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In this in-depth analysis EE publishers unpacks the fallout faced by the Department of Energy after international solar giant Edison filed for Chapter 11 bankruptcy protection. Chris Yelland and Pierre Potgieter are concerned that the group will look to extract the maximum financial value from its South African projects to convince creditors and US authorities that it has the liquidity to continue as a going concern. The question is if this should be allowed at the cost and risk to local electricity customers. – Stuart Lowman
by Pierre Potgieter and Chris Yelland*
After months of financial uncertainty, international solar giant SunEdison (NYSE: SUNE; OTC: SUNEQ), and some of its international subsidiaries, have filed for Chapter 11 bankruptcy protection in the US on 21 April 2016. This uncertainty has seen its share price tumble from a high of US $33,45 in July 2015 to $0,34 before filing for Chapter 11 protection last week.
The company has nine solar photovoltaic projects in South Africa, six of which form part of the fourth bid window (and extension) of the Department of Energy (DoE) Renewable Energy Independent Power Producer Procurement (REIPPP) programme, and are awaiting financial closure.
Two Yieldcos established by SunEdison, TerraForm Power (NASDAQ: TERP) and TerraForm Global (NASDAQ: GLBL), in which SunEdison had major shareholdings and management control, are not included in the filing. Neither, apparently, is its South African subsidiary, SunEdison Energy Southern Africa.
SunEdison relied heavily on upfront funding for project developments, acquisitions and mergers. Upon completion, the developer would spin its operational US and global renewable energy assets into Terraform Power and Terraform Global respectively. This would release capital to fund further developments and acquisitions, while the Yieldcos would then contract with SunEdison (via its subsidiaries) to operate and maintain the renewable power plants on an ongoing basis.
The distancing of SunEdison from its Yieldcos will give Terraform Power and Terraform Global the freedom to acquire renewable energy assets more widely and rationally, unrestrained by SunEdison’s management control or influence. On the downside, however, the Yieldcos are likely to face increased operational management and maintenance costs as they move to find alternative service providers for their far-flung renewable energy power plants.
Rapid expansion that relied on heavy borrowing and complicated financing structures was cited as the chief cause for the company’s failure. This was made worse by low coal, oil and gas prices, which enabled these technologies to compete more effectively with renewables for investment funding than in the past. Higher risk premiums expected by investors for projects in emerging renewable energy technologies and in foreign economies also put pressure on the Yieldcos, while bad management added to the mix.
As SunEdison and its Yieldcos struggled to raise further funding for new ventures, and the Yieldcos faced declining US dollar yields from projects in foreign markets experiencing local currency weakness, investor sentiment turned against the Yieldcos, leading to massive drops in their share prices. This in turn created difficulties in raising capital for the parent company to fund new projects and further growth.
SunEdison’s South African assets
SunEdison has nine solar photovoltaic (solar PV) projects in South Africa, which form part of the DoE’s REIPPP programme, which account for approximately 516 MW of the programme’s 13 225 MW allocated to renewable energy under the first four bidding rounds.
The REIPPP programme is a competitive bidding process to facilitate the allocation of utility-scale renewable energy generation capacity for connection to the grid, as determined by the national Integrated Resource Plan for Electricity (IRP2010-2030), and any subsequent determinations made by the minister of energy. Solar and wind projects make up the majority of the REIPPP programme projects.
|Project||Bid Window||Capacity (MW)||Status|
|Soutpan Solar Park||1||28||Operational|
|Witkop Solar Park||1||30||Operational|
|Boshoff Solar Park Jacaranda Energy||2||60||Operational|
|Droogfontein 2 Solar||4||75||Awaiting financial closure|
|De Wildt||4 extension||50||Awaiting financial closure|
|Bokomaso||4 extension||68||Awaiting financial closure|
|Zeerust||4 extension||75||Awaiting financial closure|
|Greefspan PV Power Plant 2 Solar Park||4 extension||55||Awaiting financial closure|
|Waterloo Solar Park||4 extension||75||Awaiting financial closure|
Table 1: SunEdison’s solar photovoltaic projects in South Africa.
Financing and ownership of REIPPP programme projects
The financing and ownership structures of renewable energy projects of the REIPPP programme are complex and involve many stakeholders, which vary from project to project. Fig. 1 shows a generic financial, ownership and organisational structure for such arrangements.
There is measure of resilience built into the South African REIPPP programme. In its bid award criteria, projects are chosen based on both bid price per kWh (70% weighting) and economic development grounds (30% weighting). Project financing by South African banks adds another layer of protection, with the risk assessment left to the banks. Due to their high capital cost, projects are usually co-funded by the developer with debt and equity finance.
