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As South Africa looks to diversify its energy sources, project finance bankers jostle for a share in the profits. Shannon Manders reports.

South Africa is undertaking a massive drive to increase the country’s capacity for power, and its government is increasingly willing to bring in the private sector to fill the gap.

There has often been the perception that Eskom, the country’s state-owned power utility, has long been resisting private partners, but – even if this were true in the past – it is no longer the case. “We just cannot do it on our own – we cannot supply enough of the capacity that South Africa needs,” says Hilary Joffe, spokesperson for the power utility. “We would be really keen for private producers to enter the market.”

The government’s policy to include the private sector dates back to 2004, and stipulates that private power producers should be contributing 30% of new capacity.

Although the policy has not been superseded, it has also not been implemented to much extent – due both to regulatory-related obstacles and prohibitive pricing.

Eskom’s Joffe explains that the sector has witnessed a sharp hike in tariffs in the last two years. “There’s no private producer that would have come into the market with the kind of electricity tariffs that have prevailed,” she says, adding that the market is only now beginning to move towards the level of tariffs that would be able to provide private producers with a return on their investments.

“The fact is it’s been talked about for the past five years, and people have been trying to mobilise themselves for a number of years,” says one project financier in Johannesburg. “The other big issue has been getting the regulations in place; but I think we’re now at a point where the government has a clearer idea of the path going forward.”

The publication late last year of a draft 20-year plan for electricity generation, known as the Integrated Resource Plan (IRP) 2010, is set to determine the future of the country’s energy mix.

The draft plan, which was released for public comment by the Department of Energy in October 2010 and will be finalised in 2011, essentially provides a roadmap for the construction of new power stations.

According to the draft plan, South Africa, with its projected GDP growth rate of 4.6% over the next 20 years, will need new energy capacity of approximately 52,000MW. A total of 30% of new generation will come from green, non-coal sources, namely renewables (16%) and nuclear energy (14%), while coal will account for 48% of the mix.

The finalised IRP 2010 will also map out which entities will be expected to build and operate the new power stations. It is envisaged that independent power producers (IPPs) will play a large role. “The banking sector is going to be quite busy if they do get those IPPs off the ground,” says GTR’s source.

Alternative sources

In 2009, the National Energy Regulator of South Africa (NERSA) announced the approval of its Renewable Energy Feed-in Tariff (Refit) guidelines, which in its first phase aims to achieve the government’s 10,000GWh renewable energy target by 2013. It is understood that the first round of Refit projects will be tendered for in April 2011.

“There’s an enormous raft of renewables projects being worked on,” says Brad Breetzke, head, mining and metals, power and infrastructure finance at Standard Bank in Johannesburg.

Given the paucity of projects in the past, many South Africa banks have not been big lenders in the local power market, but with the huge demand for power and the likelihood that people will start looking externally for funding, business is certain to pick up. “We are speaking to a number of developers, whether it’s solar or wind. There’s a lot of international interest,” says one project and export financier.

Although the renewables business is going to be quite small relative to the rest of the country’s power initiatives, bankers admit that there is already much competition as banks vie to become involved in projects that are likely to come to market.

“But it’s not like the banks are undercutting each other,” says GTR’s source. “The pricing reflects where the market is at.”
Even though the first phase of the Refit programme is imminent, the time to market for these projects is expected to drag, with construction only likely in the next couple of years.

Bids have to be submitted in April, but then it will be a case of the government awarding those and then negotiating contracts. It is believed that it may take a couple of months to award a contract, and that it will then take a year to put together a deal.

Nuclear energy will also form part of South Africa’s ultimate energy mix, and once again, banks are keen to secure their involvement. “Scores of people are expressing a view to be involved in the country’s nuclear build-out,” says Standard Bank’s Breetzke, adding that the bank is keen to be involved in an investment banking point of view.

Although there is clearly a lot of project development and potential investment underway, this has not yet translated into a flood of new banking opportunities. “But we’re seeing a lot of interest on the tender and formulation side, so we do anticipate that it is going to lead to a lot more activity,” says Breetzke.

Eskom itself is also looking to diversify away from coal; in the past the company has been criticised for using mainly coal-fired power stations to supply most of South Africa’ power. In a real effort to improve its reputation, Eskom is now looking to lead the country’s nuclear and solar programmes as part of its long-term ambition.

The company has existing solar and wind projects – both of which have been partially funded by the World Bank.

“We don’t really see ourselves being big players in wind or the other forms of renewables,” says Eskom’s Joffe. “But we do want to be the leading player in nuclear and solar. Those are the type of things we’re looking at beyond 2017.”

This approach forms a key part of Eskom’s drive towards lower emissions.

Although the government’s IRP will only be decommissioning old coal-fired power stations in the 2020s, Eskom’s interim plans are to make their new and existing coal stations “cleaner” before altering their energy mix and moving into nuclear and solar options.

Back on track

There has been much uncertainty surrounding Eskom’s ability to finance its current and future projects. But the company has been working hard to close this funding gap by initially deferring some of its spending and suspending contracting, and raising funds from a series of sources.

“We are confident that the funding is in place,” says Joffe. “Since September 2010 we have resumed contracting on the Kusile power station – we’re back on track and we’re going ahead. As far as we’re concerned, funding is no longer an issue for us – it’s just to deliver.”

Eskom suspended work on the R142bn, 4,800MW Kusile coal-fired power station in early 2010 because of a lack of funds. It had been rumoured that the South African government may be looking to scrap the power plant. Last year, Eskom indicated that it would explore the option of bringing in private investors to help fund the mega project, but it has since decided not to pursue this initiative.

This combination of pushing out spending and raising funds from a variety of sources: on capital markets, from development financial institutions including the World Bank, the African Development Bank and the Development Bank of South Africa, and by means of export credit facilities, has enabled the company to move towards financial sustainability and put in place a funding plan to ensure it can deliver on its capacity expansion programme.

In late November 2010, Eskom released interim results which showed a R9.5bn net profit for the six months ended

September 2010 – an improvement on the R1.1bn in the first half of 2009.

To assist with funding, the South African government has already made available a R60bn subordinated loan (R40bn of which has been drawn down to date) and R350bn in guarantees (up from its original R176bn).

Moreover, in late 2010, Eskom welcomed the South African government’s support in principle for a proposed R20bn injection of equity into the company over the three years starting in fiscal 2011/12.

Joffe explains that the guarantees provide a “significant statement of government support”, adding that it has given Eskom the confidence that it needs to move forward.

“Eskom has moved away from recovery mode and is now laying a foundation for sustainable growth,” says Eskom chief executive Brian Dames. “We have a new strategic direction, the build programme is progressing, our funding plan is in place and our results show we are improving the bottom line.”

Eskom’s own build programme has already added approximately 5,000MW of generation capacity to the system since 2005. It has also connected 3,000km of transmission network and 12,255MVA of substation transformers.

The company is currently primarily focused on its “big build” projects, all of which will be completed by 2017.

“The three big build projects – Medupi, Kusile and Ingula – add another 12,300MW of generating capacity between now and 2017,” says Eskom’s Joffe.

“Beyond that we haven’t got the go-ahead to build anything. Beyond that will be governed by the government’s integrated resource plan.” GTR