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

With the festive season upon us and bad news from Eskom hitting us daily, I thought I would like to shed some light and shed some hope on the investment opportunities related to Eskom and the energy in general. Given the dire electrical situation we currently find ourselves in and with Christmas approaching, we need a little positivity in our lives…

I wonder if André de Ruyter knew what he was getting into when he accepted the position of CEO of Eskom… Irrespective of the criticism he receives from various sources many of which are politically charged, I think he makes a excellent work. He reminds me of the captain of a one megaton tanker cruising at full speed ahead of him and suddenly seeing an iceberg 500 meters ahead of him… brake as he can, he’s bound to at least scrape the hull somewhere along the way …

Before we dive into the investment opportunities that could arise from this chaos, let’s take a very brief look at the history of why we ended up where we are today.

Wherever we consider an essential resource, politics plays a role. Whether it’s gambling, power play, bribery, nepotism or whatever else you can attribute as the reason the service delivery is unprofitable or non-functional somewhere, there will be a political connotation. Electricity is no different.

Before blaming the current government for all the misfortunes (it can be blamed for 98% of the problems), I would like to point out that the previous government before 1994, handed over an electricity network which, although decently maintained, saw no capacity expansion for more than a decade before the ANC took over SA in 1994. Many power plants at this point were already nearing the end of their lifespan and with no expansion programs in sight. horizon, the writing was on the wall at a very early stage.

We now have an electricity supplier trying to generate electricity with power plants that are well past their lifespan and inefficiently burning coal much to the defiance of clean energy lobbyists. The fact that maintenance has been neglected for many years doesn’t help with the reliability of the old dinosaur leaving us in the dark ages more often than we’d like… Add names like Brian Molefe, Jacob Zuma and the Guptas to the playground and we have the perfect storm…

Electricity has become the single biggest constraint on the South African economy.

The government realized the problem and about 10 years ago the very successful Independent Power Producer (IPP) Program was launched. Molefe, then CEO, brought the IPP to an abrupt end in 2015 by refusing to sign 27 approved IPP contracts. What had the potential for a booming solar panel industry has been buried and many solar power plants already built have not been commissioned, leading to an abrupt halt in investment flows.

Three years later, in 2018, President Cyril Ramaphosa signed all 27 IPP contracts, freeing up R56 billion almost immediately. Coal lobbyists were livid, and protests and legal challenges became the order of the day. Regardless of the protests, the intent of the Ramaphosa government became clear with the introduction of the Integrated Resource Plan (IRP) paving the way for an expansion of renewable energy which is now government policy. Mineral Resources and Energy Minister Gwede Mantashe has yet to be convinced…

The expansion is planned in phases, and we hope to see 15,000 MW added to the grid by 2030. I must repeat, we will still be using coal for many decades to come at many power plants and load shedding will still be with us for a while, but the road is paved for more abundant and cleaner energy.

Other important political decisions taken in recent times are to allow municipalities to obtain their own electricity. Johannesburg and Cape Town along with eight other municipalities are in the process of negotiating purchase agreements with private producers of electricity produced from solar, wind and gas energy. The trend is expected to continue, with reliance on Eskom decreasing over time.

In June 2021, Ramaphosa lifted the exemption to acquire a license to generate 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 resell to third parties via the Eskom network. Unfortunately, to date, no projects have yet been registered due to the complicated registration process…

Investment bargain

Using current investment figures, the activities described above can leverage R420 billion of investment over the next five to six years. This amount is for generation only. Add to that other projects and work contracts that support the projects and the figure becomes much higher. The beauty is that most of these funds will go to the private sector.

To accommodate the new electricity supply system, the network needs to be upgraded adding an additional R178 billion in expenditure, plus an additional R30 billion to upgrade the distribution system.

With Eskom/Government commitment to decommission around 35,000 MW of Eskom baseload power over the next 25 years, capacity will need to be replaced with renewables estimated at 100,000 MW.

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

Considering the above, one quickly realizes that we are talking about mega-bucks. It will take several hundred million rand to achieve this. How will this be funded?

  • Rich countries meeting at COP 26 agreed to provide R131 billion in grants and concessional funding to SA over the next three to five years for green energy development.
  • The REIPPP (Renewable Energy Independent Power Producer Procurement Program) exceeds almost all targets. It is the benchmark for public-private partnerships and its success should be celebrated by all South Africans.
  • Eskom Bonds. It’s a long-standing way to raise capital. Over the years, Eskom has issued numerous bonds and continues to do so. Any cautious investor who is exposed to income funds or multi-asset funds is likely to have Eskom bonds in their portfolio because of the high yields they offer. Many investors will cringe at the idea, but rest assured they are backed by the government (does that reassure you…?) Eskom bonds are rated “B” by Fitch, which is not too wrong.

Given the expansion and development of clean energy within the SA/Eskom space and the fact that Eskom and other stakeholders are setting the framework for producers to “roll” ( sell) the excess electricity they generate directly to other buyers via the grid opens up huge investment opportunities.

As Eskom is in the process of separating its three business units into transmission, distribution and generation companies, business opportunities in South Africa over the next five to ten years look very attractive.

“Private companies will benefit from these developments in production, maintenance, as well as upgrading of infrastructure through new digital and energy storage technologies,” says Dieter Matzner, energy and infrastructure specialist at Investec Bank.

As with all investments, one needs to look through the noise to spot opportunities and the SA energy sector could well be where handsome profits can be made over the next 10 years. SA cannot afford Eskom to fail, and Eskom/Government realizes this. They also admit that they cannot paddle without involving the private sector and South African investors, and that is where huge investment opportunities lie…

For my part, I look forward to seeing how this progresses and discussing the investment cases identified by investment analysts.

Stay safe, invest wisely and drive safe this holiday season.

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