Finance and Economic Opportunities

[a] What is the

[i] Nature of the projects

The MER initiative released a Request for Information [RFI) for new renewable energy generation projects and concepts from private project developers and municipalities in the Western Cape Province on 11 June 2021. The responses received through the RFI allowed for identification of a project concept group selection and then a pre-feasibility assessment resulting in four of the six MER candidate municipalities identified for the implementation of MER pioneering projects.

Five pioneering energy projects were identified with four out of the five developed with roadmaps for implementation based on the following principles:

• An individual municipality [one of the four candidate municipalities with pioneering projects] will procure electricity from an Independent Power Producer [IPP] by way of an open tender process – a municipal procurement process
• The municipality [as the “off-taker”] will procure the electricity from one or more IPP[s] through a long-term Power Purchase Agreement [PPA] – the term of the PPA is anticipated to be 15 to 20 years
• The IPP will build and own the new electricity generation plant
• The IPP shall identify and secure access to the land and secure all project licences, consents, and approvals, including but not limited to, environmental and heritage authorisations
• The IPP shall register the electricity generation project with NERSA [National Energy Regulator of SA]
• The new generation plant of IPP will be “embedded” i.e. connect directly to the distribution system/network of the individual municipality, at one or more of the specific municipality’s  Points of Supply/Connection [POS/POC] to feed into their municipal distribution system and distribution license area and jurisdiction
• The renewable energy generation technologies that could potentially be bid into three of these four individual, embedded generation projects have been identified as solar PV with one project identified for both solar PV and/or wind [i.e. either solar PV or wind or a combination of these two technologies to achieve the desired nominal capacity and electrical energy]
• The size [MW^[1] ]of each of the new electricity generation plants

The nature of remaining project i.e. the fifth pioneering project, the roadmap for implementation, is based on the following principles:

• Two or more of the four individual candidate municipalities [with embedded, individual pioneering projects as described above] will “pool” or “combine” their electricity demand, based on their specifics [such as maximum demand and point of connection limitations]
• The individual participating municipalities will establish a Multijurisdictional Special Purpose Vehicle [MSPV], [i.e. a multijurisdictional entity/facility], to procure electricity on their behalf from one or more Independent Power Producer [IPP] through an open tender process – a municipal procurement process
• Each participating municipality will be a shareholder of the MSPV
• The MSPV [as the “off-taker”] will procure the electricity from one or more IPP[s] through a long-term Power Purchase Agreement [PPA] – the term of the PPA will be 15 to 20 years
• The MSPV shall procure electricity only for its participating municipalities
• Each individual municipality will have a “back-to-back” PPA with the MSPV to procure the electricity from the MSPV – the term of the PPA of each municipality as shareholder will be 15 to 20 years
• The IPP will build and own the new electricity generation plant
• The IPP shall identify and secure access to the land and  secure all project licences, consents, and approvals, including but not limited to, environmental and heritage authorisations
• The IPP shall register the electricity generation project with NERSA [National Energy Regulator of SA]
• The new generation plant IPP will connect to the Eskom Transmission network and “wheel” the electricity to the individual municipality, to feed into the municipal distribution system and distribution license area and jurisdiction of the MSPV participating municipalities.
• The renewable energy generation technologies that could potentially be bid into the procurement by the MSPV  have been identified assolar PV and/or wind [i.e. either solar PV or wind or a combination of the two technologies to achieve the desired nominal capacity and electrical energy supply]. The pioneering project evaluation at this stage is based on solar PV but can be expanded to include wind.
• An alternative option for the MSPV is to identify and secure access to the land required by the IPP. In this case MSPV shall secure consents and approvals relating to the land, including but not limited to, environmental and heritage authorisations and make this land available to IPPs through the procurement process

 [ii] Envisioned locations

 

Pioneering project	Municipality/location	RE generation technology
Project 1	Drakenstein	solar PV and/or wind
Project 2	Stellenbosch	solar PV
Project 3	Mossel Bay	solar PV
Project 4	Saldanha Bay	solar PV
Project 5	On Eskom transmission network [preferably in the Western Cape) where evacuation capacity is sufficient at the substation and transformer limit  - and/or in Renewable Energy Development Zone or any REEA [Renewable Energy Environmental Authorisation location)	solar PV [can be expanded to incorporate/combine with wind)

[iii] Megawatt [MW] output

The following table provides indication of the maximum capacity^[2] that can be procured given respective municipal technical and financial constraints and estimated resource availability.

