Southern Africa’s conundrum: IPPs vs Power Utilities
> Timo Shihepo
WINDHOEK – Southern Africa has been battling power crisis in recent years and Independent Power Producers (IPPs) have been cited as the solution but lack of agreements with the region’s power utilities is hampering this breakthrough.
Due to the abundance sunshine averaging 300 days a year, the southern African region is perfectly placed to make solar IPPs major players in the energy sector. But it has however becoming apparent that IPPs are struggling to penetrate the region’s market. The difficulty is attributed to the fact that power utilities in the region play a gatekeepers role and IPPs cannot sell power directly to the end consumer. IPPs are compelled by law to enter into power purchase agreements with the utilities.
A power purchase agreement, or electricity power agreement, is a contract between two parties, one which generates electricity (the seller) and the other that is looking to purchase electricity (the buyer).
A few utilities in the region including Namibia’s NamPower have been accused of monopolising the electricity sector fearing that, should they allow too many IPPs they will not be generating as much revenues as they are currently making.
But these utilities have however been established by laws of their respective countries as a means to ensure that they provide power to their nations at cost to ensure that the poor majority have access to electricity at an affordable price.
Utilities are subsidised by their government for this reason and profit is not their primary objective. Governments fear that putting power generation and supply into the hands of the private sector could lead to the poor being excluded.
In the current setup utilities claim IPPs have failed to make significant progress in gaining access to the market because they are unwilling to take risks. In most cases IPPs claim to not have capital to fund projects and want to pass the risks associated with their energy generation projects onto the utilities.
In South Africa, for example, the country’s power utility Eskom has been on a suspended deadlock with IPPs for more than a decade, simply because the IPPs want to put a significant portion of the risks involved in their projects on Eskom. This includes an expectation, from IPPs, for Eskom to insure their power plants. The standoff persisted even when South Africa introduced a government-backed IPP programme.
This prompted Tina Joemat-Pettersson who was until last month the Energy Minister, to intervene and broker a deal between Eskom, National Energy Regulator of South Africa (Nersa) and the IPPs. Joemat-Pettersson’s intervention has led to Eskom and Nersa willing to consider applications should they be deemed financially suitable for Eskom.
As a result of the Joemat-Pettersson’s intervention, Eskom has since, January this year, connected 62 projects as part of the government-backed IPP programmes. These 62 projects have cumulatively added 4 200 MW of generation capacity to the grid. A further 620 MW is expected to be added to the grid in the 2017/2018 financial year as a result of the programme.
Likewise in Namibia, despite the Electricity Control Board (ECB) issuing more than 35 IPP licences, only four are operational. These are 4.5 MW Omburu, 5 MW Osona and two HopSol Africa projects each producing 5 MW. The majority of IPP licence holders failed to start generating electricity because efforts to conclude power purchase agreements with NamPower amounted to nothing.
“The whole process of getting an IPP license and the power purchase agreement is rather complex,” said Director of HopSol Africa, Robert Hopperdietzel. Hopperdietzel added that apart from the cumbersome IPP licence application process, the process of securing a power purchase agreement is equally lengthy and strenuous.
Hopperdietzel whose company also has power plants in Zambia, Zimbabwe and Mozambique added that it’s definitely a no-brainer that SADC doesn’t have a lot of solar IPPs when the region has one of the highest radiations, worldwide.
NamPower on the other hand says it welcomes IPPs in the country as long as they do not pass their risks onto NamPower. The IPPs’ demands and conditions for power purchase agreements are considered extreme by the utility. The Southern Times has learned that some have even put up conditions compelling NamPower to be responsible for rebuilding the IPP’s power plant should it be destroyed by disasters, natural or man-made. The power utility is reluctant to sign such agreements and instead is engaging government to come up with a solution.
In Zimbabwe, the power utility, Zesa has blasted the IPPs for not contributing to national domestic energy production, which has contributed to load shedding according to Zesa. The last investment in power generation in Zimbabwe was 30 years ago when the Hwange Power Station Stage II was commissioned.
The utility blames the situation of underinvestment in the sector because the country lacks concrete developmental plans, to attract financing. In response, the government is in the process of crafting an IPPs policy to tighten screws and force licence holders to implement approved projects.
Zambia is also still in the process of finding solutions to a structural approach in concluding power purchase agreements.
Solar Energy expert, Harald Schmidt said the answer for SADC to tap into the solar energy is simple, ‘decentralise’. He said as long as the electricity model is centralised the region will never achieve its solar energy potential. He added that for example only 34 percent of Namibians are connected to the national grid, making a case that should power generation be decentralised more Namibians will have access to electricity.
“The electricity system in Namibia is designed in a way that only a certain portion of people get to benefit from the money. There is no reason why each section of Windhoek doesn’t have its own power station. For example Pioneers Park can have its own station and in that way the money remains in the area where electricity is being produced. The international practice is that the renewable energy is centralised and until we don’t do that the majority of people won’t have electricity and costs will always be high,” he said.