Renewable energy in South Africa faces a tough job competing with a lengthy to-do list in 2018, but the country’s programme carries renewed hope following the departure of President Jacob Zuma, according to four bankers polled by Debtwire.
Eskom, the state-owned electricity monopoly, has been subject to state-capture and mired in corruption allegations, with Zuma and his board appointees championing an expensive nuclear programme at the expense of renewables. As a result, Eskom held up previously agreed deals for well over a year by refusing to sign power-purchase agreements (PPAs). Former Minister of Energy Mmamoloko Kubayi promised in September that Eskom would comply, but they remain unsigned as at time of writing.
Zuma’s ignominious departure followed weeks of ANC pressure for the scandal-stricken former leader to resign. Zuma had asked for three to six months, but his departure was confirmed last week, much to the jubilation of all parties involved.
In mid-January, at the behest of President-elect Cyril Ramaphosa and nervous banks, Eskom’s board was replaced as it flirted with default and begged for government support. A ZAR 5bn (USD 429m) loan in February from PIC, the public employee’s pension fund, as well as the government’s carefully worded expressions of support, gave enough comfort for auditors to say Eskom was a going concern.
“The hope is that this could be the catalyst to kick-start the programme once again,” said a source close to one the projects. “There will be a change in mood with Cyril as president of South Africa, and hopefully an upturn in the economy, not to mention changes at Eskom. We are all hopeful of change in the right direction.”
But some observers expressed cautiousness about the renewed optimism.
“It’s clearly positive that Zuma has gone and everyone in the market is feeling that relief,” said one banker. “But I’m pessimistic, because the Moody’s [sovereign rating] review is on the way. Even with the more positive political landscape, I don’t think it will be enough to save them.”
A second South Africa focused banker agreed.
“We are experiencing a lot of change, and I’m not sure renewable energy will top the agenda,” said the second banker. “The country is pre-occupied with a presidential resignation, a new president being inaugurated, cabinet reshufflings, the State of the Nation address and the budget speech. As you can see – IPPs are not top of our minds.”
Despite this, the sources were largely optimistic that the IPPs programme could get back on track soon.
It has been nearly eight-years since South Africa launched its flagship renewable energy programme. Commercial banks and development finance institutions plowed an estimated USD 14.9bn into renewable energy over the course of that time, financing everything from concentrated solar plants to wind farms.
Independent power producers’ interest in South Africa ballooned, and these quickly signed power purchase agreements with Eskom that were underwritten by the government. But the latest rounds have been put on hold due to political wrangling and, as one source put it, the “diabolical” mismanagement of Eskom.
Around 64 projects involved in rounds three, four and four and a half have yet to reach financial close. One of the main reasons for renewables grinding to a halt was former Eskom CEO Brian Molefe’s assertion that South Africa didn’t need more renewable production because it was too expensive.
Molefe, who became CEO of the company three-years ago, subsequently stopped signing PPAs with developers. Power slowed as companies began generating their own energy and the economy lagged. Molefe, a close ally of Jacob Zuma, resigned in November 2016 after being implicated in a corruption probe.
Eskom then took charge of an expensive nuclear-construction programme championed by Zuma. Eskom had sent a “request for information” for a proposed South African Nuclear New Build Programme in 2016. But these plans stalled last year, after a court ruled that Zuma should have sought parliamentary approval for a deal with Russia to build nuclear reactors.
At the time, speculation was rife that Zuma fired former Finance Minister Pravin Gordhan partly to suppress Treasury objections over the cost of the nuclear plans and Gordhan’s unwillingness to provide further state guarantees. It has been estimated that it would cost South Africa around ZAR 1tn (USD 76bn) to build the eight planned plants with a capacity of 9.6 gigawatts — straining public finances at a time of weak growth.
Political squabbling over the desired energy mix resulted in renewables financing dropping as low as USD 4m last year, according to the first source. More than two dozen projects that were near the point of construction are still awaiting signatures. The freeze-out risks driving away badly needed investors – many of whom are looking elsewhere in Africa.
Eskom’s financial woes have not helped, the first source said. Its new CFO Calib Cassim said earlier this month that the company cannot afford a nuclear expansion and gave little indication that it will sign PPAs with renewable providers anytime soon.
“I can’t go and commit to additional expenditure on a nuclear programme,” he said during Eskom’s interim results call on 30 January.
Ready to sign
But market participants are hopeful of “sweeping change” in the country after Zuma’s departure, according to the first source. Their sentiments were bolstered by a public declaration from the Minister of Public Enterprises Lynne Brown that PPAs with preferred bidders for round three-and-a half and four will be signed imminently.
“I have requested Eskom to work expediently to implement the decision and avoid further delays,” Brown said in a statement on 2 February.
