ECONOMICS OF ENERGY 2
rate risk and currency risk. These two may be linked to some extent but the focus of this text will be on local currency devaluation since inception of the REIPPPP and the impact this potentially has on projects already implemented. An attempt will also be made to understand how currency risks and the possibility of further local currency depreciation may affect future projects. A general overview is given in Figure 1 for the parties assuming currency risk at various stages of the renewable energy project development process under the REIPPPP. As illustrated, the risk changes hands between the IPP and Single Buyer Office at Bid Submission and then back again at financial close.
Entity holding currency risk
Single Buyer Office IPP or Project Developer
TIMELINE
Each renewable energy project within the REIPPPP is unique in terms of participating project sponsors, lenders, financing arrangements, contracting, technology, and quality of primary energy resource. This diversity means that impacts on specific projects due to currency depreciation will not be identical. Moreover, it is very difficult to quantify the impact on any single project without a full analysis of the relevant financial model. In light of this, the following attempts to highlight general impacts and sensitize the reader to questions that need to be asked (and answered) when considering a future characterised by a steadily depreciating local currency – a future that many believe South Africa faces IPP or Project Developer today. 20 years
RFP announced
Bid submssion
Preferred Bidder Status
Financial close
Commercial Operation date
Historical currency exchange trends and poLocal content % Foreign % tential future trajectory TARIFF ADJUSTED TARIFF As demonstrated in the Tariff structure at Bid Submission at financial close and Figure 2, the South AfriNon indexed % adjustments can Rand has depreciated CPI Indexed % adjustment over 30% against both the FY1 FY2 FY3 United States Dollar and Figure 1: Allocation of currency risk at various stages of project development under Euro since 2010; the year the REIPPPP prior to launch of the CAPEX
SUSTAINABLE ENERGY RESOURCE HANDBOOK
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