 

Description	Project 1		Project 2	Project 3	Project 4	Project 5
Off-taker	Drakenstein		Stellenbosch	Mossel Bay	Saldanha	All selected Candidate
Technology	Solar PV	Wind	Solar PV	Solar PV	Solar PV	Solar PV
Maximum capacity can procured	81 MW	54 MW	51 MW	37 MW	28 MW	198 MW
Annual electrical energy [output) if maximum capacity installed	200 GWh	193 GWh	113 GWh	79 GWh	64 GWh	456 GWh
Estimate max. capacity @ largest POS/POC	34MW	34MW	37MW	16MW	22MW	100 MW

[iv] Funding necessary to establish these projects

As mentioned in [i] the IPP will have to arrange the funding for each of the projects tendered into a municipal independent power producer procurement programme [embedded or MSPV wheeled]. The municipality will be the off-taker of the electricity based on a long term contract - the Power Purchase Agreement [PPA]. The terms and bankability of the PPA will depend on the bankability and structuring of the financing of the IPP [usually the IPP is a special purpose vehicle [SPV] in its own right]. The funding is therefore based on project finance and structured as equity, debt [both primary and sub ordinated debt structures].

Based on the National Renewable Energy Independent Power Procurement Programme [REIPPP), the latest indicative capital cost indications of approximately R10 million per MW nominal capacity for solar PV, a 10MW solar PV plan capital financing will be R100 million.

The table above of nominal capacity, at these indicative solar PV capital pricing will then translate into the following table of indicative capital funding [excluding other costing and impacts over the term of the PPA, such as tenure, term, interest rate, CPI escalation, operations and maintenance, plant degradation, etc.] to be arranged by IPPs and to be translated into 15-to-20-year PPA agreements.

 

Description	Project 1	Project 2	Project 3	Project 4	Project 5
Off-taker	Drakenstein	Stellenbosch	Mossel Bay	Saldanha	All selected Candidate
Technology	Solar PV	Solar PV	Solar PV	Solar PV	Solar PV
Maximum capacity can procured	81 MW	51 MW	37 MW	28 MW	198 MW
Total indicative capital cost to be funded	R810 million	R510 million	R370 million	R280 million	R1.198 billion
Estimate max. capacity @ largest POS/POC	34MW	37MW	16MW	22MW	100 MW
Total indicative capital cost to be funded	R340 million	R 370 millin	R160 million	R220 million	R1 billion

[v] Estimated timeline

The estimated timeline to commercial operation date for one of the individual embedded generation pioneering projects is June 2025.

The estimated timeline to commercial operation date for a MSPV pioneering projects is September 2026.

These timelines are subject to multiple dependencies.

[b] Who are the stakeholders, if any, who will be involved in each project

The stakeholders in a municipal independent power producer procurement programme include, but not limited to:

• The individual municipality, each of the candidate municipalities
• The Western Cape Government – Department of Economic Development [DEDAT], Department of Local Government [DLG), Provincial Treasury [PT) and Department of Environmental Affairs and Development Planning [DEA&DP].
• Provincial Treasury
• National Treasury
• Department of Mineral Resources and Energy [DMRE]
• National Energy Regulator of South Africa [NERSA]
• Department of Co-operative Governance and Traditional Affairs [COGTA]
• Eskom
• Department of Trade, Industry and Competition

The stakeholders or then shareholders in an IPP [a special purpose vehicle established to respond to the municipal independent power producer procurement programme of a municipality or of a MSPV as detailed as pioneering project 5], include but not limited to:

• Equity holders
• Debt holders
• Municipality
• Eskom [if wheeled across transmission network]
• NERSA

[1] This is the nominal or nameplate generation capacity, thus not “megawatt output”