The perfect energy infrastructure storm

Failure to deliver infrastructure impacts on basic social needs

The failure to implement infrastructure projects has been a recurring issue across African nations — with South Africa no exception. Researchers say that only some 20% of African mega projects reach financial closure because of insufficient labour skills and expertise, low labour efficiency, improper, haphazard and fragmented planning and execution, corruption, slow decision-making, mismanagement, lack of infrastructure maintenance, economic policies and political turbulence.

This mix has also created an almost perfect storm in South Africa, critically affecting societal needs for such basic essentials as energy and water.

“There is no argument to the fact that we are facing an energy crisis,” says Tivon Loubser, Fund Manager of the Twelve B Energy Fund, a product pioneered by Grovest. “Despite load-shedding having been suspended for the last while, it would be naïve to believe we are through the worst of it. Eskom is faced with aging infrastructure and a huge capital outlay required for improvements, maintenance and the roll-out of transmission lines. All this while their customer base dwindles, as mines and other large customers shift to more stable and renewable energy sources. 

“The silver lining to this energy crisis is that it has been a catalyst for the growth of renewables, leapfrogging South Africa to a lower carbon economy. At the end of 2023, South Africa had an installed capacity of just under 8GW, which accounts for almost 50% of installed capacity on the continent.“

The benefits of bridging the multi-trillion-dollar infrastructure gap in Africa are immense for all economic stakeholders, including investors seeking to unlock alternative sources of stable long-term returns. One such investor is Prescient Investment Management, through its Prescient Clean Energy and Infrastructure Fund.

Says Conway Williams, Prescient Investment Management’s Head of Credit: “We need to unlock the gridlock and decode Africa and South Africa’s struggles with infrastructure implementation.

“Our investment philosophy rests upon capital preservation and prudent fund management, and by taking a comprehensive and cohesive approach to responsible investing, we can allocate our clients’ capital in a way that fosters sustainability – and that includes investment into renewable energies and renewables infrastructure.

“Infrastructure is the bedrock of development, catalysing economic expansion, poverty alleviation and enhanced quality of life.”

Williams says the country’s infrastructure needs are enormous, and the government’s push for infrastructure investing, driven by the need for economic development and job creation, has created significant opportunities for private investment. Moreover, infrastructure investments offer an excellent asset liability match for pension funds, with their long investment horizons and stable cash flows.

“South Africa needs a comprehensive strategy, including
investment into renewable energy“

“The term ‘Just Energy Transition’ refers to the shift from fossil fuel-based energy systems to more sustainable and equitable alternatives while ensuring that the process is fair, inclusive, and addresses social, economic, and environmental concerns,” says Williams. It emphasises the need to protect vulnerable communities and workers who might be adversely affected by the transition.

“The global importance of a just energy transition is underscored by the urgent need to mitigate climate change. By transitioning to cleaner energy sources, the world can reduce greenhouse gas emissions, slow down global warming, and promote environmental sustainability. It can also enhance energy security and reduce dependence on finite fossil fuel resources.

“Its importance to South Africa is that this country has one of the highest coal dependency rates globally, with coal-fired power plants supplying the majority of the country’s electricity. While coal has been a reliable source, it poses environmental and health challenges, contributing to air pollution and greenhouse gas emissions. Transitioning to cleaner energy sources is vital for meeting international climate commitments and reducing the environmental impact of energy production, plus a just transition ensures that vulnerable communities and workers are not left behind.”

The positives, Williams says, include environmental sustainability, job creation and job opportunities in the green economy; and energy security by diversifying the energy mix.

“The negatives are job displacements and potential job losses in the coal sector, impacting communities that heavily depend on the industry, and initial upfront costs for building new infrastructure for renewable energy.

“There are, however, some countries making serious strides in on the just energy transition front, such as Germany, Denmark, Costa Rica, Norway, Sweden, the Netherlands, United Kingdom, China, Canada and Portugal.

“To manage the transition, South Africa needs a comprehensive strategy, including investment into renewable energy, developing solar, wind, and other renewable energy sources. There needs to be skills development and providing training and support for workers to transition to jobs in the renewable energy sector. There also needs to be social programmes and implementing social safety nets to support communities impacted by the decline of the coal industry.

“Readiness has taken on a new meaning as South Africa faces a just energy transition. While there have been efforts to diversify the energy mix with renewable projects, the pace needs to accelerate. There needs to be stronger policies, investment, and community engagement to ensure a smooth and equitable transition. Government, industry, and civil society collaboration will be crucial in navigating the challenges and ensuring a sustainable and just energy future for South Africa.”

Catalysing investment in renewable energy

Williams says that amid the global shift towards sustainable energy solutions, South Africa has been a leading player in renewable energy adoption through its Renewable Energy Independent Power Producer Procurement Programme (REIPPP), adding that South Africa’s REIPPP has been instrumental in catalysing private sector investment in renewable energy projects.

“The progress made through the programme highlights the sheer quantum of private sector capital that has been deployed into the renewable energy and infrastructure ecosystem to date, and is an acknowledgement of the critical importance of incorporating renewable energy sources into our energy matrix to combat climate change while improving energy resilience.

