Rand:dollar fluctuations – in the context of REIPPP projects

One of the conditions set out in the South African Power Purchase Agreements (PPA’s) under the Renewable Energy Independent Power Producer Procurement Programme (REIPPPP) is that the project owner will not be protected from foreign exchange rate fluctuations.  Prices are set out in South African Rands, with no linking to any foreign currencies.

The owner has the time between being announced as a preferred bidder until financial close to adjust their quoted prices by any fluctuations in the exchange rates that may have occurred during that time, but once the contracts are concluded, all of the South African government’s liabilities will be in Rand.

Given the Rand’s volatile history, this has largely kept foreign lenders out of the programme, but there have been foreign investors who have entered the market and accepted these terms.

This week’s events in South Africa, which has seen another marked drop in the Rand’s strength on the global stage, would naturally have affected the returns being seen by parties largely transacting in foreign currency.  The Rand’s value against the US dollar has effectively halved since November 2011 (when the preferred bidders in the first bidding window were announced).  [graphic source – OANDA]

At the same, a reminder as to what has been happening in the tariff prices in each bidding window, as competition has been increasing:

(you can see the full article by Arup on what has been happening in each bidding window, and where prices are projected to go here)

This means that, over the course of this week, any operational project sitting on a foreign party’s books will have seen a sharp drop in revenue, and this trend has been present over the last few years, as the Rand weakens and competition becomes more fierce.

Given the performance of the Rand, the conditions of the PPA, and the uncertainty regarding South African politics and policies going forward, it is not unreasonable to think that the prices we’ve seen under REIPPPP may be as low as foreign investors are willing to go.  Particularly if contracting strategies continue to favour fully wrapped EPC contracts, with the price tag that comes along with them.