Eskom’s shock decision not to enter into further power purchase agreements beyond the department of energy’s bid round 4.5 is in line with its earlier stance towards the renewable energy procurement programme and might impact investors, Ashburton Investments credit risk manager Corneleo Keevy said on Thursday.

Eskom spokesman Khulu Phasiwe confirmed to Moneyweb that the utility’s chair, Baldwin Ngubane, has written to energy minister Tina Joemat-Pettersson to ask for a meeting to discuss future power purchases from independent power producers (IPPs).

According to Phasiwe, Eskom’s issue is with procuring generation capacity from the private sector and is not limited to the renewable energy independent power producer procurement (REIPPP) programme. The projects Eskom would not at the moment commit to include the two independent coal power projects for which bids have been submitted, but not yet adjudicated.

Eskom’s decision comes against the background of a growing appreciation of the potential of renewable energy projects as an appropriate alternative investment vehicle for pension funds, with the ability to give consistent inflation-linked returns protected from the volatility of equity markets.

Keevy pointed to the benefits of the renewable energy procurement programme in increasing the country’s electricity supply and diversifying the sources, as well as attracting more than R194bn in investment — a significant portion of which is from abroad. The average tariffs at which the projects have been awarded have come down from R2,37/kWh in bid window 1 to 77c/kWh in bid window 4, he said.

“Despite these successes, there have been increasing reports of Eskom raising concerns around the REIPPP programme.”

Eskom CEO Brian Molefe has made it quite clear at different occasions that he considers renewable energy expensive and inefficient.

Keevy ascribes Eskom’s stance to the challenges it’s experienced in connecting renewable IPPs to the electricity network and the capital investment required in strengthening the network for this purpose.

Phasiwe, however, does not agree with this analysis. He says Eskom has been stabilised and is moving to a situation where it will have excess capacity. It wants government to reconsider procuring more generation capacity in light of a possible oversupply, he says.

Eskom’s enthusiasm for nuclear is, however, stronger than ever. Phasiwe says nuclear would be the appropriate base load technology to replace Eskom’s ageing coal fleet. Some of its older power stations will come to the end of their lives in about 10 years’ time.

Molefe increasingly mentions nuclear in the context of power exports to neighbouring countries and recently told Moneyweb: “You can never have enough power in Africa.”

Keevy says financial close of renewable projects is increasingly being delayed, mainly impacting bid window 4. The announcement of preferred bidders is being delayed and there is less financial flexibility in projects, as tariffs drop and additional costs are incurred to fund grid connection from bid window 4 and onwards.

This, he says, might impact returns on investment.

He says fund managers will face challenges in deploying funds as projects take longer to reach financial close, with the finalisation being uncertain. “Coupled with an average construction period of 1,8 years, it may result in significant timing delays between capital commitments and investments,” Keevy says.

The credit risk will increase, as projects are increasing gearing levels in an attempt to balance the lower tariffs with acceptable equity returns.

“These developments are to the detriment of lenders as we see increasing loan tenors, more aggressive capital structures and funding of less-conservative production forecasts.”

Ashburton nevertheless considers the exposure to independent renewable energy projects an attractive opportunity to achieve a risk-adjusted return in excess of government inflation-linked instruments, Keevy says.

The selection of the right projects is, however, key.

“Ashburton has a bias towards the inclusion of projects which are either operating or nearing the completion of the construction process, with the intention to include projects mainly from bid windows 1 to 3.5. These assets ensure that risk-adjusted returns are attractive and that the majority of funds can be deployed shortly after commitment,” Keevy says.

Ashburton’s investment in projects in earlier bid windows allows it to be selective when deciding about the inclusion of bid window 4 projects in its funds, “thereby ensuring the correct projects are selected whilst still offering investors attractive return on a gross yield and risk-adjusted return basis”, Keevy says.

He says Ashburton’s credit research team does an independent analysis of each project that is being considered, with the aim of understanding the technology and underlying risks relating to construction and operations.