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San Giorgio Group Case Study: Eskom CSP 100MW plant, South Africa

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Published: June, 2014

Executive Summary

Among emerging economies, South Africa has particular potential for CSP because of the country’s excellent solar resources. Currently South Africa relies largely on carbon-intensive coal generation for power but CSP offers a scalable alternative to diversify its future energy mix. However, to date the country has one of the lowest renewable energy penetration levels of any major economy. In order to increase energy security and meet emissions reduction targets, South Africa aims to add 20 GW of new renewable power generation capacity by 2030, of which 3.3 GW is expected to be CSP. This would double the current installed capacity of CSP worldwide.

This case study examines the 100 MW Eskom CSP power tower plant in Upington being developed by Eskom, South Africa’s national state-owned electricity utility. Incorporating 9-12 hours of thermal energy storage and a dry-cooled steam cycle to minimize water usage, Eskom CSP is one of the most ambitious and technically challenging CSP power tower projects under development outside of the US. As such, it has a higher potential for cost reduction, building up local supply chains and promoting energy security than other CSP project currently under development in the country. The project is also interesting from a public finance perspective because of the key role that international finance institutions (IFIs) have played in its financing so far. By analyzing in detail what worked and what did not in the project’s financial, political and technological risk management, this case study can inform the efforts of public entities such as national governments and the Climate Investment Funds (CIF) to design national and international public finance programs to deploy CSP and other emerging technologies.

By analyzing in detail what worked and what did not in the project’s financial, political and technological risk management, this case study can inform the efforts of public entities such as national governments and the Climate Investment Funds (CIF) to design national and international public finance programs to deploy CSP and other emerging technologies.

Low-cost debt lending from IFIs and balance sheet finance from Eskom enabled the Eskom CSP project to proceed

Early designs for Eskom CSP were discussed in 2003. After several years in development, the project was placed on hold in 2009 during the global recession, largely because reduced access to capital and increased pressure from the Government of South Africa to improve the country’s energy security at low cost led Eskom to reassess its investment priorities. In 2009, the Clean Technology Fund (CTF) assigned USD 500 million in concessional financing to South Africa for clean energy-related investment, 60% of which was targeted at CSP. The investment plan allocated significant funding to Eskom CSP and thus put the project back on track. Our analysis suggests that each project stakeholder plays a particular role in the financing to ensure that project development can proceed.

Six IFIs have committed to provide USD 995 million in highly subsidized debt. This allowed the project to proceed while lowering the financing costs. Multilateral bank loans are currently being issued at less than 2% in foreign currency terms, while local currency commercial loans for CSP projects in South Africa are closer to 12%. IFIs’ loans were essential because electricity from the Eskom CSP plant will be more expensive than other fossil fuel and renewable options and is expected to far exceed the rate Eskom can reclaim from customers through electricity tariffs. Because Eskom is subject to regulatory control and public spending laws, it can only charge customers a predetermined amount.2 This has to pay for the capital expenditure, operating and maintenance costs (including primary energy) of its own power plants and its power purchase agreements with independent power producers (IPPs). However, the estimated levelized cost of electricity for CSP (0.28-0.33 USD/kWh) is higher than for other technologies such as hydro (0.06-0.13 USD/kWh), new coal (0.08-0.16 USD/ kWh), or open cycle gas turbines (0.14-0.24 USD/kWh), making Eskom CSP financially challenging.

By developing the Eskom CSP project ‘on balance sheet’, Eskom can reduce the cost of financing and cover substantial risks. Should there be a financing gap between project cost and IFIs lending, Eskom will finance the gap on its balance sheet. Balance sheet finance already enabled Eskom to raise capital more cheaply than through alternative options such as external sources of equity or commercial debt. Once the company receives the loans from IFIs, balance sheet finance will also help Eskom to internalize the foreign exchange rate risk from raising low-cost foreign debt since Eskom has experience and the in-house capacity to manage foreign currencies in the company’s investments. Experience gathered from developing other CSP plants in South Africa indicates a 100 MW CSP power plant with less storage than Eskom CSP can be expected to cost USD 1 billion investment (including debt). The investment cost of Eskom CSP can be expected to be even higher due to its longer storage capacity. Configuration, lessons learnt, and risk sharing mechanisms will contribute to the ultimate pricing.

Eskom CSP is fully publicly financed. While it is not unusual for CSP projects to have large public contributions (given the high costs and technology risks), the 100% public financing nature of Eskom CSP is different from other CSP projects in the country and beyond, where private actors contribute to project finance.

Contracting companies with additional expertise helped manage technology risks arising from Eskom’s lack of in-house experience

As South Africa’s national electricity utility, Eskom has many years’ experience of developing large and capital-intensive energy projects, but it is relatively new to non-hydro renewable energy investments. Eskom has addressed and will address risks from this lack of in-house experience with CSP by contracting two parties during the following key stages of the project: design, construction, and early operation.

