By Duncan Abel, Principal: Energy Finance at Nedbank CIB
Given the ongoing challenges facing energy supply in South Africa, it's easy to take a pessimistic view on the development of the sector in this country.
However, as is so often the case, when we become consumed with focusing on the problems, we run the risk of also overlooking opportunities. One of these opportunities, is undoubtedly Small-Scale Embedded Generation (SSEG) and its ability to provide sustainable and affordable energy at the point of demand for clients across all sectors of the South African economy, whilst creating additional opportunities for economic growth and job creation.
Opportunities will arise directly in the development of a SSEG industry, with its requirements for manufacturing, installation and ongoing operations and maintenance, and also indirectly in other sectors that will prosper and grow on the back of a reliable and affordable energy supply.
The historical reticence by many local authorities to fully embrace embedded energy generation, while understandable, is largely misguided. While embracing this form of supplementary power generation may initially have an impact on the revenue streams of municipalities, this can be partially offset by allowing the grid to be used for storage and wheeling.
A further key positive economic spin-off will be the enhanced ability of metros, that are able to provide investors with a reliable and affordable energy supply, to attract new investment and attain all the vital benefits that such investment brings with it, not least growing employment opportunities.
The benefits of embracing SSEG
Approached correctly, the liberalisation of the SSEG market, and the synergies it would create have the potential to deliver benefits that go far beyond reducing the economic risk of long-term load shedding - although that remains a very compelling reason on its own.
One of the additional benefits of embracing SSEG that is not immediately as obvious, is the opportunity it presents for greater collaboration between public and private sector stakeholders in cities and regions across the country to help secure their resilience and growth. Within this scenario, banks, such as Nedbank, have a key role in providing funding and brokering relationships between developers, offtakers and the city.
So, while it would be naive to say that municipal electricity revenues would not experience some declines in the short-term if the constraints on SSEG were lifted, it would be equally short sighted not to see the potential long-term gains that this could unlock.
Ultimately, embedded generation presents businesses, banks, investors and local authorities with a unique opportunity to work together in securing a just energy transition, whilst unlocking significant economies of scale, and taking tangible steps towards successfully transforming the future for South African cities and their residents.