South African Business 2017 edition

SPECIAL FEATURE
to have South African partners. These are often local
energy companies and representatives of residents.
Typically, a community trust is established to represent
the interest of the local community.
Among the international investors active in
the REIPPPP process are Enel Green Power (Italy),
Scatec Solar (Norway), Globeleq (UK), Mainstream
Renewable Power (Ireland), Gestamp Renewable
Energies and Abengoa (Spain), Solar Capital (subsidiary
of Phelan Energy Group Ireland), SunEdison
(USA), ACWA Power (Saudi Arabia), China Longyuan
Power Group (China), Engie (France), juwi Group
(Germany) and Tata Power of India. The lastnamed
company has teamed up with the energy
unit of Exxaro Resources to form a company
called Cennergi.
Partnerships with foreign utilities or power companies
are becoming more common as the REIPPPP
progresses, in part because the competition is bringing
down the price at which bidders are offering to
sell power. This makes it difficult for South African
firms to compete on their own.
Johannes Horstmann of Arup wrote in Engineering
News in April 2016 that prices have dropped significantly
in the course of the REIPPPP: he cites a 29%
cheaper tariff for solar PV in round three than the
round before (R786/MWh); and a 25% drop in wind
prices (to R619/MWh). This obviously sounds nice
for the consumer, but is it sustainable for investors?
Horstmann notes that the trend suggests that solar
PV prices could further decrease by 19% and wind
by 8% but these are likely to correct to rates closer
to 6% and 3%.
The other factor favouring foreign investors is the
fact that many of them have strong reserves of cash
and don't need to borrow money. The high price of
borrowing makes it difficult for South African firms
to compete independently.
The national utility, Eskom, is the only buyer of the
energy that private companies produce. Central to
the business plan of every private producer's bid is
the agreement with Eskom that it can sell what it produces,
at an agreed price. So there was understandable
consternation when senior Eskom executives
started questioning whether they would indeed
continue to buy power from independent producers.
Eskom's single shareholder, the South African
government, quickly assured the markets (through
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