Eskom: R4bn Solar Curtailment Payments Expected to Rise Annually

• Eskom anticipates paying R4 billion this financial year to compensate solar and wind farms for curtailed generation due to grid surplus.
• This amount, known as 'deemed energy' payments, is projected to increase annually as more consumers adopt solar power.
• Electricity pricing expert Deon Conradie warns that these costs will likely be passed on to consumers through higher tariffs, potentially spiraling like Eskom's past diesel expenditure.
• Eskom's compensation obligation for curtailment is limited to REIPPPP projects; private offtaker curtailment contracts govern risk for other IPPs.
• The handling of curtailment risk is a critical factor influencing IPP financing decisions and overall investment certainty in the renewable energy sector.

The handling of curtailment risk is a critical factor influencing IPP financing decisions and overall investment certainty in the renewable energy sector.

Eskom anticipates incurring approximately R4 billion in the current financial year to compensate solar and wind power generators for "deemed energy" that was not utilized. This compensation arises when these independent power producers (IPPs) are instructed to reduce their output due to an oversupply of electricity on the national grid. The National Transmission Company of South Africa (NTCSA), an entity still operating under Eskom, projects this figure to escalate annually, a trend attributed to the increasing adoption of solar energy by consumers.

Keith Bowen, a senior manager for market operations at NTCSA, highlighted this growing financial obligation during a recent panel discussion hosted by Cresco and Fasken. The surge in solar power generation, coupled with more consumers relying on their own electricity during daylight hours, has led to a daytime surplus on Eskom's grid. Despite this, Eskom refrains from shutting down its coal-fired power stations, as these are essential to meet demand once the sun sets and consumers require electricity for evening activities. To maintain grid stability and prevent a system collapse, the operator must then instruct renewable energy facilities to curtail their generation, even though Eskom remains obligated to pay for this unconsumed power.

The financial burden of these Eskom deemed energy payments is expected to ultimately fall on consumers through increased electricity tariffs, according to electricity pricing expert Deon Conradie. While the current R4 billion in NTCSA curtailment compensation is relatively small compared to the R383 billion Eskom is permitted to recover from consumers by the energy regulator Nersa, Conradie cautions that these costs could rapidly escalate out of control. He draws a parallel to Eskom's past expenditure on diesel for its open-cycle gas turbines (OCGTs).

Eskom's diesel spending, initially around R320 million in the 2018 financial year for peak period supplementation, surged dramatically to nearly R24 billion by the 2024 financial year as OCGTs were increasingly deployed to mitigate load shedding. This substantial increase had a significant impact on electricity tariffs. Conradie warns that a similar trajectory could unfold with curtailment costs, especially as the installation of solar power accelerates due to deteriorating local distribution networks and a large number of new solar farms are expected to become operational within the next two years.

The escalating frequency of curtailment instructions since late last year, mirroring the growth in solar installations, introduces a critical element of South Africa renewable energy curtailment risk for investors and developers. Crucially, Eskom's obligation to compensate IPPs for curtailment is limited to those projects that are part of the government's Renewable Energy Independent Power Producer Procurement Programme (REIPPPP). For projects involving private offtakers, the management of curtailment risk is determined by the specific contractual arrangements between the parties involved.

Olga Suchkova, an associate director at Cresco, emphasized during the panel discussion that how curtailment risk is addressed lies at the heart of IPP financing decisions. Lenders require certainty regarding a project's revenue stream to approve financing, needing assurance that their advanced funds can be repaid. Mamoso May, CEO of Artemis Group Holdings, concurred that this issue is increasingly influencing investment decisions, underscoring the necessity for clear guidelines on curtailment obligations and compensation mechanisms throughout a project's entire operational lifespan.

Lawyers advising independent power producers (IPPs), lenders, or private offtakers in South Africa's renewable energy sector must scrutinize curtailment clauses in power purchase agreements and financing documents. This is crucial to assess revenue stream certainty and mitigate financial risks, especially given Eskom's increasing deemed energy payments and the distinction between REIPPPP and private offtaker contractual arrangements.

Source: Original reporting via MyBroadband