The risks and rewards of renewable energy projects

Dubbed the most attractive emerging investment destination for solar photovoltaic (PV) capacity, South Africa has seen a number of renewable energy projects going operational and start contributing meaningfully to the power grid operated by Eskom.

According to David Dyer, divisional executive for consumer products and renewable energy at Marsh Africa, about four years ago, the Department of Energy announced a Renewable Energy IPP bidding programme with an allocation of about 3725MW of power in five different rounds, with a split between solar PV (1450MW), wind (1850MW), concentrated solar power (CSP), hydra, landfill gas, biomass and biogas making up the balance.

“Government issued 28 project licenses (1 416MW) in Round 1, most of which have now been connected to the grid, involving mainly wind and solar PV projects in the Eastern, Western and Northern Cape provinces”, he says.

A further 19 projects were awarded licences in Round 2 (1 044MW) some of which are still under construction. This has been followed by 17 Round 3 projects (1 456MW) that are in the process of reaching Financial Close before construction of these projects can start.

Another 2 concentrated solar projects (200MW) were given preferred bidder status in what became known as Round 3,5 in mid-December 2014, and the Industry is awaiting the announcement by the Department of Energy, of preferred bidders, in Round 4.

“It is quite a lengthy process, but once a project has been selected as a preferred bidder and reaches financial close, construction can start and within nine months to three years, depending on the nature of the project, will reach commercial operation date, which is much quicker than the time it takes to build a new coal or nuclear power station.”

However, the risks involved in erecting such a renewable energy plant can be wide-ranging, from engineering and construction risks, to the logistics of getting massive equipment moved from the harbour or factory, to its final destination. The use of experienced local contractors and insurers with an in depth knowledge and understanding of local conditions, translates into a significant differentiator, says Dyer.

Initially most of the equipment had to be imported from overseas because we didn’t have any manufacturers in South Africa. This has, to some extent changed, particularly with Solar PV projects where several manufacturing facilities of solar panels have now been established. Whilst there is still no turbine manufacturer in South Africa, the towers for wind turbines can now be manufactured locally, and much of the electrical reticulation equipment is also supplied locally which is helping developers meet the stringent local content requirements laid down by government.

“The marine risk involves heavy equipment being transported by sea on board vessels and then by road to site, often on secondary roads, where accessibility can sometimes be a big challenge, particularly as some of the sites are located in rural areas”, Dyer explains.

During the construction phase, the risk of fire, flood and lightning damage are very real and there have been instances of damage being caused to blades, nacelles and other heavy equipment whilst in the process of being erected on site. From a security point of view, there must be adequate safekeeping on site to protect valuable equipment and cabling from being stolen.
“Once the project is completed, and has been properly commissioned, there are operational threats that need to be considered as well”, Dyer points out.

Dyer explains that because most of these projects are financed, the Lenders require a robust insurance programme to be put in place to protect not only their interests, but the interests of stakeholders in the project, in the event that something goes wrong throughout any stage of the project.

He says, however, that there is now much pressure on developers to be competitive, and whilst the cost of building these projects has reduced, so has the price paid by Eskom for the power being produced. The price paid for the power, is however, governed by Power Purchase Agreements signed between Eskom and the project developers.

Consequently, we are now seeing clients expanding their activities into Africa where there are many other opportunities as well.