Laura Caetano, Research Analyst, and Travis Hough, Business Unit Leader for Energy & Environment, Frost & Sullivan
South Africans are in a state of shock following President Zuma’s seemingly abrupt decision to reshuffle Cabinet. Paired with the subsequent credit downgrades, the country’s future is, yet again, riddled with uncertainty.
The new minister of energy, Mmamoloko Kubayi, has held positions within the telecommunications and postal services industries, and is a member of the National Assembly. It is unclear whether these positions have given her enough experience to be apt in energy matters but to some extent this is not what will concern the energy sector of South Africa. What is a major worry is the fate of the Renewable Energy Independent Power Producer Procurement Programme (REIPPPP).The concern is predominantly spurred on from recent announcements to halt the program, due to the high cost Eskom will be contractually required to pay, and the decision taken by the power utility provider that it could no longer support the Power Purchase Agreements (PPAs). The President then announced during the State of the Nation address that projects will be signed as agreed. Eskom clarified and gave a benchmark tariff of R0,62/kwh per project that is now considered suitable for signature. This process took over six months to get in place but the delay has tarnished the REIPPPP which was seen as a benchmark by many countries on how to develop a renewable energy sector.
The delay in signing the PPAs will undoubtedly have an impact on other incumbent energy industries such as Liquefied Natural Gas (LNG). The combined lack of adherence by Eskom to the REIPPPP, unexpected cabinet reshuffle and subsequent credit downgrade will cause anyone looking at entering the LNG sector in South Africa to have second thoughts. If they haven’t already decided to walk away from prospective deal, LNG players will now be running new calculations, taking into account not only the increased borrowing costs and weaker rand, but also adding on an increased cost to any project based on country risk. For most companies operating in the energy sector, be they in oil and gas or renewables, there are not many jurisdictions in which they wouldn’t operate. The difference though is the higher the country risk, the greater the margin investors will expect to see. This balancing of risk versus reward may very well see companies being unable to justify the risk of setting up operations in South Africa.
The future of South Africa’s energy industry will not be shaped solely by our new energy minister. Our ministers are rarely in one position long enough to make any major contribution. Rather, our energy sector will be defined by government’s willingness to assure investors that programs and policies they put in place are going to be adhered to and changes will be made through a consultative process. If the most recent round of projects had such a difficult journey to find clarity, what would be the fate of future rounds South Africa once envisioned? Without this stability and engagement, we will be left with no further investment in renewables, LNG or any other energy source open to IPPs, putting nuclear back on the cards as it will be the only option. Perhaps this is the end goal of government.
The decision between renewables and nuclear should be made with caution in light of the newly issued junk status, which will increase borrowing costs.
The nuclear versus renewable debate has become increasingly political. The deal requires approval from treasury in order to proceed, something Pravin Gordhan posed significant hindrance to. Zuma’s choice to replace finance minister Gordhan with previous home affairs minister Malusi Gigaba begs the question — could the R1 trillion nuclear new build have something to do with the sudden game of musical chairs?
Enquiries: Samantha Frost. Email Samantha.James@frost.com
Image credit: Copyright: vencavolrab78 / 123RF Stock Photo