Power sector shortcomings including low electrification rates, low manufacturing indices, load shedding as well as lack of distribution, transmission and generation infrastructure, creates unequalled opportunity for lenders, equity investors and suppliers, says Omar Vajeth Head of the Project Advisory Unit and Senior Transaction Advisor at the Southern African Power Pool.
This article first appeared in ESI-Africa Edition 2, 2018. It will be published online during May/June 2018.
With over 22 years of history, the Southern African Power Pool (SAPP) is the oldest
and most developed power pool in Africa. Speaking with ESI Africa ahead of the 2018 African Utility Week conference, Vajeth explains the invaluable role that SAPP, together with utilities, plays in ensuring a healthy business environment that continues to stimulate and nurture investment.
While investor confidence in the Southern region remains healthy – attracting interest from development financiers, commercial banks, economic consulting agencies and private equity remaining high – funders are looking for projects that are de-risked and bankable.
To ensure this is a viable move for investors, Vajeth stressed that as a power pool, together with the utilities, they need to “address this satisfactorily in order to move
projects forward. In order to achieve this more emphasis needs to be placed on legal and financial structuring work at an earlier stage of projects.”
The Southern African region displays weakness in utility creditworthiness, a critical challenge for the raising of funds in a capital-intensive industry – Vajeth notes that a number of the utilities fall short of this requirement. A further issue is the lack of experience in development of assets in the region from both a local and an international perspective, which will see improvement as more projects are rolled out.
However, the sector needs to bolster the pace at which it currently moves: “The speed at which the entire value chain operates is a challenge. Numerous bureaucratic hurdles make project development slow. To address this, SAPP needs to strategise around
implementing innovative solutions to overcome these hurdles and speed up the public sector side of the project development exercise,” Vajeth adds.
“There is a great deal of opportunity in the power sector: low electrification rates, low manufacturing indices, load shedding as well as lack of distribution, transmission
and generation infrastructure create an unequalled opportunity for investors,” Vajeth explains, adding that “this creates space for lenders, equity investors and suppliers to the sector.”
He notes that there are many generation projects in the pipeline – many in the public sector – however, as the IPP market is playing a greater role there will be more
opportunity for investors. Commenting on the annual generation comparative: “Generation across the region has stabilised largely because of excess power available in the region at the moment. There is still uncertainty as to how long this will last but it has been two years
of stability already and new plants continue to be implemented by utilities.”
Vajeth continues: “There is desire for independence to ensure security of supply. This is being countered by cheap exports from countries with excess power. Countries do see
the benefit of trading power on a market basis as prices reduce with excess power in the region. We have seen a greater shift towards the market in the last year when
compared to previous years.”
In terms of transmission, this area has proved less popular than its generational sibling when it comes to private investment. “There is a lot of work needed to evolve into an Independent Transmission Company model. The World Bank has issued a report on this opportunity in the long-term but this will need structural change in the sector,” Vajeth adds.
Barriers to entry
The balance between base-load and variable renewable power needs to be understood, Vajeth explains. “There are various studies underway in an attempt to understand this.
This is a technical challenge that can be solved through understanding and analysis. This will lead to projects that allow for grid stability if needed. The challenge of cost has
largely been addressed and renewables are now seen as cost effective in terms of a solution to the region’s needs.”
As a result of improved procurement procedures, countries who see the opportunity to attract large investments will continue on this growth path. “The impact of these investments on governments’ balance sheets due to credit support arrangements must also be fully understood. There is still apprehension in terms of providing support for utility offtakers as they seek to ensure that government commitments are managed across
sectors,” Vajeth says.
Looking at utility versus off-grid projects, there are striking benefits for off-grid solutions in remote locations with low energy consumption. With load growth these do become viable but this requires economic activity to be stimulated. A grid solution does have benefits and regional grid integration allows for further benefits for reducing cost and stimulating economic activity between countries.
“Both grid- and off-grid solutions need to work together with the goal of providing access to electricity,” Vajeth notes. Confident that the renewables market is on the upward trajectory, he attributes this growth to the availability of funding and the declining cost of the renewable energy sector.