Grand Renewable Plans Overly Ambitious
BMI View: South Africa's REIPP programme continues to attract private investment, with high-profile bidders securing contracts for renewable energy projects. However, the success of the five-round auction system is looking increasingly uncertain as a number of political, economic and sector specific risks are beginning to emerge and in turn threaten the renewables expansion plan. Until we start to see projects progressing down the constr uction cycle, and finally come online , we will maintain our cautionary outlook towards the sector.
The Renewable Energy Independent Power Producer Programme (REIPPP) was launched in August 2011 and established a bidding system for renewables projects, as well as outlining a roadmap for the renewables expansion. REIPPP calls for 3,725MW of green energy capacity - made up primarily from onshore wind, solar photovoltaics (PV) and concentrated solar power (CSP) - to be installed by 2016, and have recently added a target of an additional 3200MW to be added by 2020. The programme covers the procurement of projects in five different rounds subject to the availability of capacity, and has so far been met with a high level of interest from high-profile international green developers, including Enel, Tata Power and Vestas.
Two Down, Three To Go
The Depart ment of Energy received 53 bids before the first round submission deadline o f 4 November 2011, and 632MW of capacity was allocated. This constituted 18 solar PV projects, two CSP plants and eight wind farms - all supposedly to go online during 2014 and 2016, total ling an estimated US$5.4bn worth of investment. The second round of bidding took place in December 2011 , with 19 projects allocated, representing roughly 1,044MW of capacity , which are expected to be finalised - signing and effective date of Power Purchase Agreements ( PPAs) - in March 2013. According to South Africa's Department of Energy, the third round submission will be in May 2012. It is thought that over 4GW of capacity is left to bid for in the remaining auctions rounds, due to the government's recent announcement that it has upped the 2020 capacity target by 3.2GW.
|Technology||REIPP 2016 Target (MW)||1st Round Bidding, November 2011 (MW)||BMI 2016 Forecasts (MW)|
|Source: South Africa Department Of Energy, BMI|
|Solar PV||1,450||632||427 combined|
However, we question the REIPPP's feasibility, as evidenced from the table above, and instead we have adopted a bearish outlook for the capacity targets. In fact, we have downgraded our forecasts for both the solar and wind sectors, as a number of political, economic and sector-specific risks are beginning to materialise:
Both the original dates proposed by the government for the financial close of the projects for round one and two have been rescheduled, and delayed by at least three months. This has consequently delayed the construction phase of many projects, and decreases the likelihood of the first round projects going online by the given time frame of 2014- 2016 . The cause of the delays stem from issues of land permits (in particular ensuring that there are no mineral rights to the land proposed for renewables development) and the PPAs made with parastatal energy firm Eskom.
We believe that Eskom could emerge as the weak link in the REIPPP process. The company is heavily indebted and is looking to use consumers to foot the bill for its capacity expansion plans , for both renewables and conventional power projects. With unions so strong in South Africa, we expect to see a backlash against rising consumer electricity prices and projects may be thrown into jeopardy as financing becomes increasingly uncertain. That said, South Africa's renewables industry is receiving considerable support from t he Development Bank of Southern Africa (DBSA) , and in October 2012 the bank approved a loan of an roughly $US1.1bn for renewable energy projects.
We maintain our long-term view that the use of auctions for power projects presents some downside risks, as companies vie to offer the lower bid. Lower return margins may mean that projects remain vulnerable to complications that are likely to arise along the way.
South Africa's volatile political climate at present is spilling across many sectors and we note that policy continuity could be adversely affected. Sudden and unforeseen amendments to the REIPPP are likely to significantly rock investor confidence. Additionally, South Africa's track record for implementing power projects is poor, and although the government often ' talk big' plans seldom come to fruition.
|Bearish On Targets|
|South Africa Wind and Solar Capacity, and Growth, 2012f-2021f|
The risks mentioned above underpin our cautionary outlook for South Africa's renewables industry. We still expect relatively robust growth for the industry as a whole, especially as the sector is so underdeveloped at present - our forecasts for average annual growth are 18.3% and 19.7% for non-hydro renewables capacity and generation respectively, through 2012-2021. However, we expect installation rates for solar and wind projects to be far below the capacity targets outlined in the overly ambitious REIPPP. Until we see projects successfully coming online we will maintain our cautionary outlook.