Solar panels

11 Aug 2022

Ramaphosa flicks the power switch

The president’s new power plan is a step in the right direction. But success rests on large-scale private sector electricity generation and massive upgrades to the Eskom grid.


LISTEN: Ramaphosa’s power plan: will it work?

President Cyril Ramaphosa has announced the most comprehensive package of energy reforms in two decades. But we’ve seen plenty plans in the past that have amounted to no more than words. Will this one be different? In this episode, Investec experts unpack the president’s plan.


Just a few weeks ago, loadshedding ramped up to the dreaded Stage 6, playing havoc with our lives and livelihoods and denting investor and business confidence in South Africa. In response to the crisis – and some might say a decade too late – the president announced a new energy plan, which calls on the private sector to play a more active role in public power generation.

If indeed the plan can coax renewable energy projects into the light and spark hope in the hearts of investors, it could spell the beginning of the end of power shortages that have constrained South Africa’s economic growth for far too long. But formidable challenges remain, including questions around financial viability and construction capacity.

So, can the plan work? This urgent question was the focus of a recent edition of No Ordinary Wednesday, a podcast series on Investec Focus Radio.

Andre Wepener, Head of Structured Finance Solutions at Investec, summed up the opportunity, and the hurdles that lie in its path: “The President has really firmly knocked the ball back into our court as the private sector. The private sector, particularly in our industry, for a number of years, has been crying out for these changes. Now that they've come, we really need to step up to the plate and show that we can deliver.”

Andre Wepener
Andre Wepener, Head of Structured Finance Solutions at Investec

There's an enormous challenge to be overcome here. Essentially, we need to alleviate the current shortfall in generation capacity (remove loadshedding). The next challenge is to replace the generation capacity that we will lose as the coal fleet is retired systematically over the next seven years.

The plan

A key feature of President Ramaphosa’s plan is to expand the bid windows for independent power production to increase generation capacity on the grid. He intends to scrap licensing requirements in order to increase private sector participation. In addition, there’s talk of major investments in critical transmission infrastructure.

Private sector participation and investment is crucial and will be required on an ongoing basis well into the future. From large-scale utility projects to South African residents with rooftop solar contributing to the grid, changes to legislation empower all sectors of society to play a part in solving the crisis.

Wepener estimates that the benefits of these changes will start to appear within the next two to three years, with the possibility that major capacity issues can be addressed in roughly six to seven years’ time.

But even if the private sector is able to get its act together, the plan’s success still fundamentally depends on whether the state electricity utility can channel power from where it’s generated and deliver it to where it’s consumed.

“What tends to happen is that the parts of the country where we have a very rich resource in terms of solar and wind is not necessarily where the demand for the power is,” explains Wepener. “So the transmission grid becomes critical. I understand [Eskom] is planning to add around 8000 kilometers of additional transmission lines and 101 additional substations over the next seven years. There are obviously plans to strengthen the distribution network, because of all the additional embedded generation that we anticipate being added to the grid. So big plans by Eskom – and we hope they can deliver.”

Tariff increases on the way

Big plans require deep pockets. Tertia Jacobs, Treasury Economist at Investec, sums up the problem.

“The first issue is Eskom’s debt load of R396-billion. Eskom just can’t afford to service the debt. In October, the Minister of Finance will announce how this debt will be restructured. Currently, it looks like at least half of it will be transferred to government's balance sheet. That will then allow Eskom to bring on new finance capacity. But what becomes so important here is sustainability: it’ no use transferring that amount of debt onto the government’s balance sheet, which could potentially hold implications for taxpayers, if Eskom has to go back to government in future for additional financing.”

Compounding the problem, Jacobs explains, are municipal arrears amounting to more than R40-billion, as well as electricity tariff increases.

“Unfortunately, I think we are heading towards steeper tariff increases going forward. NERSA has had the tendency over the past few years not to grant Eskom the increase that they required. Eskom has requested an increase of 32% for the next financial year. It is major, so we’ll have to see how this is going to play out. I think businesses and households have to prepare themselves for relatively steep increases, which feeds into fixing the energy crisis.”

A story of hope

Despite near-term costs to consumers and businesses, there’s plenty of good news in store should the President’s power plan succeed. “There are massive positive repercussions for our economy,” says Jacobs.

Tertia Jacobs
Tertia Jacobs, Investec Treasury Economist

You know, when you look back over the past 10 years since the FIFA World Cup and the construction of the Gautrain, South Africa hasn’t actually had any major investment projects.

“Very important are the implications for business confidence, with the stage six loadshedding in June representing a tipping point,” says Jacobs.

Bernard Geldenhuys, Transactor for Investec’s Power and Infrastructure Finance team, believes the positive ripple effect on key South African industries will be significant. He is also confident that banks will have the appetite to provide the required finances.

“The industries that jump to mind are the construction companies and your equipment suppliers, both on the generation side and on the infrastructure side. Off the back of that you will see more opportunities for banks and financial institutions to participate in this whole process.”

“I think the resurrection of the local industries supporting this massive infrastructure rollout will eventually result in additional job creation across the country,” Geldenhuys continues. “This is really important to support the whole energy transition from dirty coal to gas and ultimately green power.”

