Memo

June 24, 2021
Sailing into trouble: Why South Africa’s Karpowership deal is creating waves
By Catrina Godinho

South Africa has been in the midst of an ever-deepening power supply crisis since the late 2000s – in large part due to a high-level of political intervention in the sector and governance failures at the state-owned power utility Eskom. Widespread, chronic load-shedding leaves households and businesses without power for up to 12 hours a day and has cost the South African economy up to R388 billion (~USD 27.5 billion) over the past decade.1 While reliability has steadily decreased, consumer prices have increased more than fourfold since 2007.2 Meanwhile Eskom is tumbling further down its utility death spiral – requiring regular annual bailouts.3

In response, the Minister of Mineral Resources and Energy established the Risk Mitigation Independent Power Producer Programme (RMIPPP) to procure 2,000 MW of new capacity, ostensibly in a “fair, equitable, transparent, competitive, and cost-effective” manner.4 The RMIPPP was also meant to establish “stringent local content thresholds,” though the official request for proposals (RFP) is not publicly available.

The Karpowership Deal

The Minister’s March 2021 pronouncement of the preferred bidders came as a surprise to many: Karpowership’s “floating power plants” secured three of the eight bids, amounting to almost two thirds of the total 1,845 MW announced. These bids are in partnership between South African Powergroup SA (established in 2020 and now holding a 49% stake in Karpowership SA) and Turkish Karadeniz Energy Group (51%). Even more unexpected was the revelation that Eskom will enter into 20-year power purchase agreements (PPAs) with bid winners, including a 50% minimum dispatch requirement. These terms seem to directly contradict the spirit and intention of an emergency procurement. The Council for Scientific and Industrial Research (CSIR) estimates that, if the Karpowership projects reach financial close and the PPAs get signed, Eskom will be on the hook for at least R218 billion (~USD 16 billion) over the next two decades.

Many parties — including: environmental groups,5 opposition parties in Parliament,6 an unsuccessful bidder,7 investigative journalists,8 and the media more broadly9 — have challenged this bid’s outcome.

Unanswered Questions

The lack of transparency has left involved actors and concerned citizens with a number of unresolved questions:

  1. Was the tender purposefully biased? Before bids were even submitted in Q4 2020, media reports noted that the tender’s technical requirements skewed in favor of expensive gas- or diesel-generators.10 New analysis confirming this suggests that the outcome was predictable – and that the bid was certainly not technology agnostic (as it claims to be) nor cost-competitive across technology options.11 For example, projects needed to “stand-alone” (i.e. draw no power from the grid) between 5 am and 9:30 pm, which made renewable only or renewable + battery options near impossible. Additionally, some elements of the tender changed after it was launched – which some suggest unfairly benefited Karpowership SA.12
  2. Do the Karpowerships really meet environmental requirements? The Ministry of Environmental Affairs, Forestry and Fisheries withdrew a highly controversial emergency exemption afforded to Karpowership in 2020, which would have facilitated its bid.13 The application for the exemption is now being investigated as it is possible that Karpowership “willfully, knowingly or negligently, provide[d] incorrect or misleading information” to secure it in the first place.14 Without the exemption, independent environmental impact assessments had to be undertaken and submitted with the bid. Though these assessments cleared the projects (pending some mitigating measures), environmental groups have argued that the Karpowerships are not environmentally friendly as they a) commit to 20 years of emissions, regardless of whether or not cleaner alternatives would be available, b) negatively impact local communities and fisheries, and c) will harm marine life and the surrounding environment.15
  3. How did the Karpowership bid perform on economic development obligations, including job creation? Though the RFP remains outside the public domain, investigative journalists have pointed out a number of highly questionable interpretations of known bid requirements when it comes to meeting economic development obligations. Firstly, despite the fact that the main selling point of powerships is that they can readily sail to destinations that need power, the Karpowership bid somehow managed to qualify as “greenfield projects” and, secondly, managed to pass the 40% local content threshold during construction, despite being built before reaching South Africa. This outcome hinged on securing substantial exemptions from the Department of Trade, Industry, and Competition, as well as an unusually low weighting of economic development obligations (90:10 to price) – compared to previous IPPPs (70:30).

