CAPE TOWN: South Africa has structured its new gas-to-power requirements in a lender-friendly manner, paving the way for more investment in the country’s LNG imports, bankers told ICIS.
“The risk of South African utility Eskom defaulting on its payments is ring-fenced by the power purchase agreement,” said a project finance banker. “Everyone is satisfied that a default cannot happen with this structure.” However, the project comes with other risks. Investing in South African Rand means that the project financing could appeal better to local banks rather than international lenders, possibly limiting choice for financing future LNG import projects.
For more on South Africa’s plans to import LNG see the ICIS Fact Box . Earlier this month South Africa issued its LNG-to-Power Independent Power Producers Procurement Programme (IPPPP). This could lead to the first LNG imports into South Africa if the process is successful.
Obstacles to financing include the poor financial performance of sole buyer Eskom but also how the ownership of power stations, regasification assets and LNG sales is structured. “Someone has to guarantee the power stations’ offtake in order to finance [the project],” said an energy market analyst speaking with ICIS.
A sovereign guarantee is one way of ensuring that Eskom will pay. According to the IPPPP document, South Africa’s Department of Energy (DoE) has an implementation agreement with Eskom “providing support in the event that Eskom is unable to fulfil its payment obligations to the successful bidder.” However, South Africa’s credit rating is set at BBB-/Baa2 by ratings agencies Standard & Poor’s and Moody’s both with a negative outlook. “The sovereign guarantee is good. The question is how important is this sovereign rating to bankers?”, said the analyst.
The answer is not very important, according to a project financing banker. “The sovereign guarantee is not where we look,” said a project finance banker talking to ICIS. “Our issue is repayment, and the power purchase agreement (PPA) is structured in such a way that a sovereign guarantee will never be called.”
According to the structure of the PPA, Eskom is allowed to add any additional costs from the PPA onto what it charges the consumer. South Africa’s energy regulator NERSA has approved this PPA. “This means that the money needed to pay the PPA will not sit on Eskom’s balance sheet. It will be separate from the money needed to run Eskom, and it will be charged instead to the consumer,” said the banking source.