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Private power-generation programme gets a boost after change of leadership

PUBLICATION: BUSINESS DAY | WRITER: JOHANN BARNARD | DATE: 29/03/2018

Some of the swift actions of President Cyril Ramaphosa have reinvigorated the economy. One beneficiary is the renewable energy independent power producer procurement programme (Reipppp), which ground to a halt two years ago.

In 2016 Eskom baulked at signing round-four power-purchase deals, claiming the programme was unaffordable.

The power utility cut a lonely figure in its opposition to a programme that has been lauded as SA’s most successful public/private partnership. In the five years to 2016, about R200bn had flowed into it.

Paul Semple, portfolio manager of Futuregrowth’s Power Debt Fund, describes this hiatus as a lost opportunity.

As an early backer, Futuregrowth has an exposure just short of R7bn through 24 IPPs participating in the programme.

"The biggest loss is the reputational damage that’s been caused to the programme," he says. "It would be difficult to measure in rand terms, but it’s probably best quantified as the loss of potential growth in fixed investment that was riding on the back of a very successful renewable programme.

"In particular, international suppliers that were setting up shop in SA, creating jobs and setting up factories to manufacture equipment for multiple new projects, have been pulling out because their businesses haven’t been sustainable."

The same applies to international funders who looked for a more stable investor climate.

Semple says that despite this, there is still a lot of interest from local investors keen to back these projects. The expectation is that they will jump in as soon as power-purchasing agreements are signed.

One local player that has also supported projects in earlier rounds is Investec Specialist Bank. Its head of power and infrastructure finance, Michael Meeser, says he has since shifted focus to funding commercial and industrial projects.

But he believes the Reipppp process could be restarted by mid-2018, provided clarity is given in the department of energy’s integrated resource plan (IRP). This outlines the department’s priorities and envisaged energy mix.

It was released for public comment last year and by mid-February this year was still mired in confusion over when the final version would be released. One sticking point for the industry has been the bias towards nuclear, which was included in the first version of the IRP released in 2010.

In the interim, Eskom has moved from too little to too much capacity as the economy slowed and consumption shrank. And the full life cycle cost for nuclear plants has risen 35% in real terms while the cost of solar photovoltaics (PVs) has fallen by 83%, says Richard Halsey of environmental group Project 90 by 2030.

Meeser says the energy sector’s changing dynamics could alter Eskom’s role in the industry significantly. Saddled with debt of about R367bn, he says, it will be hard pressed to pursue profitability to pay this off over 20 years.

The utility’s insistence on implementing above-inflation increases year in and year out has alienated many large industrial users.

"I think we might see a segregated market where future generation will always be done by the private sector and Eskom could potentially, over the years, become purely a distributor rather than a generator of power," Meeser says. "It’s not going to happen overnight, but I think you’ll see the percentage split between Eskom generation and private generation shifting to the private sector."

This potential is one of the reasons for Investec shifting its focus to private-sector, self-generation projects of varying size and complexity.

Another player in the Reippp programme that has had substantial exposure since its beginning in 2009 is Mergence Investment Managers.

Mark van Wyk, head of the asset manager’s unlisted investments, says the experience and confidence built up in these types of projects gives investors far greater comfort in the risk-return profile.

The lower assumed risk means capital can be accessed at more favourable rates.

"The projects are definitely derisking," he says. "Once the plants are stabilised and we have actual performance data, rather than estimates, investors can take comfort from this because they can more easily predict what the cash flows are going to be. With more certainty, you can start lowering the cost of capital,"

He backs Investec’s prediction that private power generation is the next step for renewable power in SA. The cheaper capital, along with technology improvements, could result in large consumers being the first to become independent of the grid.