THEUNS EHLERS: Exciting new reality awaits with captive power solutions

In Absa's recent results announcement there are two important numbers to highlight. First: the bank is working on power projects for more than 2,000MW. Second: it has R45bn in new power projects in the pipeline. This comes on top of the estimated 4GW of projects closed to date.

In the context of our economy, these are significant. It is easy to be disheartened by economic challenges brought about by load-shedding. Whether it is factories idled by power cuts or coming home to no electricity, the challenges affect all citizens and businesses.

When we look at the scale of projects in the pipeline we believe that the next few years will be transformative for our country, our people and the economy. While Eskom remains a major cog in the SA electricity infrastructure, it is important to realise that the broader ecosystem is changing quite rapidly, and we should be aware of this shift.

The lifting of the cap on generation projects opened the door for several new developments. We are now entering an era where an independent energy exchange has been licensed and established to resell excess power, and buyers and sellers will be able to negotiate market-related rates. While there are still questions about distribution and transmission, this big leap forward could be a blueprint for the energy transition across the African continent.

Captive power projects are growing rapidly around the country. As one of the major funders of these projects we have learnt important lessons in the past 12 to 18 months. Unlike government-backed renewable energy projects in SA, where we have sovereign guarantees backstopping Eskom’s commitments to power purchase agreements, for the captive market banks and investors have to take a long-term view on the off-taker, where credit quality may not match that of the sovereign.

In the normal corporate lending world, corporates typically raise debt financing for shorter tenors compared with what is required under a captive Independent Power Producer (IPP) project with a 20-year purchase agreement.

Banks and investors are now starting to take a view on the broader energy market, looking beyond the initial power off-taker to a market where it will be possible to find alternative off-takers for projects supplying power into the national grid, and eventually to power traders where a spot market is expected to develop over time.

In this context it becomes important to understand where a specific project sits on the energy cost curve, to provide some comfort that it will be able to produce power at a competitive rate should it need to sell power into a liberated market over time. 

For most of our clients the investment in renewable energy serves three main purposes. First, it provides a level of energy security, particularly for captive, behind-the-meter systems where the combination of a solar installation with battery storage can supply a minimum level of baseload power. Second, based on tariffs experience, entering into long term power purchase agreements with grid-connected IPPs can result in a significant saving on their electricity bill, compared to what they pay the utility.

So these projects help clients lower their operating cost base and improve their position on the global cost curve. Last, the introduction of renewable energy into a client’s energy mix helps reduce reliance on fossil fuels, reducing their carbon footprint. Most corporates now have clear goals to achieve net zero emissions by a certain date. 

We are in an exciting phase for the energy market across the continent. There are short-term pains and frustrations when it comes to grid capacity, but we must not lose sight of the innovations that are taking place, and how we can use these to be a blueprint for the rest of Africa.

• Ehlers is head: resource & project finance at Absa CIB.