Deregulating South Africa's power supply

MEDIA RELEASE

22 MARCH 2022

Powering the future – the road to private power in South Africa

As South Africa is hit by yet another wave of load shedding, the deteriorating generation capacity of the incumbent is abundantly clear. In an effort to address this challenge, government has, at long last, eased up the requirements for the generation of private power. We are now seeing the start of a boom in private power as many corporates seek to either generate their own power or contract with independent power producers (IPPs). A deregulated power sector is an enormous opportunity for South Africa and brings the country more in line with international best practice. However, it also requires innovative funding solutions to get it off the ground so as to make this power accessible to the market.

New government regulations allow the private sector to generate up to 100MW capacity, without the requirement for a generation licence,  subject to certain requirements such as compliance with the Grid Code and having registered with the National Energy Regulator of South Africa (NERSA). 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,” says Dario Musso, Co-head: RMB Infrastructure Sector Solutions.

Renewable energy generation is an essential component of the future power plans for countries across the globe, and South Africa, with its excellent solar and wind resources, is no exception. However, as we transition away from coal-generated electricity, there is a significant gap that needs to be filled. This problem is compounded by the current reliability of supply issues. The reality though is that renewable energy is cheaper to produce in South Africa than current thermal sources, especially given the reliance on diesel generation.

The emerging private power sector could potentially own a bigger market share than the government sector power procurement programmes, if certain challenges can be solved. These include transmission and grid constraints, as well as access to municipal distribution grids to connect a broader universe of 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. Finally, there is the challenge of funding IPPs selling to corporates because they 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 5-to-7-year debt tenors generally available for corporates. This impacts on affordability of electricity tariffs for corporates under an IPP model. Corporates do not always wish to enter into long-term offtake contracts with IPPs, but IPPs need long-term commitments in order 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,” says Daniel Zinman, Head: Power, RMB Infrastructure Sector Solutions.

“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. This allows us 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,” he adds.

The incumbent is stuck in a debt spiral, and coal power is neither desirable nor sustainable in our future. 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.

End

Contact:

Kate Kelly l RMB l kate.kelly@rmb.co.za