Industry Trend Analysis - IPP Contract Delays Will Further Erode Investor Appetite - APR 2018

BMI View: The decision to delay the planned IPP contract signings will further decrease investor sentiment for South Africa's power sector. While we still maintain that non-hydropower renewable electricity capacity will be South Africa's growth outperformer, a negative outcome of the court hearing on March 27 could lead to further delays for the implementation of the project, representing a downside risk to our forecasts.

On March 13, the Department of Energy decided to (once again) postpone the signing of 27 Independent Power Producer (IPP) contracts. The cancellation follows the surfacing of a reported court interdict, and will further cloud the country's investment environment. The impact of the move will be pronounced, considering the existence of conflicting reports as to why the contract signings have been postponed. The National Union of Metalworkers South Africa (Numsa; a trade union), and civil group Transform RSA, had reportedly obtained a last-minute court interdict against the planned signing of contracts. Meanwhile, the Department of Energy denies that an interdict had been granted and, instead, stated that it voluntarily postponed the signing 'in the spirit of constitutionalism and the rule of law'.

Numsa's arguments for an interdict against the IPPs was that the projects would cause up to 30,000 job losses in South Africa's coal sector, as coal-fired electricity use would decline. Numsa also stated that the introduction of further IPPs would raise the cost of electricity throughout the country. The Department of Energy has said, however, that the IPP projects would create over 60,000 jobs and that the electricity generated from the IPP projects would be cheaper than that of existing power plants. We expect that this will remain an issue of contention between government and the various unions.

Renewables Capacity South African Growth Outperformer
Total Net Capacity, By Type & Non-Hydropower Renewables % Growth y-o-y
e/f = BMI estimate/forecast. Source: EIA, BMI

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