So what have financiers’ key motives been when selecting preferred bidders for CSP projects in these recent windows of South Africa’s Renewable Energy Independent Power Producer Procurement Programme (REIPPPP)?  

By Annabel Eaton

Competitiveness

Marc Immerman, director of Lereko Metier Sustainable Capital Fund, a private equity fund, provides the context for the REIPPPP. Lereko Metier is integral to the ACWA Power-led consortium for Bokpoort, a 50 MW project awarded in the second round of the REIPPPP.

Immerman says that the REIPPPP has become significantly more competitive across technologies as the windows have progressed. Window 3 saw aggressive price decreases across all the technologies: 

Table 1. Price decreases from REIPPPP Window 1 to Window 3 for Wind, PV and CSP technologies

Source: Based on data extracted from South Africa’s Renewable Energy IPP Procurement Program: Success Factors and Lessons report. 

Note: ZAR/USD conversions calculated at date agreements were signed in each window.

Immerman explains that the REIPPPP price decreases coupled with the pressures faced by Eskom in relation to the grid connection challenges will ensure that the most competitive projects will have definitive advantages in future rounds. Equity returns are always important.

Support for CSP technology

Commenting on reasons for supporting CSP technology over other renewable energy (RE) technologies, Immerman says that while CSP is still relatively expensive when compared to solar PV and wind, a major benefit CSP offers is its storage capacity. “In South Africa the key challenge is peak demand which occurs in the morning and evening. The dispatchable nature of CSP offers significant value as it effectively provides South Africa with a more manageable dispatch profile.”

Xina Solar One will have a storage capability of five hours, Ilanga I and Kathu CSP will be able to store energy for four and a half hours and Redstone CSP Project for 12 hours.

“I believe CSP offers a better bid success ratio compared to the other technology types,” Immerman continues. Success ratio refers to the number of bids received versus the number accepted.

“Based on round three I would estimate the PV success ratio to be 10% to 15% and wind 20% to 25%. CSP had a 100% success rate up until the third round, and in Window 3.5 three bids were received of which two were successful.”

Immerman adds that given the track record of CSP plants he would expect a relatively longer useful plant operating life from CSP and, as a result, a larger terminal value. Terminal value is the value of a project's expected cash flow beyond the forecast horizon.

Pricing is the main evaluation criteria when selecting preferred bidders, and it has a 70% evaluation weighting. Non-price evaluation criteria, which carry a 30% weighting and include issues such as localisation, black economic empowerment, preferential procurement and community development, are also vital. Commenting on this Immerman says that the levels of local content being achieved for CSP are impressive, especially when considering the scale of the projects.

Criteria when selecting preferred CSP bidders

What are the key criteria financiers look for when examining potential CSP projects and selecting preferred CSP bidders? Some of the key aspects are outlined by Nicolas Tucker, senior specialist at Investec Specialist Bank and Asset Manager, which has made considerable investments in the REIPPPP, and Javier Relancio, project manager at the renewable energy technologies division of Mott MacDonald. Mott MacDonald, engineering and development consultancy, has to date supported five out of the seven CSP projects awarded under the REIPPPP.

The following criteria are reviewed:

- The type of technology used, its overall project design and key components is one of the criteria reviewed. Financiers look for proven technology. Some of the aspects examined is how long the technology has been in operation, how many operational sites there are, what the largest operational plant is and what the performance has been to date. CSP technology is very specific and constantly evolving when compared with other RE technologies, such as photovoltaic, and lenders generally require more scrutiny for CSP projects than other RE projects.

- Project participants’ capability and track record, and the quality of sponsors and shareholders.

- Who the engineering, procurement and construction (EPC) and Operations and Maintenance (O&M) contractors are.

- The Power Purchase Agreement (PPA) and Grid Connection Agreements.

- Location and solar resource.

- Compliance with the Department of Energy (DoE)’s non-price stipulations for localisation, percentage of local equipment, and Black Economic Empowerment etc.

- Environmental requirements and approvals.

However Relancio states there is no absolute basis on which the financial viability of each CSP project is assessed, and each project is looked at individually.

Why choosing an experienced EPC improves financing possibilities

In addition to the criteria mentioned, what should CSP developers focus on to improve their chances of obtaining funds in the next bidding rounds?

Immerman emphasises that a bankable and experienced EPC consortium is vital, and that this is more challenging than it sounds. Bids must be financially sound in structure. Developers should also ensure that all regulatory licenses are in place. Finally, grid connection needs to be carried out at a reasonable price.

Capital investment

The capital investment for the CSP projects awarded in Window 3 and 3.5 range between $500 to $1200 million each. Does the fact that CSP is capital intensive make any difference to the criteria financiers look for?

“Not entirely,” says Tucker. “Banks select a project according to its feasibility and how robust its cash flow is. High capital expenditure (CAPEX) projects can potentially create funding constraints. These projects are then in most cases financed by a number of financiers, usually more than three banks.”

Relancio comments: “CSP projects typically have larger budget requirements than the average RE project. This often leads lenders or financiers to join forces to fund CSP projects. As different lenders may have different areas of focus or sensitivity, we find that this introduces an additional scrutiny requirement from technical and other advisors.”

Conclusion

To date seven CSP projects have been awarded in South Africa’s transition to RE sources, and it is expected that CSP technology will continue to evolve and mature. The DoE is in the process of reviewing Window 5 and an announcement will be made once Window 4 is finalised and the names of the preferred bidders released. CSP Today will be following and communicating any developments regarding CSP allocation in the fifth round of the REIPPPP.