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Did you know that your investment portfolio is probably exposed to Eskom?

And that is not necessarily a bad thing…

With the festive season upon us and bad news flows from Eskom hitting us daily, I thought that I would like to shed some light and cast a glimmer of hope on investment opportunities linked to Eskom and the larger energy sector. Given the dire electricity situation that we currently find ourselves in, and with Christmas around the corner, we need some positivity in our lives…

I wonder if Andre de Ruyter knew what he was getting involved in when he accepted the position as CEO of Eskom… Irrespective of criticism that he receives from various sources of which many are politically charged, I believe that he is doing a great job. He reminds me of the captain of a mega-ton oil tanker cruising at full speed ahead and suddenly seeing an iceberg 500 meters ahead of him…brake as he may, he is bound to at the very least scrape the hull somewhere along the way…

Before I dive into the investment opportunities that may come out of this mayhem, let us very briefly look at the history of why we ended up where we are today.

Wherever we consider a critical resource, politics play a role. Whether it be a money play, a power play, corruption, nepotism or whatever you can ascribe as a reason for why service delivery is uneconomical or non-functional somewhere, there will be a political undertone. Electricity is no different.

Before we blame the current government for all the woes (they can be blamed for 98% of the problems though), I would like to point out that the previous government pre-1994, handed over an electricity network that although maintained decently, saw no expansion of capacity for more than a decade before the ANC took over leadership of SA in 1994. Many power stations at that stage were already approaching the end of their lifespans and with no expansion programs on the horizon, the writing was on the wall at a very early stage.

We now have an electricity provider that is trying to generate electricity with power stations that are way past their lifespans which are burning coal inefficiently much to the despise of clean energy lobbyists. The fact that maintenance has been neglected over many years does not help with the reliability of the old dinosaur leaving us in the dark ages more often than we like… Add names like Brian Molefe, Jacob Zuma and the Guptas to the playing field and we have the perfect storm…

Electricity has become the biggest single constraint on the SA economy.

The government realised the problem and some 10 years ago the highly successful Independent Power Producer Program (IPP) was launched. Molefe the then CEO brought the IPP to a screeching halt in 2015 by refusing to sign 27 approved IPP contracts. What had the potential of a soaring solar panel industry was buried and many already built solar plants were not commissioned resulting in investment flows coming to an abrupt halt.

Three years later in 2018, President Cyril Ramaphosa signed the 27 IPP contracts thereby releasing R56 billion almost immediately. Coal lobbyists were livid, and protests and court appeals became the order of the day. Irrespective of the protests, the Ramaphosa government’s intent became clear with the introduction of the Integrated Resource Plan (IRP) paving the way for an expansion of renewable energy that is now government policy. Mineral Resources and Energy Minister Gwede Mantashe may still have to be convinced…

The expansion is planned over phases, and we hope to see 15 000 MW added to the grid by 2030. I must reiterate, we will still use coal for many decades in many power stations and load shedding will still be with us for some time, but the road is paved for more and cleaner energy.

Further important political decisions of late are to allow municipalities to procure their own power. Johannesburg and Cape Town plus another eight municipalities are in the process of negotiating purchasing agreements with private producers of electricity that is generated using solar, wind and gas. It is expected that the trend will continue with reliance on Eskom reducing over time.

In June 2021 Ramaphosa lifted the exemption to acquire a licence to produce electricity from energy regulator Nersa from 1 MW to 100 MW. We cannot underestimate the importance of this change. Private producers can now produce their own electricity and what they don’t use they can sell on to third parties via the Eskom grid. Unfortunately, to date, no project has been registered yet due to the complicated process of registration…

Investment bonanza 

Using current investment numbers, the activities outlined above can harness R420 billion in investment over the next five to six years. This amount is only for generation. Add to this other projects and contract work that support the projects and the figure becomes much higher. The beauty is that most of these funds will flow to the private sector.

To accommodate the new system of electricity procurement the grid must be upgraded adding an additional R178 billion to the expenses plus another R30 billion to upgrade the distribution system.

With Eskom/Government commitment to de-commission around 35 000 MW of Eskom baseload power over the next 25+ years, the capacity will have to be replaced by renewable energy estimated at 100 000 MW.

To generate the 100 000 MW, it would take roughly 320 million solar panels or 37 000 wind turbines to add the 100 GW…

Considering the above one quickly realises that we are talking mega-bucks. It is going to take multiple hundred million rands to achieve. How will this be funded?

  • Rich countries convened at COP 26 agreed to provide R131 billion of grant and concessional financing to SA over the next three to five years for green energy development.
  • The REIPPP (Renewable Energy Independent Power Producer Procurement Programme) is outperforming almost all targets. It’s the gold standard for public-private partnerships and its success should be celebrated by all South Africans.
  • Eskom Bonds. It has been a long-standing way of raising capital. Over the years Eskom has issued many bonds and they continue to do so. Any conservative investor who has exposure to income funds or multi-asset funds is likely to have Eskom bonds in their portfolios due to the high yields they offer. Many investors will cringe at this idea but rest assured, they are backed by the government (does that set your mind at ease…?) Eskom Bonds are rated “B” by Fitch which is not too bad.

Considering the expansion and development in clean energy within the SA/Eskom space and the fact that Eskom and other stakeholders are in the process of defining the framework to allow producers to “wheel” (sell on) excess electricity they generate directly to other buyers via the grid opens enormous investment opportunities.

With Eskom in the process of separating its three business units into transmission, distribution and generation companies, merchant opportunities within South Africa over the next five to 10 years appear to be very exciting.

“Private companies will benefit from these developments in generation, maintenance, as well as the modernisation of infrastructure using new digital and energy storage technologies,” says Dieter Matzner, a power and infrastructure specialist at Investec Bank.

As with all investments one needs to look through the noise to spot the opportunities and the SA energy sector may just be the place where handsome profits can be made over the next 10+ years. SA cannot afford for Eskom to fail, and Eskom/government realise that. They also admit that they cannot paddle the boat without involving the private sector and SA investors, and therein lies huge investment opportunities…

I for one am looking forward to seeing how this progresses and discussing the investment cases that investment analysts identify.

Stay safe, invest wisely, and drive carefully over the festive season.

ADVISOR PROFILE

Marius Fenwick

WealthUp (Pty) Ltd

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