The South African power sector is undergoing a major shift towards decentralised power projects as a “massive energy crisis” grips the country, says Nedbank Corporate and Investment Banking (CIB) infrastructure, energy and telecommunications head Mike Peo.
Speaking during an Infrastructure Africa panel discussion on decentralised power, on June 23, he said the topic “is extremely pertinent” as the energy sector is increasingly shifting away from the “old-fashioned way of provisional large utility-scale power”.
He attributes the shift to economic circumstances and the fact that, historically, financial institutions provided finance on the back of a power purchase agreement with a utility which was supported by a government guarantee, and that such guarantees were becoming increasingly difficult to write as a result of factors like commodity cycles.
For the past four to five years, Nedbank CIB has spent a significant amount of time in looking into how to shift the funding model – a scenario in which banks would provide reasonably cheap debt to these massive projects.
As a result of this, Peo said the shift to decentralised power projects had accelerated further.
WHAT IS REQUIRED
However, and unfortunately, he noted, the complexity around decentralised power projects is complicated as every country has different power policies and regulatory frameworks, which require time to understand how liberalised the respective power sector is and how easy it would be to provide funding.
Nonetheless, Peo pointed out that the power sector has, in the past four to five years, been undergoing “probably the most innovate[ive]” period in the past 20 years.
Further, although new technologies were empowering power project developers, the pace of project development was too slow. “The lack of access to energy is still too high and we do need to shift the dial up dramatically to increase the financeability of projects.”
In terms of raising a project’s financial viability, he said three key factors play a role - the first being the requirement of power policy certainty. “We need to know that national governments are committed to sector reform in the energy space.”
The second key enabler is regulatory reform, which would likely follow from policy certainty. “We need to see the right regulations in place, so that people can operate under those regulations,” said Peo.
Thirdly, what is required to increase the financial viability of new power projects is an actual pipeline of waiting bankable projects.
“We are increasingly seeing huge amounts of bankable projects, but the reality is that there are nowhere near enough projects being developed at the moment [to mitigate South Africa’s energy crisis],” he stated.
Domestically, Peo stated that South Africa needs “incredible regulatory reform” to liberalise its power sector which has been controlled for the past century almost, by a single utility – Eskom.
“[Eskom] is now battling under an incredible debt burden, and although it is in a process of reforming, right now we still have a situation where generation, distribution and transmission are all controlled by [it],” he said.
As a result, South Africa’s power sector is suffering from a combination of increasingly high tariffs.
“At the same time, energy security is unreliable as South Africa is facing regular rolling blackouts,” he stated.
Further, Peo noted that Eskom is also burdened by the fact that it is predominantly focused on coal-fired power – a factor that meant South Africa was the most significant air polluter in the whole of Africa.
In this regard, if South Africa, and by association Eskom, was able to reduce its emissions, future funding for power projects was most likely to be more forthcoming as funders eye projects and jurisdictions that are actively lowering emissions in an effort to mitigate climate change and mitigate the effects of global warming.
Positively, he noted that the South African power sector was shifting towards full liberalisation of the sector, but cautioned that these developments were too slow and should be sped up.