Vuyo Ntoi, joint managing director of African Infrastructure Investment Managers (AIIM) speaks to African Review about the development of renewable energy projects in South Africa
How has AIIM navigated this difficult year? What impact has the Covid-19 pandemic had on your investment business?
The pandemic has significantly impacted economies around the world, including our operations as an investment business and our underlying investment portfolio. We’ve fortunately been able to seamlessly transition to work from home arrangements, and our ability to manage existing investments and to consider and implement new transactions has remained intact. Our underlying portfolio of investments has been affected by the pandemic as well, but has remained quite resilient, as one would expect of an infrastructure portfolio.
The impact of the pandemic on our energy infrastructure projects has been relatively limited. Many of our investments in renewable energy projects operate with take-or-pay arrangements with state power utilities. Looking at our South Africa-focused IDEAS Fund, despite minor incidents of curtailment during the lockdown period, the plants in which the fund is an investor have continued to operate and earn revenues from the off-taker. Where we have faced some challenges has been on plants under construction, where activity was reduced by lockdown measures, resulting in delays.
In other areas, particularly across transport, the pandemic has had a more material impact. That being said, the toll roads in our portfolio are quite well capitalised and have been able to withstand the liquidity impact of some months of much-reduced traffic levels. Moreover, effects of the pandemic have been felt less on heavy vehicle volumes, which account for a disproportionate portion of overall revenue. Airport assets have been notably affected. International air traffic has reduced significantly and this accounts for majority of the revenue for African airlines. However, as airports implement more stringent codes for travel and restrictions ease up across the world, we are seeing activity pick up in the sector.
Do you agree that renewable energy is well positioned to play an important role in South Africa's economic recovery post Covid-19? If yes, please explain why.
Renewable energy is playing an important role in the South African energy mix. This has been evidenced by the increasing contribution to the overall energy generation capacity over the last decade and the associated reduction of carbon emissions. Integral to the development of the renewable energy sector across the country has been the Renewable Energy Independent Power Producer Procurement (REIPPP) programme. Competition, supported by a continuous pipeline of opportunities and a transparent bidding process with a high degree of regulatory and execution certainty, enhanced private sector involvement in the early stages of the process. Procurement costs of electricity across solar PV and wind projects have fallen by between 69% and 37% respectively, through the bid windows.
The challenges of the Covid-19 pandemic are putting increasing pressures on public finances, with many of the continent’s national utilities continuing to face liquidity challenges. Notwithstanding this challenge, we believe that renewable energy IPPs and distributed generation offer a solution for rapidly improving economic activity in the country, particularly from the commencement of construction. The implementation of these projects is relatively quick, and in many instances projects can be completed within a year of breaking ground. This entails that they are a source of rapidly deployable additional power (which the economy needs), while also not creating an upfront capital expenditure burden on state-owned enterprises and the fiscus.
What impact have AIIM's funds had in investing in the renewable energy sector in South Africa? Can you list specific projects AIIM has invested in or plans to do in the future?
AIIM has invested in renewable projects and contributed to circa 24.5% of total green energy generation capacity across the country. We have investments in more than 25 renewable energy projects in South Africa through our IDEAS Managed Fund. These projects span the wind, solar PV and mini hydro sectors. An example is our investment in the139MW Cookhouse Wind Farm in the Eastern Cape, which produces around 341,000MWh of clean electricity on an annual basis, which is enough to power 43,000 medium-sized South African homes for a year. This generation helps to avoid approximately 348,000 tonnes of carbon emissions from traditional coal-fired power stations annually. Beyond the clean energy generation, this project is located in a very poor rural part of South Africa, and is a lifeline for many of the communities around it. The project company’s flagship social initiative has been the development of more than 45 early childhood development centres in the region, from which more than 2,500 children have benefitted to date.
In addition to our large IPP projects, which sell power to the grid, AIIM has invested in some distributed power entities, which are developing localised renewable energy for commercial and industrial users, as well as poor households. Throughout the pandemic, a prevailing theme we have noticed is the resilience shown by distributed power systems, which have performed extremely well. This is an area we see significant opportunity around as opposed to larger on-grid IPPs where creditworthiness of offtakers is becoming increasingly challenging. Distributed systems have the ability to deliver power to end users at lower costs without the requirements for associated costs of distribution and transmission infrastructure.
South Africa has a high electrification rate, which means that the attractions of home roof top solar that permeates the continent are not as prevalent here. However, the current supply pressures being experienced on the grid entail that even households with grid connection and large businesses are now increasingly looking at distributed generation opportunities as an alternative. An example is our investment in Orionis, which develops commercial roof top solar for shopping centres and industrial and office users. The company, in which we have joint ventured with the Sola Group, operates across South Africa, and is building a sizeable portfolio of rooftop solutions. We have also invested in a start-up company that is exploring the deployment of small mini-grids in South Africa’s informal communities.
What further electricity regulatory reforms should South Africa’s debt-saddled government adopt to make sure the sector continues to flourish independently from the state?
The main challenge in the country’s electricity sector is the financial status of the government-owned utility, Eskom. I believe that the enhancement of a positive credit environment in the sector will go a long way towards allowing the renewable energy sector to flourish, without burdening the debt-saddled National Treasury. There is already some work underway to unbundle Eskom, but the solution potentially lies in the creation of an independent creditworthy offtaker, which collects tariffs from end-users and pays generators directly without requiring balance sheet support from government. Of course, a long-term solution will need to be developed for Eskom, and this is likely to result in the National Treasury taking on a significant portion of its financial obligations.
Further to that, we believe that allowing entities to self-generate and lifting onerous licence and regulatory hurdles will quickly alleviate the supply constraints currently being experienced in South Africa. We also believe that clarity on the costs of wheeling power through the grid will be required in order to give further impetus to self-generators, who might want to locate their generation sources far from their operations.
What does the future hold for AIIM and its role in supporting renewables development in South Africa?
Scope for development in the renewables market is ever increasing and the effects of the pandemic have underlined the need for timely intervention, outlining the importance of access to energy and its wider role in safeguarding the well-being of South Africa’s population. In effect, we are given the opportunity to reshape the energy market in a framework of the future, to benefit the citizens for generations. UNDP analysis illustrates this, showing that for every cent spent on future-focused, resiliency-building infrastructure, like renewable energy, the return is fourfold. With the twin impacts of climate and economic uncertainty, a resilient renewable energy market will help propel South Africa to a more sustainable tomorrow.
Aware of the possibilities and our responsibility, AIIM's view is very much to develop on previous momentum and enhance our role as one of the country’s main players in the renewable energy market. As the largest investor in REIPPP projects, we’d like to extend that work towards a greener future for South Africa.