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 by the negative impact of load-shedding on the economy. 

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

In SA, addressing load-shedding is top priority, and the government and businesses have agreed to collaborate to ensure implementation with impact. The establishment of the national energy crisis committee and the implementation of the energy action plan, as announced by President Cyril Ramaphosa in July 2022, focus on five key interventions:

1. Eskom improving the availability of existing supply;
2. Enabling and accelerating private investment in generation capacity; 
3. Procuring new capacity from renewables, gas and battery storage; 
4. Promoting investment in rooftop solar by businesses and households; and
5. Transforming the electricity sector for long-term energy security.

It is essential to implement a holistic approach that includes much-needed sector reforms as they fast-track implementation and can open the sector to a liberalised market model — an important driver of success. 

The importance of partnerships and efficient collaboration to enable investment 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 also need to consider adopting a new market model with future development where off-takers procure power through new models.

Through its sector focus, Standard Bank has adopted a proactive approach to partner with clients to develop new ideas and be future-ready as market reforms are under way. Standard Bank clients want 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 policies towards power market reforms will be required.

The development of the decentralised power market is driven by large, energy-intensive users procuring power through processes including bilateral long-term power purchase agreements (PPAs), and small-scale embedded generation. There is a need to unlock flexibility for off-takers 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 Regulation 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 requests for proposals (RFPs). However, power aggregators now allow smaller-scale electricity users to access private power without launching their own RFPs.

Power aggregators source renewable energy from various generation assets (either through owning them 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, the aggregator, and their off-takers — as the tenors may vary.

This requires funders to consider off-takers differently, as there will be a portfolio of them 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 off-takers for proof of concept. As the aggregator model develops, this may become less necessary.

Standard Bank is 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. In addition, 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 off-taker 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 off-taker 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. Investment in grid infrastructure is also 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 in Africa and has successfully completed a number of utility-scale and decentralised power projects, demonstrating the bank's commitment to driving sustainable development and growth in the sector.

About the authors: Rentia van Tonder is head of power and Vincenzia Leitich is an executive of energy & infrastructure at Standard Bank. 

This article was sponsored by Standard Bank.