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Renewable energy investors need policy certainty

By Larry Claasen

Despite the rapid growth in South Africa’s renewable energy sector, it has not yet reached the scale where it has reached a tipping point for investment decision-makers.

This is the view of Odyssey Energy Solutions, head of investments, Jay Lurie, in an article in the Africa Solar Industry Association’s Annual Solar Outlook 2024 report. Odyssey is a US-based renewable energy investment platform that operates across Africa.

Lurie notes that though there have been many promising developments happening in the renewable energy sector, like the launch of a virtual wheeling platform later this year, which will allow businesses to buy electricity directly from Independent Power Providers (IPPs), it is still a nascent industry.

Eskom piloted its VWP with mobile phone operator Vodacom, which operates more than 15 000 low-voltage sites across 168 municipalities.

Wheeling is expected to be a transformational change in the local energy market as it will not only allow businesses to mitigate the impact of load shedding by ensuring a constant supply of electricity but also means they can get it at a lower rate than that charged by Eskom.

The problem for financial sector decision-makers is that because the industry is still in a developmental stage, it is not clear what the return on investment is for them.

“Bank financing and market activity suffer from a chicken-and-egg dilemma as the market would need to experience significantly more volume to interest financiers,” says Lurie.

He says this means, for now, banks will require standard documentation and water-tight Power Purchase Agreements (PPAs) to ensure their investments pay off.

Policy visibility needed 

Lurie also points out that even if virtual wheeling does get traction in South Africa, the feasibility of the project will depend on “policy visibility.”

He gives an example of the importance of policy visibility by pointing out how a bank will have to protect against transmission fee changes. 

The transmission fees are charged by municipalities and Eskom, and the ways they can protect against huge changes is to have “onerous debt service coverage buffers” and/or “to have covenants incorporating such changes to standard Change in Law provisions.”

Lurie says either way, it will mean the project’s viability is impacted because of the lack of predictability.

Aside from the policy visibility concern, He says South Africa’s ageing grid infrastructure and limited capacity also remain” significant bottlenecks” to growth in wheeling in key geographic nodes. 

Though South Africa has liberalised electricity generation, further liberalisation of transmission and distribution would allow the private sector to work toward alleviating these bottlenecks.

Even so, despite concerns over the viability of renewable energy projects and business models, the country’s move away from only having Eskom as its sole energy provider is seen as a good thing, as it will not only ease the country’s electricity crisis but also reduce cost over the long-term.

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