Eskom’s announcement in July 2016 that it would not sign any independent power producers onto the South African power grid threw a booming renewables sector into disarray.
JCRA, a leading financial risk consultancy, have today released a paper in partnership with the Centre for Economic and Business Research (Cebr) looking at the Eskom dilemma and its cost to the South African economy.
By claiming that solar photovoltaic and wind-generated power were too expensive and refusing to sign power producer agreements, the electricity provider effectively crippled the momentum of an industry that generated high foreign investment and put South Africa at the forefront of renewable energy uptake.
JCRA Director, Lionel Kruger says: “South Africa has favourable solar and wind resources, with few land constraints, and as the per-unit costs of various renewable energy types continue to fall, Eskom’s choice to delay the uptake of renewable energy makes little economic sense.
“The firm’s statement that they “…remain committed to renewables at a pace and cost the country can afford” seems at odds with its patent lack of commitment to such projects, stalling renewable uptake as these sources become ever cheaper compared to non-renewables.”
Investment in infrastructure returns large benefits. In the UK, Cebr has found that every £1 spent on infrastructure boosts GDP by £1.30 given various multiplier effects to boost economic activity through key supply chains such as construction and manufacturing. The cost of cancelling or delaying infrastructure projects also comes at a considerable cost.
Cebr estimates that the postponement of infrastructure investment leads to further negative knock-on effects and will discourage investment. In the UK, we calculate that a one-month transport infrastructural delay translates to around £2 billion worth of lost investment-related GDP over the following five years.
In South Africa, the Renewable Energy Independent Power Producer Procurement Programme (REIPPPP) attracted R196bn of investment from 2011 to 2016 and aimed to attract another R550bn by 2020. Subject to the same multiplier observed in the UK, these investments until 2020 would return around £715 billion in South Africa, however this will be significantly reduced if progress is delayed.
However, the tide seems to have turned against the energy provider, with President Jacob Zuma reconfirming the government’s support for the REIPPPP in his State of the Nation speech in January. The Department of Energy has announced that on April 11, Eskom will begin signing off on REIPPPP round four – affecting up to 27 stalled projects.
Despite this welcome news, the reason for the standoff is a concern. “By controlling the means by which new suppliers can enter, Eskom is essentially in control of the market in which it operates,” says Kruger. “If their targets are ever at odds with policy planners, then more deadlocks in the future seem highly likely.”
Power-sector restructuring and reform is common in many Western and emerging economies. Many such reforms have opened the way for private generators to trade in power to the national grid, further boosting the capacities of alternative energy sources. This kind of restructuring and reform may be just what South Africa’s energy sector needs.
JCRA are independent financial risk advisors, specialising in hedging advice that is strategically aligned to what you and your business want to achieve. We have over 28 years’ experience structuring and negotiating for competitive pricing in derivative products. We formulate and execute interest rate, foreign exchange, inflation and commodity hedging strategies and provide debt advice to real estate, project finance and infrastructure, private equity, social infrastructure and corporate clients across the globe. Helping businesses and organisations stay one-step ahead.
Centre for Economics and Business Research is an independent consultancy with a reputation for sound business advice based on thorough and insightful research. Since 1992, Cebr has been at the forefront of business and public interest research. They provide analysis, forecasts and strategic advice to major UK and multinational companies, financial institutions, government departments and agencies and trade bodies. For further information about Cebr please visit www.cebr.com