“We believe that as South Africa moves ahead, this country faces a pivotal year in 2024 with twin challenges that are critical to the REIPPP’s continued success. Firstly, the integration of renewable energy into the national power grid, and secondly, significant advancements in energy storage technologies. These challenges are central to ensuring a stable, efficient, and sustainable energy landscape capable of supporting an increased reliance on renewable sources. Addressing these challenges needs responsible environmental, social and governance (ESG) investment. We have intentionally incorporated ESG considerations into our investment process and the way we evaluate potential infrastructure investments.”

Williams also highlights the importance of South Africa’s IRP2023, the country’s blueprint for electricity infrastructure, detailing both expected demand and supply.

“While noting the announced bid windows of renewable energy, battery storage and gas, we at Prescient, however, view the document as falling short in certain areas, not fully addressing the country’s energy needs. In light of continued load-shedding, one cannot underscore the importance of the IRP2023. Even in its current form, it foresees continued load-shedding until 2027, highlighting the failure to address the pressing issue of electricity supply. One only needs to look at the continued decline in Eskom’s Energy Availability Factor (EAF) to understand the stark reality that we as a country face. Eskom’s EAF has declined from the reported 58% in 2022 to 54.7% in 2023.”

Prescient has recently supported two landmark transactions, facilitating BEE ownership in large-scale projects that have positive environmental impact. The first is an equity finance facility to Reatile Renewables Virginia through the Prescient Clean Energy and Infrastructure Debt Fund (CEIDF). Funding is being utilised to allow Reatile to acquire 31.5% of Ursa Energy, a 240MW solar PV farm, which forms part of bid window six of the REIPPPP.

The second is the CEIDF providing equity finance to Jade Sky Virginia. This will fund Jade Sky’s equity contributions to its round six renewable energy project company, positioning it as a 15% shareholder.

Prior to these transactions, the CEIDF had already committed over R4 billion to 30 renewable energy projects and infrastructure opportunities and contributed towards enabling an additional 2.2GW of clean energy — the equivalent of one million average South African homes.

Capacity and stability

Williams emphasises that the integration of renewable sources into South Africa’s grid is a monumental task and one that is critical to this country’s future. He also says that this is a significantly complex endeavour, primarily due to the variable nature of renewable energy sources, added to which, grid capacity and voltage stability are vital for success. These must be addressed to enable further renewable energy sources to be integrated at scale. 

“Notwithstanding the progress made, risks still abound. While the availability of capital is not one of these risks, tight time frames are concerning, and so is coordinating multiple stakeholders, including government entities, utilities and private investors. This poses a complex challenge requiring effective collaboration and streamlined decision-making processes.

“We believe that with strategic partnerships between international experts, local players and those charged with policy development and execution will ultimately encourage further private sector participation.

“South Africa’s challenges in bringing sufficient renewable energy online are not insurmountable. Instead, they present opportunities for innovation and progress. By emphasising infrastructure upgrades, fostering collaboration among stakeholders, embracing advanced technologies, and prioritising the needs of our REIPPP, we believe South Africa can overcome the hurdles and chart a path towards a more sustainable energy future,” concludes Williams.

The sunny side of solar

Solar is the most accessible of all the renewables, according to Tivon Loubser, fund manager of the Twelve B Energy Fund, who adds: “You’d be hard-pressed to put up a wind turbine in your back yard, but you can easily put solar panels on your roof. South Africa is a very high yield area for solar. Most areas in South Africa average more than 2 500 hours of sunshine per year, and have very high average solar-radiation levels, compared to most of Europe, where they barely break 1 000 hours of sunshine a year!

“I think what is evolving most is the accessibility of solar. Traditionally solar has been inaccessible to businesses and body corporates due to the high up-front costs. With more financing options now coming about, various entities are able to benefit from the likes of solar without having to spend anything upfront.”

Twelve B’s focus is on providing funding for smaller rooftop installations, with anything ranging from a 120kwh system to a 4MW system. “Traditionally these spaces have been neglected,” says Loubser, with the majority of development finance institution (DFI) investments being targeted at much larger ground mount installations.

“We think it is important to cater to these markets, as they make up a large portion of the economy. We have partnered with various Energy Performance Certificate-accredited (EPC) organisations and have a number of business development people sourcing deals. We also have numerous entities approaching us directly requesting funding. Investors are attracted by strong returns and tax breaks.

“As with any investment opportunity, one has to make sure that you do adequate due diligence. Renewables are a gold rush right now and are attracting fly-by-nights. Use only tier one solar equipment and carefully check accreditations.”

Incentives
Loubser says a top reason for the uptake on solar should be credited to National Treasury; the tax incentives like section 12B and 12BA have made investing in renewables very attractive. “It has also opened the door for private capital market players to get involved. Twelve B Green Energy Fund, for example, offers investors a 125% tax deduction on their invested amount, while also earning an average of 14% cash yields over the term and an 18% IRR.

