The Department of Energy has released the fourth edition request for proposals under the Renewable Energy Independent Power Producer (REIPP) procurement programme. A number of the amendments have been made following much consultation with developers and lenders over the previous three bid submission rounds. The fourth edition of the RFP can make the bidding process cheaper for developers but there are risks.
Developers are no longer required to include in their bid responses a fully developed shareholders agreement or detailed heads of terms for major contractors, subcontractors and equipment suppliers. To developers, this is welcome news, because the process of negotiating and drafting these documents often contributes to costs, and much angst amongst sponsors who are expected to agree commercial terms of a transaction that is not guaranteed success. This process highlights key areas of tension between the parties and can strain relationships.
Developers must evaluate whether spending additional money up front will result in significant cost savings at a later stage.
Although this is a welcome concession by the DoE, it may have a downside. Developers are still required to commit to a tariff at bid submission. If the developer is awarded preferred bidder status, it is not allowed to change the tariff. The tariff is directly linked to the commercial terms of the major contractors and shareholders. A developer, who has not agreed these commercial terms, in an attempt to save costs at bid submission may find it very difficult to offer a realistic tariff, and will be in a weaker negotiating position once selected as a preferred bidder.
It is doubtful that lenders will provide a letter of support to a developer with little to no commercially agreed terms, especially with the major contractors. A developer, therefore, faces the prospect of becoming sandwiched between contractors unwilling to accept terms common in the South African market, and lenders insistent that certain South African market standards be maintained. This creates a very real risk that a developer may lose its preferred bidder guarantee for failing to reach financial close. Developers must evaluate whether spending additional money up front will result in significant cost savings at a later stage.