The procurement process’s limited transparency leaves these critical questions unanswered, and highlights further issues, such as how LNG supply agreements will be managed and whether Eskom — which famously refused to sign agreements with renewable IPPs — will sign these PPAs.16 Ultimately, most questions stem from an underlying concern that the RMIPPP has been corrupted and has failed to meet the stated goals of being “fair, equitable, transparent, competitive, and cost-effective” as well as higher-order national development goals, including advancing broad-based black economic empowerment, environmental sustainability, local economic development and industrialization.17 With all projects required to reach financial close by the end of July 2021, many hurdles remain – including litigation from an unsuccessful bidder (DNG) that has leveled allegations of outright corruption.18 It seems likely that more questions (and hurdles) will arise ahead of the deadline. Most recently, on 24 June 2021, the Department of Forestry, Fisheries, and the Environment announced that it rejected the environmental impacts assessments.19 It seems increasingly likely that the Karpowership deals will end up dead in the water, with devastating implications for economic recovery for South Africa.

Where does South Africa go from here?

Given South Africa’s checkered history of power procurement and a number of corruption cases involving Karadeniz Energy Group’s powerships in other countries, the South African government should make procurement documents, bid submissions and evaluations, and potentially PPAs publicly available, or at the very least, available to oversight bodies – including Parliamentary committees.20,21,22


Endnotes

  1. https://www.csir.co.za/csir-releases-annual-power-sector-statistics
  2. https://www.gsb.uct.ac.za/files/Eskom_Enquiry_booklet_V3_Web_2.pdf
  3. https://www.businessinsider.co.za/eskom-needs-r1-billion-a-week-from-government-to-keep-the-lights-on-in-2021-2021-3
  4. https://www.gov.za/sites/default/files/gcis_document/202007/43509gon753.pdf
  5. https://news.bloomberglaw.com/environment-and-energy/environmental-groups-seek-probe-of-south-african-gas-power-deal
  6. https://m.engineeringnews.co.za/article/questions-concerns-remain-about-karpowership-bids-2021-05-03
  7. https://www.reuters.com/world/africa/south-african-emergency-power-tender-challenged-court-2021-04-30/
  8. https://amabhungane.org/stories/210514-powerships-how-the-multi-billion-rand-tender-was-legally-rigged/
  9. https://mg.co.za/business/2021-05-07-new-consortium-scores-big-in-south-africas-floating-power-station-deal/
  10. https://www.engineeringnews.co.za/article/energy-expert-calls-for-rmipppp-overhaul-to-facilitate-cheaper-cleaner-emergency-power-2020-10-08/rep_id:4136
  11. https://www.businesslive.co.za/bd/national/2021-05-17-news-analysis-how-the-tender-dice-was-loaded-to-favour-expensive-karpowership-gas/
  12. https://amabhungane.org/stories/210514-powerships-how-the-multi-billion-rand-tender-was-legally-rigged/
  13. https://www.dailymaverick.co.za/article/2020-08-13-proposal-for-turkish-company-to-anchor-floating-power-stations-off-sa-harbours-raises-alarm-bells/
  14. https://www.dailymaverick.co.za/article/2021-06-09-karpowership-sa-green-scorpions-enviro-investigation-could-capsize-r225bn-deal/
  15. https://www.capetalk.co.za/articles/415107/creecy-to-have-final-say-on-karpowership-deal-after-enviro-assessors-give-go-ahead
  16. https://www.ee.co.za/article/drama-at-the-signing-why-did-eskom-refuse-to-sign-the-ppas.html
  17. https://www.gov.za/issues/national-development-plan-2030?gclid=CjwKCAjwqIiFBhAHEiwANg9szkZSLvjJiw_AHLG-1LQLHoHGfH_bSXMiVURoWkWA_ttwC12ELp9HPBoCp_gQAvD_BwE
  18. https://www.bloomberg.com/news/articles/2021-04-29/dng-energy-takes-legal-action-to-halt-s-african-power-award
  19. https://www.businesslive.co.za/bd/national/2021-06-24-karpowership-fails-crucial-environmental-test/
  20. https://www.timeslive.co.za/sunday-times/news/2021-05-16-kusile-free-for-all-exposed-how-eskom-crooks-siphoned-millions-from-project/
  21. https://www.brecorder.com/news/40053147
  22. https://www.bbc.com/news/world-middle-east-57112611
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