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11 Aug 2022

Ramaphosa flicks the power switch

Jeremy Maggs

Jeremy Maggs

Host | Ordinary Wednesday

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.”

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