The harnessing, harvesting and provision of diverse energy resources is one of immediate international interest and concern. Africa’s ability to attract and retain investment in particular is dependant on the provision of affordable, reliable and sustainable energy sources.
World interest is also increasingly focused on confronting and alleviating the poverty that confronts many hundreds of millions of Africans. An integral part of purposeful development is access to appropriate energy resources for all of Africa’s people and their businesses.
There is massive investment in energy in Africa in general and southern Africa in particular, including, but not limited to, significant investments in oil exploration and exploitation, gas fields, hydroelectric projects and coal and nuclear power plants. Many of these initiatives are associated cross-border agreements.
Appropriate energy law, including national statutes, international conventions and cross-border agreements, are the keystone of determining investment in energy. Access to such law, as is in place from time to time, is of vital interest to policymakers, politicians, investors, commentators, international agencies, advisers (including lawyers) and civil society when examining energy in the African context.
In its effort to meet its energy needs and to encourage development within the region, South Africa has recognised the need to increase generating capacity and has recently allocated several billion dollars for new infrastructure developments and investments. Like all host countries, it has looked carefully at the barriers to investment into its energy generation market and has had to decide which incentives are needed to encourage investment.
Over the years the South African government has created a user-friendly investor climate. It has sought to ease the process by which foreigners can invest in South Africa and moreover has removed restrictions to foreign investment. Studies have shown that the legal system does not discriminate between domestic and foreign companies.
Government policies aim to encourage foreign direct investment (FDI). In particular the national industrial participation programme is an obligatory programme directed at the energy, transport, information and telecommunications industries, under which 125 FDI projects have been undertaken up to 2004.
Given the South African energy crunch, the cabinet has asked the Department of Minerals and Energy (DME) to procure 1,000MW of peaking capacity from independent power producers by 2008.
As a consequence independent power producers have tendered for the right to build, own and operate two 500MW open-cycle gas turbine plants. The winning bidder would have the right to build the new plants in two of South Africa’s provinces, KwaZulu-Natal and Eastern Cape, to begin providing power in 2008.
So as to make the offer more appealing, South Africa’s power utility Eskom has committed to signing a 15-year power purchase agreement with the winning bidder and the government would cover the costs of environmental assessments. In addition to providing much-needed capacity, these plants are an essential part of the government’s plan to create a more competitive market so as to attract new investment. Eventually the government will ensure that 30 per cent of the country’s generating capacity is owned by private companies, which will be part of a black economic empowering entity.
Another barrier to investment would be any gaps or instability in the legal and fiscal regime that may apply to a project. Investors and lenders are discouraged by a legal climate that does not include laws generally accepted by lateral and multilateral investment treaties against investment abuse and expropriation: adequate double taxation treaties, opportunities for the involvement of multilateral agencies such as the International Finance Corporation (IFC), the existence of a stabilisation agreement with the government, freedom from import duty on parts and equipment, the ability to invoke and enforce international arbitration and for investment incentives and enforcement of contracts, all of which can survive changes of government.
Proposals for the reform of South Africa’s energy market were approved in 2001. They included the creation of a wholesale market between generators and distributors by restructuring the national electricity distribution industry (EDI). The EDI Holdings Company was created by the DME in 2003 to facilitate the restructuring process. The reform involved transforming the electricity distribution business by creating various electricity distribution companies.
In addition, a new bill on electricity restructuring was considered in 2006, which will accelerate the completion of the reform. The new legislation set will address concerns that have been raised by Eskom and the municipalities involved in the process.
A third barrier for any major project is lack of clarity in the legal and licensing regime itself. For example, are there local procurement requirements that may affect the choice of key contractors? Are all required licences free from political interference?
The National Energy Regulator of South Africa (Nersa) has developed a regulatory framework for the participation of independent power producers (IPPs) in the power generation market.
The overall criteria applied by Nersa to any licence application will be to establish whether the developer applicant can construct, operate and maintain an efficient co-coordinated, economically efficient system of electricity generation, transmission or supply.
The current Nersa regulatory framework covers power generation projects based on conventional primary energy resources with electricity production equal or greater than 5GW per annum.
The Nersa has a very broad mandate to approve licences in terms of the Electricity Act and Regulations. It may make any condition that it regards appropriate for the plant or facilities that are required to obtain a licence. Furthermore, licence evaluation approval looks to various terms and conditions that must be included in any power purchase agreement.
They include, inter alia: provisions of the terms of the contract are limited to the term of the financing institution; provisions for reduction of the offtake commitment and capacity payment after the term of the financing expires; clear provisions in the contract that specify means to calculate the buyout; clear provision for the conversion of the power purchase agreement to physical or financial bilateral contracts when the power exchange commences operation; participation of local developers; and inclusion of black economic empowerment.
Social and environmental impact
A fourth barrier to investment, which is of increasing importance, is social and environmental impact. The more transparent and open the debate in the country on the merits of encouraging investment in a major project and national sharing of the benefits, the more comfortable will be the investors and sponsors.
The South African government has committed to ensuring that black-owned companies have access to the energy sector. Under its black economic empowerment programmes, the South African government has set a target of 25 per cent black enterprise ownership of energy companies by 2014. Large, predominantly white-owned corporations have sold assets to achieve this objective, with the first sale occurring in 2000. Black-owned enterprises are commonly referred to as ‘empowerment firms’.
By embarking upon this dynamic process, the South African government and important stakeholders within the country and region have made the necessary power sector reforms essential for the encouragement of independent power producers’ entry into the country. The tender process has confirmed to government investor interest in South Africa’s energy market, with 98 parties expressing interest and 13 consortia applying to qualify for the contracts. With this interest and reform support, South Africa and the region look forward to reliability and the security of its electricity supply, which will encourage development and the continued growth for all the region’s peoples.
Gregory Nott is counsel at LeBoeuf Lamb Greene & MacRae