The Stortemelk hydropower scheme is a 4.2MW installation on the Ash River in South Africa developed by Renewable Energy Holdings (REH) under the Renewable Energy Independent Power Producer Procurement Programme (REIPPPP).
The procurement approach was a typical split contract arrangement which enabled risks to be appropriately managed at an affordable price. Whilst such an approach is not unique, it was the first time that it had been applied to a scheme under the REIPPPP.
As the Lender's Technical Advisor (LTA) for the project, our focus was on ensuring that risk allocation between the contracts were clear, that the parties holding the risks were capable and had been priced appropriately, and ultimately, that the lenders were protected.
4.2 MW installed capacity
R186 million project capital cost
26 months construction duration
It was clear that in order for the project to bid competitively the proposed contracting also presented a level of risk to the lender that was unusual in the REIPPPP. This required a more detailed review and subsequent recommendation to the lenders and developer to ensure adequate risk mitigation measures being implemented on the project.
Key areas of risk included programme coordination with third parties, such as the annual shutdowns of the Lesotho Highlands Water Transfer and delay to commercial operations resulting in the application of REIPPPP penalties.
Due to the split contracting structure there was limited ability for financial recourse against parties for either capital cost overruns or consequential loss arising from poor performance. As a result, the project financial risk fell back on to the developer and ultimately the lender. Arup provided a detailed breakdown of the potential areas where material risks could occur and quantification of the potential financial impacts.
Delivered below budget
The Stortemelk project was the first hydropower scheme within the REIPPPP to reach commercial operation using a split contract approach. This required a heavy integration of Arup as the LTA to provide inputs into the project during the financial close process. Critical to this was the successful engagement between the developer’s team and the lenders team to develop risk mitigation processes prior to financial close. This resulted in the project being delivered on time and approximately 2% below the initial project budget.