A deregulated electricity sector is an “enormous opportunity” for South Africa, bringing the country more in line with international best practice and helping it tackle generating deficits, as well as building in resilience, reports investment bank Rand Merchant Bank (RMB).
However, for private electricity producers to gain momentum in the market requires innovative funding solutions to make this power accessible to the market.
RMB infrastructure sector solutions co-head Dario Musso points out that new government regulations enable the private sector to generate up to 100 MW of their own electricity without needing a generation licence.
This is, however, subject to certain requirements such as compliance with the Grid Code and having registered the project with the National Energy Regulator of South Africa.
“This is a massive opportunity and comes at an opportune time. Corporates are currently looking not only to access long-term, predictable and reliable energy, but to reduce their carbon footprint as well,” he says.
Although renewable energy generation is an essential component of the future power plans for countries across the globe, RMB states that South Africa, with its good solar and wind resources, needs to consider how it bridges its current generation deficits, which will be exacerbated by moves away from coal and coal-fired power generation.
In this regard, RMB highlights that renewable energy is cheaper to produce in South Africa than currently available thermal sources, especially considering the country’s reliance on diesel generation from peaker plants.
Rolling out more independent renewable energy plants could potentially grow the emerging private power sector to a point where it has a bigger market share than the government sector power procurement programmes. However, this would require certain challenges to be overcome.
Such challenges include transmission and grid constraints, as well as access to municipal distribution grids to connect more consumers.
The issue of developing fair and well-regulated tariffs that are both standardised and transparent is also something that the municipal sector in particular continues to grapple with in the current environment, says RMB.
Another challenge is that of funding independent power producers (IPPs) that want to sell electricity to corporates, because IPPs do not fit into the traditional corporate debt financing models, or even typical government-backed project finance models.
“A power plant is a long-term asset, with a lifespan that stretches well beyond the typical five-to-seven-year debt tenors generally available for corporates. This impacts on affordability of electricity tariffs for corporates under an IPP model,” says RMB infrastructure sector solutions power head Daniel Zinman.
This presents a conundrum as corporates do not always wish to enter into long-term offtake contracts with IPPs, but IPPs need long-term commitments to attract longer-tenor financing to drive down tariffs. “Lenders need to become more innovative in their funding and take more of a market view in this space,” he adds.
He notes that, while South Africa may not be able to deliver a surplus of renewable energy in the medium term, renewables are sought-after as part of the decarbonisation agenda and they offer cheaper power supply.
“We need to look at different considerations when funding IPPs. If the IPP facility is to be connected to the Eskom network and the buyer is as well, for example, it would be feasible to find a new buyer of that power should the corporate off-taker fall away,” says Zinman.
This, he says, enables investors to take a longer-term view in the funding of IPPs supplying well-rated corporates and offer debt terms that deliver attractive electricity tariffs. “The success of this model is already being seen in the mining and industrial sectors, where a number of the IPP clients that we have supported have been selected as preferred bidders.”
RMB notes that Eskom, stuck in a debt spiral, is primarily using coal to fire its baseload fleet – a source of fuel which is neither desirable nor sustainable in South Africa’s future.
As such, RMB states that a new solution is needed to address South Africa’s power problems, and financing independent, renewable power production has become critical to South African economic growth.
“Banks have a major role to play in facilitating this, by offering a full spectrum of innovative services and solutions.
“From acting in an advisory capacity, to funding both IPPs selling their power and corporates looking to generate their own, to credit offerings that enhance power traders and equity investments in developers, IPPs, power traders and platforms, the market is ripe with opportunity,” states RMB.