The CEO of RMB, James Formby, said today that last week’s R130bn concessional climate finance ‘Green Deal’ at COP26 from the US, UK, Germany, France and the European Union (EU), could translate into a R500bn boost to help South Africa’s Just Energy Transition to decarbonise its sources of energy.
“We are yet to see the details behind these financial commitments such as the timing and conditions, but overall we are optimistic about the potential substantial decarbonisation benefits for South Africa that will move us closer to globally accepted emission targets.”
The finance is earmarked to help Eskom ultimately retire its coal power stations and assist it in building the renewable energy sector while preventing up to 1-1.5 gigatonnes of emissions over the next 20 years.
He said that the initial commitment of $8.5 billion (R130bn) for the first phase of financing, could ‘crowd in’ up to a further R390bn of local and foreign private investor capital.
Because of the fairly predictable cash flows, debtfunding can be as much as 70-80% of total financing required. Assuming 75% of debt and assuming the R130bn (25%) comes in as grant money or can be back ranked to commercial lenders, this means that up to R390bn could be unlocked in the form of debt funding from South Africa’s banking and savings industries. It will be important that the terms of this $8.5 billion enablethis. This also assumes an appropriately capitalised and separate ‘gridco’ which would give lenders confidence that the power produced would be paid for, without requiring further government guarantees.
Formby said infrastructure assets are an ideal long term asset match for the liability profile of pension funds which need the yield to preserve wealth for pensioners.
“This is why there are proposed changes to Regulation 28, which governs where pension funds can invest, to include an explicit infrastructure category to support the allocation to infrastructure assets, subject to the discretion of fiduciary asset managers of course.” The non-bank assets under management of the SA savings industry are approximately R11 trillion as at 31 December 2020, mostly invested in equities, so SA has the capacity to help unlock this transition.
Banks play a key role in structuring the transactions and assuming risk during the development phase of the projects.
“Having this financing to anchor projects will create great confidence in private investors to invest in these green transition projects. It will allow government to leverage the initial funding many times over resulting in a far greater impact in developing green sources of energy than just the initial funding number suggests.”
Formby added that, while this won’t solve Eskom’s debt burden and capital structure, the deal was very positive news for South Africa.
“As we once again struggle with load shedding, it’s clear Eskom needs urgent help with accelerating the decommissioning of coal plants and replacing them with renewables, gas bridging and storage.
“We also need to ensure that there is a Just Transition that supports affected people as well as benefiting and uplifting local communities. Let’s hope that the headlines can translate quickly to renewable projects that can pivot South Africa’s energy mix. In addition, this funding can unlock new opportunities for South Africa, for example in green hydrogen and electric vehicles,” Formby concluded.