The REIPPP programme requires that each project company must have a minimum of 40% South African ownership, with a minimum black ownership of 12% (with a target of 20%), and a minimum of 2,5% ownership by communities living within a 50 km radius of the project site. Ownership of the projects is complicated, often involving a foreign developer or South African subsidiary of a foreign developer, independent South African companies, and a local community trust.
A 2015 study by Dr. Lucy Baker shows ownership in renewable energy projects in South Africa has become increasingly concentrated, with a limited number international companies winning greater capacities. With an increasing shift to corporate debt financing, the role of South African banks has also decreased.
Corporate-financed debt is not subject to the same stringent loan conditions required by South African banks. More critically in the case of SunEdison’s South African projects, the corporate debt is dependent on strength of the balance sheet of the provider of the corporate debt guarantees.
The Industrial Development Corporation (IDC) is a significant debt financier and equity investor, and also supports BEE companies and local community trusts in buying equity. In its 2015 annual financial report, the IDC states that it invested R14-billion in support of the REIPPP programme over the last four years. The Public Investment Corporation (PIC) and various development finance institutions (DFIs) are also involved.
Impact on SunEdison’s South African projects
Bid Window 1 and 2 projects
SunEdison indicates that all its shareholdings, and specifically those previously held by its subsidiary SunEdison Energy Southern Africa in its operational Bid Window 1 and 2 projects (i.e. the Soutpan, Witkop and Boshoff Solar Park projects), had already been transferred to Terraform Global prior to the Chapter 11 bankruptcy protection filing on 21 April 2016.
Neither Terraform Global nor SunEdison Energy Southern Africa are part of the SunEdisons’s Chapter 11 filing. As such, Terraform Global may continue as a foreign shareholder in SunEdison’s former Soutpan, Witkop and Boshoff solar PV projects, with the project company contracting with SunEdison Energy Southern Africa (or any other company) to operate and maintain the plants.
Bid Window 4 projects
Six projects awarded to SunEdison as developer under Bid Window 4 (and its extension) are awaiting financial closure, prior to the conclusion of power purchase agreements (PPAs) with Eskom and implementation agreements with the DoE, before commencement of construction.
Although there may be significant local and international appetite to acquire SunEdison’s financial interest in these projects, any such change in the proposed ownership structure after bid award and prior to financial closure will be subject to the approval of the DoE.
An additional hurdle to overcome before financial closure can take place is the receipt of final and binding quotations from Eskom for grid connection. These should have been provided by Eskom in April 2015, but the utility has delayed the process due to funding shortages and disagreements as to what grid upgrade costs are to be borne by Eskom, and what are to be borne by the renewable energy project.
A final decision and agreement on this is essential before financial closure of SunEdison’s six Window 4 projects is possible, as the allocation of the disputed grid upgrade costs among the various projects may significantly affect the viability of a project.
DoE in a quandary
In the meantime the IPP Office of the Department of Energy has undertaken a further “expedited” round for Bid Window 4, involving an additional capacity allocation of 1800 MW.
Bids received for the “expedited” round are understood to have come in at significantly lower prices per kWh and/or with faster completion times than SunEdison’s Window 4 extension projects, due to the “expedited” projects being located in areas with lower or no grid access constraints.
The current uncertainty created by SunEdison’s filing for Chapter 11 bankruptcy protection, and possible changes in the ownership structure of SunEdison’s six Window 4 projects, may delay or even prevent financial closure of these projects.
The DoE will need to make a decision whether to allow customers to pay for the higher priced electricity from SunEdison’s Window 4 extension projects, or to remove these projects from the table and reallocate the megawatts to projects in the “expedited” round having lower prices per kWh and/or faster completion times.
The IPP Office of the DoE, on the other hand, may want to preserve the sanctity and integrity of the REIPP procurement process, even at the higher bid prices and longer completion times, and approve any credible and viable restructuring of SunEdison’s interests in its six Bid Window 4 projects, which have already been accepted by the DoE subject to financial closure.
In light of its filing for Chapter 11 bankruptcy protection, SunEdison will clearly want to extract the maximum financial value from its South African projects to convince its creditors and the US authorities that it has the liquidity to continue as a going concern.
But should this be allowed to happen at the cost and risk to South African electricity customers?
Despite repeated requests by EE Publishers for comment and input from the DoE’s IPP Office on the impact on the REIPPP programme of SunEdison’s filing for bankruptcy protection, no comment or input was received by the publishing deadline.
- Pierre Potgieter and Chris Yelland, EE Publishers