OUTA files legal challenge to overturn NERSA’s Karpowership licences

NERSA failed to act in the interests of South Africa, failed to provide adequate reasons and failed to consider that the Karpowership 20-year “emergency” contracts will not resolve loadshedding but will instead tie South Africa to an expensive long-term contract.

Help us oppose corruption

OUTA is standing up against government corruption and mismanagement. Our work is made possible though donations by our paying supporters.

28/04/2022 08:47:56

        OUTA files legal challenge to overturn NERSA’s Karpowership licences

        The Organisation Undoing Tax Abuse (OUTA) has filed an application for the review and setting aside of the decisions by the National Energy Regulator of South Africa (NERSA) to grant the three Karpowership independent power producer (IPP) generation licences.

        OUTA’s application was filed in the Pretoria High Court on Tuesday 26 April. The respondents are NERSA, four Karpowership companies, the Minister of Mineral Resources and Energy, the Minister of Forestry, Fisheries and the Environment, and Eskom. The Karpowership companies are Karpowership SA (the holding company) and its wholly owned subsidiaries Karpowership SA Coega, Karpowership SA Saldanha Bay and Karpowership SA Richards Bay. OUTA’s action is directed against NERSA, while the other parties are cited due to their interest in the matter.

        This is an application in terms of the Promotion of Administrative Justice Act.

        The application is supported by an affidavit by OUTA Executive Director Advocate Stefanie Fick and a confirmatory affidavit from a specialist consultant supporting the views on the negative economic impact and lack of consideration of far more viable alternatives.

        “It is submitted that NERSA has displayed a cavalier attitude towards statutory compliance and public concerns throughout its decision-making process to award generation licences to Karpowership. By doing so, it has failed to properly exercise its mandate in terms of the ERA [Electricity Regulation Act] and fulfil its oversight functions of regulator without the necessary independent checks and balances to ensure that the interests of electricity suppliers are balanced with the interests of customers, the public and the South African economy,” says Advocate Fick in the affidavit supporting the application.

        “The decisions to award the licences to Karpowership for generation at Coega, Saldanha Bay and Richard’s Bay respectively were irrational, unreasonable, and taken without regard to relevant considerations or with regard to irrelevant circumstances.”

        OUTA believes that the normal public procurement processes for new generation capacity and private procurements by electricity customers themselves are now overtaking the Risk Mitigation Independent Power Producer Procurement Programme (RMIPPPP), the so-called “emergency” process.

        What OUTA is asking the court

        OUTA is asking the high court to review and set aside NERSA’s decisions to award generation licences to the three Karpowership IPPs, and order NERSA to reconsider these decisions.

        The Karpowerships: how we got here

        In February 2020, Minister of Mineral Resources and Energy Gwede Mantashe made a determination that 2 000 MW of emergency generation capacity should be procured through the Risk Mitigation Independent Power Producer Procurement Programme (RMIPPPP). NERSA concurred with this determination in May 2020.
        The Department of Mineral Resources and Energy (DMRE) issued a request for proposals and, on 18 March 2021, the DMRE announced seven preferred bidders, including the three Karpowership SA companies. The three Karpowership projects would together provide 1 220 MW of gas-fired generation capacity. 
        The ships housing the gas-fired power generation capacity (powerships) are supplied with gas from floating storage and regasification units (FSRUs), which are in turn supplied with imported liquified natural gas (LNG) from international suppliers on purpose-built LNG carrier ships. The powerships and FSRUs would anchor permanently in the three harbours for the duration of the planned 20-year contract. Karpowership SA, the holding company, is owned by Karadeniz Holdings, a Turkish energy company.
        On 21 September 2021, NERSA awarded generation licences to the three Karpowership IPPs and, on 29 October 2021, published its reasons for decision.
        The projected costs of the Karpowership projects, including fuel supply, over a 20-year period are reported to be more than R200 billion.

        OUTA’s court papers call NERSA’s decisions procedurally unfair, irrational and unlawful

        Fick’s affidavit supporting OUTA’s application includes these points:

        ·         NERSA’s decision-making was procedurally unfair. The process was premature and lacking in transparency, with significant portions of the licence applications redacted.

        ·         The law requires that NERSA acts in the best interests of the country, but OUTA believes that NERSA has failed to do so. The Electricity Regulation Act, which empowers NERSA to issue the licences, requires a fair balance between the interests of customers and end-users, licensees, investors and the public. The National Energy Regulator Act requires that every decision by NERSA be “in the public interest” and “based on reason, facts and evidence”. This Act also provides for the judicial review of NERSA decisions in terms of the Promotion of Administrative Justice Act.