“We are also seeing returns of 16% at the project level, which is being bolstered up to 18% when one takes into account the 12BA allowance. Once we employ gearing into the fund, we will see well in excess of 20% returns.

“Investors realise investment return will be over the longer term, but that the risk is low and the
potential ROI high.

“I believe that SARS trying to remove the 12BA incentive would be a short-sighted move, especially in the light of the significant contribution to the economy, and thus society, renewables can make. Incentives around investing into renewables are still of utmost importance.”

“We are seeing many good news cases where solar has revolutionised business efficiency, reduced operating costs and mitigated the effect of the unstable grid and load-shedding,” he concludes.

South African energy sector opportunities

By global standards, South Africa is extremely attractive for energy sector investors. This is evidenced by over R400 billion of private sector capital deployment in the renewable energy sector over the past 14 years, with attractive returns for both equity and debt investors. Major beneficiaries have been offshore developers and equipment suppliers (European, Japanese, Chinese), overseas DFIs and funds, as well as local developers, banks, DFIs and infrastructure funds. Of interest is the explosion over the past 10 years of “empowered” developers, who may well spark a trickle-down effect of more empowered participants in the energy value chain.

Whereas the first wave from 2011 to date was anchored on wind and solar power generation, the next phase offers a blend of renewables, gas-fired power, grid investment and open market direct and indirect (value-chain) market opportunities.

The IEA Africa Energy Outlook 2022 asserts that “Africa’s industrialisation relies in part on expanding natural gas use” and further explains that “more than 5 000 billion cubic metres (bcm) of natural gas resources have been discovered to date in Africa which have not yet been approved for development. These resources could provide an additional 90 bcm of gas a year by 2030, which may well be vital for the fertiliser, steel and cement industries as well as for water desalination”.

IEA further qualifies that “Natural gas demand in Africa increases in the Sustainable Africa Scenario (SAS), but it maintains the same share of modern energy use as today, with electricity generation from renewables outcompeting it in most cases” and that “the use of domestic natural gas production makes sense for African consumer countries, offering the considerable advantage of lower energy costs compared with fuel imports”.

An optimal energy mix considers full cost of energy (FCOE), availability, security of supply, reliability, safety (for humans, animal life), and the environment (air, soil, plants, marine life) in its construct.

It is further driven by industrial policy, regional geo-politics, regional power pool dynamics (transmission capacity, traded volume, pricing), while addressing historic geo-spatial demand imbalances.

Gas is cited as a suitable primary energy source for meeting over 13GW of new build, as part of the SA energy resource base which the draft Integrated Energy Plan, classifies as: Renewables (Wind, Solar, Hydro, Biomass), Fossil fuels (Natural Gas, Crude Oil, Coal), and Nuclear fuels (Uranium). Conversion of these primary sources coupled with storage, transmission/transport, end-user servicing promises well over R500 billion of medium-term sustainable investment opportunities for investors in:

• natural gas upstream activities (given the high hydrocarbon potential onshore and offshore SA)

• natural gas midstream infrastructure including liquefaction or re-gasification (requires port access rights through either a Department of Transport Section 56 process or a Ministerial Section 79 directive),

• gas-to-power via Government procurement and Commercial and Industrial (C&I) clients,

• gas for use in industrial or agricultural processes,

• embedded/captive rooftop and commercial space solar to residential (called SSEG) and C&I

• wheeled solar and wind power to C&I clients

• gas-derived products (ammonia, ammonium, fertiliser, cleaning, refrigerants, etc.)

• biogenic carbon/biomass (including municipal solid waste, agriculture and food waste, and wastewater)

• co-generation (such as from paper/pulp and sugar/bagasse operations)

• biofuels (manufacture, storage, transport and blending)

• Liquified Petroleum Gas (LPG)

• power transmission self-build (for independent power producers)

• energy trading (including banks and insurers)

• carbon markets and trading

• grid power feed-in

• energy aggregation

• virtual power stations (with AI enablement for supply-demand balancing)

• energy trading (bilateral and markets)

• smart grid technology/services, and

• emission abatement technologies/services.

Other non-direct opportunities related to the energy value chain include:

• battery assembly

• low-carbon transportation (such as synfuels, hydrogen, methane-driven heavy duty vehicles)

• green steel production

• sustainable fuels

• maintenance and equipment supply in generation

• high voltage (HV) transmission network materials

• substations maintenance

• low voltage (LV) network equipment

• smart meters manufacturing/assembly/supply

• industrial, agricultural and residential heating and cooling (that use de-centralised power)

• digitisation and the new energy economy and business models (driven by 2050 Net Zero Emissions scenario) which will also include alternative payment methods enabled by decentralised finance (deFi), energy tokenisation, and energy-backed cryptocurrency (stablecoins).

South African capital providers including banks, DFIs and infrastructure funds that draw on long-term capital from pensions and offshore capital are well-positioned to provide funding in support of developers, manufacturers and service providers wishing to leverage these opportunities.

Mazi Asset Management is an authorised financial services provider. FSP number: 46405