Construction on Eskom’s Sere wind farm in the Western Cape is well under way but its purported ability to produce electricity at a far cheaper price than independent power producers (IPPs) has raised questions about the repercussions for the fledgling renewables industry in South Africa.

Last month, the National Energy Regulator of South Africa (Nersa) granted a generation licence to Eskom to produce wind power from its Sere site, allowing construction to go ahead on the R2,4bn project, due to be in full commercial operation by the end of 2014. It is expected to generate up to 100MW for the national grid, which, in the greater scheme of things, is just 0,25% of Eskom’s total power generation capacity of 40GW.

Eskom, which recently expressed concern about its ability to fund its operations after it was denied a 16% tariff hike in February, has estimated it will be able to generate power from this site at an average 77c/kWh. This is significantly lower than the cost per kilowatt-hour that independent power producers have provided in windows one and two of the government’s renewable energy independent power producer procurement programme.

The programme will introduce some of 3 725MW of new generating capacity. Eskom has said its levelised cost (at which it is required to break even over the lifetime of the project) “compares favourably” with the R1,14/kWh in the first window and the 89,7c in the second. This is despite criticism by several independent power producers that the wind farm is inefficient.

But Kilian Hagemann, director of G7 renewable energies, said that, if afforded the same benefits as Eskom, independent power producers could generate electricity at a cost as low as 60c/kWh to 70c/kWh.

“The only way Eskom can get to such a low tariff with such low wind farm efficiency is through access to cheap finance, as Steve Lennon [Eskom group executive for sustainability] admits himself,” Hagemann said.

“Access to debt on attractive terms and very low interest rates is possible for Eskom since their debt is largely underwritten by national treasury. IPPs don’t have that luxury and have to source their debt from commercial banks at much higher interest rates without any third party underwriting the debt.”

The Sere project has been funded by a group of development finance institutions, including the World Bank, the African Development Bank, the Clean Technology Fund and Agence Française de Développement.

Although Eskom did not provide the Mail & Guardian with the cost of financing from these four institutions, in 2010 Eskom’s loan from the World Bank (which was intended to co-finance the coal-fired Medupi power station as well as Eskom’s solar and wind projects) was widely reported to be at an interest rate of 0,5% and described at the time as the “cheapest money” around.

Further funding was secured from the Clean Technology Fund, which is overseen by the World Bank, and reported to have an interest rate of 0,25%.

Eskom spokesman Hilary Joffe said the public enterprise had passed on the benefits of the lower cost of capital and that the granting of concessional funding was done by the lenders to encourage investment in clean energy sources, which was also expected to bolster broader regional development. Financiers of independent projects say their rates are also competitive precisely because of government support for renewable energy projects.

Mike Peo, Nedbank Capital’s head of infrastructure, energy and telecommunications, said that because of the level of government support, independent power producers were definitely getting a better rate and the deals were extremely competitive. “It is far cheaper than where there is no government support.”

Peo said Nedbank had underwritten 10 of the winning bids in round one of the renewable energy independent power producer procurement programme, valued at R4,5bn in direct investment and about R6bn indirect. In round two, it had underwritten five winning bids, with direct and indirect investment worth R9bn.

“On long-term deals, pricing is marginally higher than equivalent government long-term debt — probably 180 to 300 basis points,” Peo said. There was no standard price but, generally, a range of margins that were set to vary during the life of a project.

But Davin Chown, chairman of the South African Photovoltaic Industry Association, said it was not cost but rather value for money that the industry should focus on. He said independent power producers were the cheapest way to go.

Chown said one needed to consider other aspects such as water and carbon dioxide savings, the number of jobs created, the economic spin-offs for the area where projects were built and the de-risking of the South African economy.

In the case of independent power producers, the state covered only the cost of electricity and bore no risk as far as construction or budget overruns were concerned, Chown said. By default, more fuel available in the grid lowered the wholesale price of electricity substantially over the medium term and de-risked the economy, and in turn boosted gross domestic product (GDP).

The government’s debt-to-GDP ratio continues to raise the concern of international ratings agencies but some analysts say funding for projects such as Sere could be limited, despite the concerns raised by independent power producers about Eskom’s potentially unfair competitive advantage.

Chown said private industry players undoubtedly had access to capital. A bond raised by Soitec for its solar plant, for example, saw all debt placed on the market and it received a good rating from Moody’s ratings agency. “Eskom can’t play the game alone; they don’t have the capacity. It is all hands on deck,” he said.

Wikus van Niekerk, director of the centre for renewable and sustainable energy studies at the University of Stellenbosch, said it was unfair to suggest that Eskom had an advantage as the funding for the Sere wind farm was probably a once-off arrangement. “The chances of Eskom getting this cheap finance [again] are unlikely,” he said.

Chown, who is also a director of the renewable energy developer Mainstream South Africa, said the position of Sere on the West Coast was believed to be a lower than expected wind-resource area.

“Few IPPs would have taken that risk in that area: that strip of the West Coast’s wind resource is not what they thought it is,” he said. “You would have to use much taller turbines, adapted for low wind speed and lower energy yield areas, which is exactly what Eskom is doing.”

Because of confidentiality concerns, finer details about the farm were removed from the public version of Eskom’s application for generation to Nersa. Joffe said the land on which the Sere plant is being built is privately owned and added that whether renewable projects would be built on state or privately owned land in future would depend on the availability of renewable resources and proximity to the grid.

According to industry experts, connection fees on a 100MW project could range from R100m to R200m. Asked whether Eskom would also pay connection fees, Joffe said all projects that got connected to the grid paid connection fees in terms of the policies set out in the South African grid code.