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Sectors 5 Jul 2023

Driving sustainable growth through the power sector will need innovative thinking

The importance of a strong and sustainable power sector in supporting economic growth has been emphasised, as unprecedented levels of load shedding have had a negative impact on the economy.

Globally, there is a need to focus on developing and planning flexible generation, efficient transmission, and distribution to support  growth in all sectors of the economy. 

In South Africa, addressing load shedding is a top priority, and the government and businesses have agreed to collaborate to ensure implementation with impact. The establishment of NECOM and the implementation of the Energy Action Plan, as announced by the President in July 2022,  focus on five key interventions:

  •  Eskom, improving the availability of existing supply
  •  enabling and accelerating private investment in generation capacity 
  • procuring new capacity from renewables, gas and battery storage 
  •  promoting investment in rooftop solar by businesses and households and,
  • fundamentally transforming the electricity sector for long-term energy security.

It is essential to  implement a holistic approach that includes much needed sector reforms to ensure an effective and efficient power sector. Sector reforms, not only fast-track implementation but open the sector to a liberalised market model, an important driver of success, unlocking growth.    

The importance of partnerships and efficient collaboration to enable investment and growth will need a new approach and urgency from policy stakeholders and funders, ensuring bankability is achieved with innovative funding models and effective risk allocation. Financiers need to also consider adopting a new market model with future development where offtakers procure power through new models.

At Standard Bank, through our sector focus, we’ve adopted a proactive approach to partner with our clients to develop new ideas and to be future-ready as market reforms are underway. Our clients seek flexible, cost-effective, sustainable solutions to support their long-term growth ambitions. Understanding the current market challenges (including timing) and future demand-and supply dynamics are crucial to success.

 Standard Bank recently commissioned research through Intellidex, which found that sufficient electricity supply will remain a challenge over the medium term, and urgent implementation of enabling policies towards a power market reforms will be required.

The development of the decentralised power market is currently driven by large energy intensive users procuring power through processes including bilateral long-term Power Purchase Agreements (“PPAs”), as well as small-scale embedded generation.  There is a need to unlock flexibility for offtakers and industry through new ideas and a model that allows shorter-term commitments and access to a combination of technologies through cost-efficient tariffs. 

With the amendments to the Electricity Regulations Act and the move towards private power, the opportunity for power aggregators has emerged. Previously, smaller power users were excluded from procuring private power through utility-scale, expensive Request for Proposals (RFPs). However, power aggregators now allow smaller-scale electricity users to access private power without launching their own RFP. Power aggregators source renewable energy from various generation assets (either through owning the generation asset themselves or procuring power from an Independent Power Producer), such as wind and solar, and sell it to multiple off-takers. The presence of power aggregators in the market may create a mismatch of PPA tenor between the Independent Power Producer (IPP), the aggregator, and their offtakers, as the tenors may vary. This requires funders to consider offtakers differently, as there will be a portfolio of offtakers purchasing power from a project. Initially, lenders may need to assess the aggregator's ability to deliver, and there may be a need to look at the ultimate offtakers for proof of concept. As the aggregator model develops, this may become less necessary.

Standard Bank is currently exploring different measures to reduce risks and increase the bankability of these structures. One of the main ways to mitigate risk is through portfolio diversification, which helps minimise the impact of any default by a buyer of the energy and oversubscription of the portfolio acts as a buffer in case of default. These risk mitigants, along with others, make the projects more viable and allow for certain structuring. Additionally, they provide a basis for reducing the need for standard bilateral power purchase agreement payment security, especially once there is evidence of successful implementation. 

When an offtaker procures renewable energy through an aggregator, there are added benefits such as flexibility in the power purchase agreement, including terms, tariffs, security commitments, and faster execution. Furthermore, since the aggregator sources renewable energy from different sources, there is an increased ability to match the energy demand of the offtaker more effectively compared to relying on a single renewable energy source. 

However, it is important to note that this model relies on the power being transmitted through the grid and does not address the issue of load shedding. Solutions are needed to enable transmission across municipal and metro distribution networks. Additionally, investment in grid infrastructure is necessary to ensure that renewable energy projects in areas with limited grid capacity can connect and transmit power effectively. 

Standard Bank is a leading financier of the power sector on the continent and has successfully completed numerous utility-scale and decentralised power projects further demonstrating our continued committment to driving sustainable development and growth in the sector.

Prepared by:
Rentia van Tonder - Head: Power
Vincenzia Leitich - Executive: Energy and Infrastructure