  • Eskom has brought in expert design services from outside the organization. Eskom contracted an Owner’s Engineer (OE), an engineering design consortium that has optimized the project concept and basic designs and increased confidence on costs and feasibility. In this way, Eskom benefited from external expert advice on all aspects of the project’s development stage.
  • Eskom will reduce technology risks through an engineering, procurement and construction contract. Eskom is in the process of procuring a full engineering, procurement and construction (EPC) contractor for the construction and early operation of the project. The contractor will procure the necessary technology, arrange contracting, warranties and any sub-contracts, construct and commission the plant, then operate the plant for five years while training Eskom staff for the handover and minimizing any integration risks. Eskom will contribute expertise on connecting the plant to the grid.
If successful, Eskom CSP could provide important benefits such as technology cost reduction, job creation, and energy system benefits

Eskom CSP is expected to provide greater potential to bring technology costs down and create local supply chains than any other CSP project currently under development in South Africa. CSP power tower technology looks set to become one of the dominant CSP technologies in the coming years, while to date only 500 MW have been built making Eskom CSP an even more significant project. The 100 MW generation capacity and the technology configuration selected for Eskom CSP is expected to provide a higher cost reduction potential than smaller installations in the country. Increased skills in planning and installation, operation of a power tower plant, as well as the establishment of a local supply chain and infrastructure should lead to cost reduction of CSP in South Africa. Furthermore, developing a local supply chain is a primary objective of South African policymakers and public lenders since it creates local jobs and improves the region’s wealth.

Eskom CSP provides the most storage capacity with the highest volume of delivered energy of the CSP projects currently under development in South Africa. It should therefore deliver the biggest energy system benefits. The value of energy storage managed by the energy system operator is that it can be used at any time to alleviate supply shortages or avoid use of more expensive electricity generation especially at peaking times. If Eskom CSP is a success and accompanied by a significant reduction in CSP technology cost, its innovative technology configuration could be replicated in the country and further afield.

While enabling Eskom CSP, foreign debt from IFIs results in additional challenges, which Eskom has to manage. Addressing these challenges can lower costs and speed up implementation.

Foreign debt from IFIs played a big role in enabling the Eskom CSP project to proceed. However, it also brought additional risks that Eskom had to manage. We found a variety of ways in which these issues could be addressed and outline them in the table below.

Recommended Approach Challenges it Addresses
Technology context. IFIs can help to ensure that projects contract the most suitable, experienced and cost competitive technology and service providers by adapting procurement standards appropriate to a technology’s stage of development. IFIs have important standards that seek to make the procurement process as transparent and nondiscriminatory as possible. Bidders must also prove certain eligibility criteria including demonstrating expertise and experience or a certain degree of financial health, to show they are able to fulfill the safeguards set by the lenders’ policies. Reconciling these requirements was challenging in the case of CSP power tower technology, because it is at an early stage of deployment and there are only a limited number of experienced technology and service providers. Given the risks associated with the early technology development cycle, Eskom and the lenders have agreed to discussions with prospective bidders (the OE or EPC contractors in Eskom CSP) to ensure that risks are adequately addressed in the structuring of the project and that the most suitable, experienced and cost competitive provider is awarded the contract.
Administration context. Large projects with many involved IFIs would benefit from a harmonized approach to procedures and standards. The lack of harmonization among IFI lenders, and differences between public spending policies and lender requirements, are issues that merit further consideration by IFIs, especially in the context of climate finance when delays can result in cost escalation and jeopardize project viability.
Finance context. Project sponsors and lenders need to investigate what foreign exchange rate risks exist and respond to them accordingly. While foreign public debt offers lower interest rates (less than 2%) than South African lenders (around 12%), the cost for hedging the related foreign exchange rate risk, can increase the cost of debt by up to 8% at current rates depending on the currency and the degree of hedging employed. Eskom handles the sensitivity of project returns to currency exchange rates using in-house expertise in exchange rate hedging and accepts the decreased value of concessionality in the early loans.
Eskom CSP demonstrates that public support is still required to deliver on the global expectations of CSP

As long as CSP technology is still moving down its learning curve, it is clear that CSP projects need public support in its broadest context to finance plants and drive cost reductions. The technology is currently still at an early stage, thus presents many development uncertainties and challenges to its investors. Proof of technical design and related system performance will help to establish the real value of the technology in particular large volumes of storage, and incentivize its replication and scale up. It will also help to reduce risk perception among all stakeholders including project developers, host governments and possible future lenders. National policymakers and international funding can cover risks that commercial stakeholders are unable or unwilling to take, thereby mobilize private investments in CSP, accelerate efforts to scale-up CSP and reduce its costs.