        ·         NERSA granted the generation licences for the Karpowership IPPs prematurely, without the relevant facts before it, and conducted the public participation process without providing the public with the necessary facts on which to comment, including pricing aspects. “The lack of transparency points to a decision that was procedurally unfair as the public was not informed of and able to comment on and submit relevant facts and evidence to NERSA on the costs involved over the next 20 years,” says Fick.

        ·         In its reasons for the decisions, NERSA failed to provide a meaningful response to the public concerns and objections, effectively undermining the public participation process. Instead, NERSA “simply brushed aside” the public objections, says Fick.

        ·         In August 2021, OUTA made a formal submission to NERSA objecting to the granting of generation licences to the Karpowerships. Many of these objections still stand and have not been addressed.

        ·         At the time when the applications for generation licences by the Karpowership IPPs were considered by NERSA, the regulator did not take into account that the Karpowership IPPs failed to meet certain legal and regulatory requirements, including NERSA’s own prescribed requirements for generation licence applications to be considered. These include failure to obtain environmental authorisations, port authorisations, water licences, emissions licences, waste management licences, various gas infrastructure construction, operating and trading licences, fuel supply agreements and power purchase agreements.

        ·         NERSA’s lack of transparency on the financial information raises concern about the effect on the public. “It failed to deal with the issue of price variation in circumstances where prices over the next 20 years will be dependent on the US dollar price. This causes uncertainty and may come at tremendous costs for the South African public,” says Fick.

        ·         NERSA appeared to prioritise the interests of the Karpowership IPPs over the public. Fick says that “it is of great concern that NERSA, a South Africa public body using public funding, expresses concern about the financial affairs of a private Turkish majority-owned company, thereby creating the distinct impression that the financial well-being of Karpowership should enjoy preference above that of the South African public.”

        ·         Eskom has not signed power purchase agreements with the Karpowership IPPs and there is no certainty that it will do so, which is an important factor when considering the granting of generation licences.

        ·         Despite the DMRE having repeatedly extended the deadline for RMIPPPP preferred bidders to obtain the requisite regulatory approvals and authorisations necessary for financial closure, the Karpowership IPPs have still failed to provide these.

        ·         NERSA accepted the “plans” by the Karpowership IPPs to comply with environmental legislation as actual compliance.

        ·         NERSA failed to take value-for-money considerations into account, including consideration of more cost-effective options.

        Fick’s affidavit refers to input from OUTA’s independent consultant:

        There are faster and substantially cheaper generation project options available to eliminate loadshedding in the short-term, so the Karpowership projects are not needed.
        The Karpowership projects will impose unnecessary financial, economic and environmental costs on South Africa and the 20-year contracts carry a significantly greater risk to customers, the public and the economy than the available alternatives.
        NERSA has failed to conduct a proper analysis of the project costs and cost risk, and appears to have misconstrued the issues surrounding the electricity pricing formulas (in particular the gas pricing components). This includes the price being significantly exposed to variations in the US dollar / rand exchange rate and global gas prices.
        The Karpowership bid price in April 2020 was about R1.50/kWh and NERSA said this would be up to R2.80/kWh from April 2022, but the independent consultant estimates the current price is close to R5/kWh, roughly two to three times the cost of alternative generation methods.
        The pricing methodology is such that the Karpowership IPPs could receive “windfall” profits.
        NERSA failed to consider the climate impact of 20-year generation licences for the Karpowership IPPs (which run on fossil fuels) when cleaner, cheaper and faster electricity supply options are available. “High capacity factor gas power as proposed by Karpowership, will mostly not displace CO2 emitting coal power as claimed by NERSA in the RfD [reasons for decision], but will rather displace the amount of future renewable energy that will be built. It will thus result in a higher emitting power sector than what would otherwise have been the case, thereby undermining the country’s efforts to decarbonise its economy,” says Fick.
        Contrary to NERSA’s assertion in its reasons for decision for granting the Karpowership IPPs’ generation licences, renewable energy solutions provide more employment opportunities on a per kWh basis than will be provided by the Karpowership projects.

        Further information

        A soundclip with comment by OUTA's Advocate Stefanie Fick is here.
        A podcast with an interview with OUTA’s Adv Fick and OUTA Legal Project Manager Brendan Slade by OUTA’s Ilse Salzwedel is here.

        OUTA's media briefing on 28 April on this action is online here.

        Background on OUTA's objections to the Karpowerships deal is here.

        The court papers
        The notice of motion is here.
        The founding affidavit by Adv Stefanie Fick is here.
        The annexures are here: Annex FA1, Annex FA2-4, Annex 5, Annex 6, Annex 7-11, Annex 12-14, Annex 15-17, Annex 18

        Picture: Wikimedia Commons