and are priced between 200-400bp over the Johannesburg Interbank Rate. Local banks such as Standard Bank and Nedbank are covering much of the debt, due in part to the PPAs’ denomination in Rand, which foreign lenders often struggle to fund competitively.

The rules

The programme stipulates that all of the projects must have foreign investors, either as part of a consortium or as a minority stake in project companies principally owned by local firms or community groups. Foreign firms with renewable energy experience involved in the first round include SolarReserve, Scatec Solar, Globeleq, Soitec and Sumitomo Corporation. Vestas, Suzlon and Juwi are among the international technology providers to have signed engineering, procurement and construction contracts for projects.

Project companies were initially asked to submit bids based on renewable energy feed-in-tariff (REFIT) rates when the programme was first launched in 2007. A lack of interest caused the government to lower the REFIT prices, but then two years passed without Eskom signing a single power purchase agreement. REFIT was then replaced with a competitive bidding process, with a ceiling tariff rate for each technology, which saw the cost of energy significantly cut and the first 28 projects approved in December 2011.

The hurdles

Developers have been faced with a number of unexpected hurdles during the process of closing on the projects. Obtaining documents such as water permits and mineral rights was complicated by the government’s reluctance to comment on the environmental impact of each project before preferred bidders were confirmed. Davin Chown, director of Mainstream Renewable Power, co-sponsor of three of the projects, argued that “we needed parties such as the Department of Water to comment before we got to preferred bidder stage. We were asking sponsors to reach financial close in six months when under normal circumstances the process of issuing water-use licences typically takes up to 18 months.”

Several sponsors discovered land-use issues with their prospective sites only after having their bids accepted. In South Africa farming and mining is given preference over other uses for land, and a number of projects belatedly realised that their sites had potential mineral or arable value. This has not proved an insurmountable problem for any of the projects, with all land disputes apparently resolved amicably, but the requirement for state-level and national approval has further slowed the programme’s progress.

Helen Tregurtha is leading the Hopefield wind project for Umoya Energy and has been kept “very busy” over the last few months answering questions about permitting, although her development suffered no land-use conflicts. She says that the level of due diligence required by the programme is higher than she has ever seen before. For example, a lot of requirements that would typically be considered during the construction phase have now been brought forward to pre-financial close. “It’s like thinking you have won a marathon only to see the finish line move further and further away,” she comments.

“Everything is in place, with all the required approvals and authorisations signed off, but then there is more time and so the lawyers and advisers look again at all of the documents and ask more questions. All of these projects could have closed three months ago quite happily. But now more problems have been found, more due diligence has been conducted and more issues have come to light.”

The hassles

Complicating things further, the government has had to reconfirm tariffs with all of the projects in round one, after the 300-day deadline for holding bidders to their prices passed in August. Round one bidders received good initial tariffs because of a lack of competition in the South African market, and re-agreeing tariffs should be straightforward, but these additional delays are beginning to threaten the rest of the programme.

The South African government has committed to facilitating 3,625MW of new capacity from wind, solar, hydro-gas, biogas, biomass and landfill gas by 2016. The projects have been split into three separate rounds of development, each with its own competitive tendering stage. A major electricity crisis in 2007 led the government to commit to building 42.6GW of new generation capacity by 2030. South Africa has traditionally enjoyed cheap power prices, but rapid economic development has severely dented its energy reserve margin. A commitment to reduce carbon dioxide emissions to just 275 million tonnes per year by 2024 makes these renewable projects a small but vital part of the government’s wider energy strategy.

Eskom, along with its work on round one, is currently conducting due diligence on the 19 round two projects which were approved in May. Round two includes nine solar PV, seven wind, one solar CSP and two hydro developments, with an accumulative capacity of 1,044MW. Financial close for round two has been initially scheduled for 13 December 2012. Round three bids submissions are currently scheduled for 1 October 2012.

Chown argues that the extended deliberation of the first 28 projects should bode well for subsequent rounds. “The learning curve of round one should make the process much easier in round two and perhaps even easier still for round three,” he said. That is cold comfort for Tregurtha, however. With Umoya not involved in rounds two or three, and adviser and legal fees mounting, she says sponsors in a similar position are having “to pay for [the government’s] learning”.

Matt Ash is a director at Norton Rose’s South Africa office, which has been advising on 15 of the first round deals. He is worried that Eskom has become overloaded with documentation requests due to the delays to the process. “My sense is that we really need to get round one done this month or else the whole process may be compromised. Everyone is so concentrated on financial close for round one that it is a real challenge to get budget quotes from Eskom for round two and ver, very difficult to get cost estimate letters for round three,” Ash explains.

The deadlines

Sponsors on round three expected to receive estimate letters the week Project Finance went to press in order to get their projects proposals in front of banks’ credit committees well in advance of the 1 October deadline. Eskom has now pushed this back and said it will issue the letters at the latest by 15 September. Sources close to the programme claim that as many as 110 cost estimate letters are yet to be issued, and several sponsors that submitted applications as early as February are still waiting for a response.

An announcement by the Department of Energy on 13 July stated that the programme had been suspended “indefinitely”. It says much about the lack of effective communication from the government, however, that even after this statement was made, lenders and sponsors still believed that financial close could be achieved in a matter of weeks. The programme now hinges on the signing of government protocols that were previously due on 24 August. With that deadline now passed, all parties involved with the process await the government’s next official announcement.

Chown argues that the process should still be regarded as successful because of the rigour shown by all parties and the volume of work undertaken. He believes that all the projects will reach financial close, because it is “not in anybody’s interest that any of the deals fall over”. He added: “The auditor general has given an assessment saying that the process has been fair and run properly, and given the context of the South Africa market, that should create a great deal of investment confidence.”