“We are pretty confident of it happening sometime soon,” said a source close to the 138 MW wind farm being developed by Enel Green Power in Roffeveld, Northern Cape Town.
The company has named Rand Merchant Bank as sole MLA to source between ZAR 2.8bn and ZAR 3.2bn to fund construction of the project, which was awarded preferred bidder status in round four of the renewable energy programme.
“Obviously Eskom has a new board in place and they need to sign the documentation,” he said. “It is not practical for Eskom to be the sole provider of power. They clearly need some support from the private sector.”
Too high a price
Stakeholders have been promised this before, however. In September, Kubayi said South Africa would sign PPAs in October. A few months earlier, Zuma had promised these signings would come before his state of the nation address.
“There will be resolve from the top to get things done this around,” said a third source close to the programme. “The minister for public enterprises was one the major impediments to deals being concluded, but now she is on board and there are changes at the top we might get something soon.”
Despite Eskom’s contention a year ago that IPP tariffs are too high, the source argued that tariffs are “competitive” for the project he is involved in, without giving further details. The public enterprises minister had stated that the utility would not pay more than 0.77c p/kwh, but agreements are in place for photovoltaic and wind projects, he said.
“It not really a case of tariffs,” the source said. “Eskom will be adequately compensated with a commensurate increase in tariffs via the energy regulator Nersa.”
The utility had requested a 20% increase in energy tariffs last month, or ZAR 219bn in revenue, but South Africa’s energy regulator Nersa granted the firm only a 5.23% electricity tariff increase.
“They will be compensated via a tariff increase pass through,” said the source. “There are all kinds of variables factored into their applications, including the potential cost for coal, nuclear and renewables. Any discrepancy between what they ask for and what they get is not going to be a huge factor. And the increase should be enough to cover renewables.”
It’s an assertion backed by the numbers. Eskom’s total capital expenditure costs for enabling IPP connections amounted to ZAR 3.7bn for projects in bid windows one to four of the REIPPPP, Eskom’s executive for transmission Thava Govender said last year. Its total energy for IPPs amounted to over ZAR 18bn up to March 2016, he added.
“We see no issues for Eskom from a cost perspective,” the third source said.
A fourth source close to projects being developed by Ireland’s Mainstream Power’s, which include the 110 MW Perdekraal East wind project and 140MW Kangnas wind project, was less optimistic about Eskom’s ability to cover the cost of renewables. But he was confident of the sovereign’s ability to foot the bill, if necessary.
According to Eskom’s FY17 report, primary sources of funding include unutilised government guarantees, which for FY17, ZAR 134bn was available, and ZAR 33.8bn was used during the year. As noted by S&P, Eskom already benefits from government guarantees of 8% of GDP. Even though the government is Eskom’s shareholder, advancing shareholder loans to Eskom means forgone interest income to the government, weakening its balance sheet through cash outflows and increased contingent liabilities in the form of guarantees. Click here to see Debtwire’s credit report.
“Can Eskom afford to pay for the IPPs? That’s an incredibly loaded question.” said the fourth source. “Eskom has had a deteriorating liquidity position for some time. Back when the programme was first implemented, it had to rely on a lot of guarantees, and shareholder injections.”
In 2015, the government injected ZAR 23bn into Eskom, financing the deal through the sale of a 13.91% equity stake in Vodacom Group. “The sale of the Vodacom stake was the most viable option for ensuring that the government was able to swiftly realise the proceeds and inject equity into Eskom to bolster the utility,” the Treasury said at the time.
The company is in a far worse position than in 2011, the fourth source continued, but adding that the entity contributes a huge amount to South Africa’s GDP.
“If it fails, the government would be willing to step in,” he said. “We know there are implicit guarantees from SoAf Inc – so we are pretty comfortable. Our clients have received budget quotes and tariffs for individual development projects. We are just waiting for confirmation Eskom is about to sign.”
Mainstream has mandated Absa to lead around USD 328m in rand-denominated project finance debt, as reported.
Despite this, the first source remains enthusiastic about the renewable energy programme. “It’s not a case of simply writing off these deals,” he said.
Renewables continue to be of high priority to South Africa’s integrated resource plan and are expected to form 42%, or 17.8 GW, of South Arica’s electricity generation capacity by 2030, according to a government proposal. This is more than any other form of electricity generation.
Coal makes up more than 90% of the current energy mix. The final IRP – still to be made public – is at parliamentary level for approval.
“It [renewables] will be a huge part of South Africa’s energy mix,” said the first source. “It‘s not that the tariffs are unaffordable, they are competitive as they are. The expectation is that this [minister’s suggestion that they will be signed imminently] won’t be just another false start. There will be a little bit of delay before we see additional procurement programmes, and bankers will need to adjust their business models.”