Jacobs is cautiously optimistic about the longer-term impact on South Africa’s struggling economy. “I think loadshedding is still going to be a challenge – it's not going to go away any time soon. From that perspective, business activity production and consumer confidence will still be impacted. It’s very important then that this momentum that happened over the past week is going to be sustained. And certainly, there will be more energy. I’m talking about dynamism coming into our economy as this build starts to take off.”

Wepener offers an interesting perspective on government’s past failure to bring on sufficient coal-powered energy for South Africa’s needs. Had these failures not occurred, he asks, “would we ever have liberalised our generation capacity and our energy sector to the point that we have now? Probably not. And I think that's something we need to be positive about and at least celebrate, in a way, that some good has come out of the bad.”

“I don't believe we are out of the woods yet,” Wepener cautions. “But I do hope that we've reached our maximum point of pain and that we now are at the tipping point where, from here, we are really going to see this growth and, eventually, an end to the crisis.”

  • Disclaimer

    Focus and its related content is for informational purposes only. The opinions featured on the site are not to be considered as the opinions of Investec and do not constitute financial or other advice. The information presented is subject to completion, revision, verification and amendment.

    Although information has been obtained from sources believed to be reliable, Investec Securities Proprietary Limited (1972/008905/07) or its affiliates and/or subsidiaries (collectively “ISL”) does not warrant its completeness or accuracy. Opinions and estimates represent ISL’s view at the time of going to press and are subject to change without notice. Past performance is not indicative of future returns. The information contained herein is for information purposes only and readers should not rely on such information as advice in relation to a specific issue without taking financial, banking, investment or other professional advice. ISL and/or its employees and/or other Investec Companies may hold a position in securities or financial instruments mentioned herein. The information contained in this document alone does not constitute an offer or solicitation of investment, financial or banking services by ISL. ISL accepts no liability for any loss or damage of whatsoever nature including, but not limited to, loss of profits, goodwill or any type of financial or other pecuniary or direct or indirect or consequential loss howsoever arising whether in negligence or for breach of contract or other duty as a result of use of the reliance on information contained in this document, whether authorised or not. This document may not be reproduced in whole or in part or copies circulated without the prior written consent of ISL.

    Full Investec Bank Limited disclaimer    

    ICIB disclaimer

    The information furnished in this report, brochure, document, material, or communication (“the Communication”), has been prepared by Investec Bank Limited, acting through its Investec Corporate and Institutional Banking division (herein referred to as “Investec”). This Communication does not constitute: a research recommendation, investment, legal, tax or other advice; and is not to be relied upon in making an investment or other decision. The intended recipients should consider the information contained herein to be objective and independent of the interests of the trading and sales desk concerned. Opinions and any other content including data and market commentary in this Communication are provided for information purposes only.

    The information contained herein has been obtained, where required, from various sources believed to be reliable and may include facts relating to current events or prevailing market conditions as at the date of this Communication, which conditions may change without notification to Investec and/or the recipient.  This is a summary of relevant information and should not be considered as complete. This Communication may not be considered as “advice” as contemplated in the Financial Market Act, 19 of 2012 and/or the Financial Advisory and Intermediary Services Act, 37 of 2002 as it does not take into account your financial position or needs.

    This Communication may also not be seen as an offer to enter into or conclude any transactions.  In relation to the information Investec does not guarantee the accuracy and/or completeness thereof and accepts no liability in relation thereto. You should make your own independent evaluation of the relevance and adequacy of the information contained herein and make such other investigations as you deem necessary, including, where relevant, obtaining independent financial advice, before participating in any transaction in respect of the securities referred to in this document.

    Any opinions, forecasts or estimates herein constitute the personal judgement of the party who compiled this Communication as at the date of this document. Thus, this Communication reflects the different assumptions, views and analytical methods of the specific individual/party who prepared this Communication. As such, there can be no guarantee that future results or events will be consistent with any such opinions, forecasts or estimates. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied is made regarding future performance.

    There may be risks associated with the information, products or securities, including the risk of loss of any capital amounts invested or traded due to market fluctuations. There is no obligation of any kind on Investec or any of its Affiliates to update this Communication or any of the information, opinions, forecasts or estimates contained herein.

    This Communication is confidential for the information of the addressee only and may not be reproduced in whole or in part, nor shall it be copied, redistributed or circulated, or disclosed to another unintended party, without the prior written consent of the relevant entity within Investec. In the event that you contact any representative of Investec or any party in connection with the receipt of this Communication, you should be advised that this disclaimer applies to any subsequent oral conversation or correspondence that occurs as a result of this Communication.  Any subsequent business you choose to transact shall be subject to the relevant terms and conditions thereof. Neither Investec nor any officer or employee thereof accepts any liability whatsoever for any direct or consequential loss arising from any use of this Communication or its contents.

    Investec Corporate and Institutional Banking is a division of Investec Bank Limited registration number 1969/004763/06, an Authorised Financial Services Provider (11750), a Registered Credit Provider (NCRCP 9), an authorised Over the Counter Derivatives Provider, and a member of the JSE. Investec is committed to the Code of Banking Practice as regulated by the Ombudsman for Banking Services. Copies of the Code and the Ombudsman's details are available on request or visit Investec COBP