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06/14/2022 | News release | Distributed by Public on 06/14/2022 10:17

Karpowership deal delayed by Eskom indemnity clause

Turkish firm Karpowership's emergency power supply deal with South Africa's Eskom has been delayed by the latter's demand that the former indemnify it from damages, including potential losses from corruption allegations.

The Eskom board has to approve all power purchase agreements under the risk mitigation independent power producer procurement programme (RMIPPPP), according to Karpowership. The RMIPPPP is meant to alleviate South Africa's electricity supply crisis through the urgent procurement of new generation capacity.

The standard PPAs that all preferred RMIPPPP bidders must sign already contain comprehensive indemnity clauses in Eskom's favour, Karpowership says.

But Eskom's board, citing its fiduciary duty, set an additional requirement that the Turkish firm signs an "extremely wide-reaching, open-ended indemnity agreement" that has not been requested from any other preferred bidder, according to Karpowership. The firm says it was only made aware of Eskom's additional demand on 23 March.

Karpowership said this is "highly irregular" and risks opening the whole RMIPPPP to charges of an unfair tender process. Eskom's additional indemnity request potentially exposes Karpowership to huge liabilities outside of the firm's control, it says. "Even more problematic is that it has not been requested from any other preferred bidder."

Karpowership was selected in March 2021 as one of 11 preferred bidders to provide 1.22GW of emergency power - nearly two thirds of the overall 2GW tender under the RMIPPPP.

The firm's gas-fired power ships and floating storage and regasification units would anchor permanently at the ports of Richards Bay, Coega and Saldanha Bay. The projected cost, including supplying LNG to Karpowership's projects over the 20-year contract period, is more than 200bn rand ($12.5bn).

Apart from the outstanding PPA with Eskom, Karpowership still faces a multitude of other regulatory obstacles and legal challenges.

The department of forestry, fisheries and the environment (DFFE) is yet to decide on the firm's appeal against its refusal to grant environmental permission for its project.

Independent consultancy Environmental Impact Management Services (EIMS) submitted its report on 31 May. The DFFE must within 10 days of having received the report submit its recommendations to the minister, who then has 20 days to decide the appeal.

The Turkish firm further contends that the DFFE's grounds for rejection were influenced by "well-funded outside interests opposed to natural gas and a sensationalist media campaign based on misinformation".

Karpowership's multi-billion-rand contract has also been dogged by allegations of corruption and government interference.

South African LNG importer and losing bidder DNG Energy claims the RMIPP bid process was rigged in favour of the Turkish firm. The high court initially rejected DNG Energy's application for an urgent court interdict against the award to Karpowership, but DNG has since obtained leave to appeal the ruling. The judge said that, after studying earlier evidence that the court disqualified, an appeal had a "reasonable prospect" of success.

The Transnet National Ports Authority (TNPA) still has to grant the firm port access and long-term mooring rights, or authorise construction of LNG infrastructure.

So far, the only RMIPPPP contracts to be concluded were signed on 2 June with Norway-based renewables firm Scatec for three solar PV and battery storage projects at Kenhardt in Northern Cape province. The projects will have a combined capacity of 150MW and 1.1GWh of battery storage.

Together, the projects have attracted R16bn in investment. The projects have until 3 August to reach financial close and are expected to deliver energy within 12-18 months from that date.

The head of the Independent Power Producers Office, Bernard Magoro, said the eight remaining RMIPPPP projects - including Karpowership's - will still be given an opportunity to "finalise and resolve outstanding matters".

Originally, the "non-negotiable" RMIPPPP deadline for all projects to reach financial closure was 31 July 2021. But this deadline has been pushed back several times and so the August 2022 timeline for first power from the RMIPPPP to flow to the national grid has slipped significantly.

Elaine Mills