State of the SA energy sector

It all comes down to economic growth

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With news of the first negative emissions power plant in Iceland going viral, the road ahead for the South African energy sector isn’t looking quite so healthy. South Africa’s energy sector will remain in this rather static state until regulatory and political stability return, says Noor Kapdi, Africa Chief Executive Officer & South Africa Managing Partner at Dentons law firm.

This lack of investment in energy is particularly troubling because energy capacity and economic growth are so tightly intertwined.

“Energy infrastructure requires long-term investment, and so is particularly dependent on investors’ confidence in the country’s stability, and the forward trajectory of its economy,” he says. “Unfortunately, South Africa is ticking neither of those boxes at the moment.”

“With three energy ministers in the past year, integrated and energy resource plans that are not finalised and overall policy uncertainty, our energy sector is not an investment magnet.”

“To complicate matters, any economic growth that takes place will be reliant on there being enough capacity to meet increased demands for energy. Getting this balance right is hard enough at the best of times, and particularly difficult under present conditions.”

Policy uncertainty, particularly as regards the energy mix, is particularly counterproductive because it deters even those investors who might be willing to assume greater risk.

At present, Mr Kapdi says, there is no certainty as to the relative importance of nuclear, solar, wind, coal and gas in energy account. No investor will commit capital to a project whose inclusion in the national energy strategy is doubtful or uncertain. The effects of this failure to provide a confirmed energy strategy can be seen in the lacklustre investor interest in the proposed gas pipeline from the Mozambican offshore fields and shale gas exploration in the Karoo.

A further drag on investment is the disarray at most of the key parastatals. Eskom’s current oversupply and oscillating attitude towards renewables is one example, as is the delay in commissioning its new coal-powered power stations. Another is the delay and uncertainty related to the contribution of natural gas to the energy mix and economy. The initial considerations and excitement created around the importation of LNG, the migration to a regional gas feed supplied by a pipeline and eventual exploitation of shale gas seems to have lost momentum. This ambitious but achievable natural gas endeavor would require several SOE’s to be aligned, most importantly Transnet, who has to provide both the receiving harbor infrastructure and pipeline development and operations.

South Africa’s political and economic travails prompted downgrades from the ratings agencies, with more a real possibility. The downgrades have raised the cost of capital, thus placing further constraints on energy investment. If another downgrade occurs, Mr Kapdi points out, capital costs will rise yet more, placing investment in energy infrastructure still more at risk.

All of these are problems that are largely of our own making. But, says Mr Kapdi, we must also not forget that investment in our energy sector is also affected by global issues. One is the reduction in foreign direct investment (FDI).

“FDI is one of the drivers of economic growth, and when it goes down, our economy feels it. For example, Britain remains one of our leading providers of FDI to South Africa, but investment interest are subdued in the wake of Brexit. And, of course, other sources of FDI are deterred by our political and economic woes,” he argues.

“While it’s very difficult to pinpoint one factor as fundamental, I would say that in the end it all comes down to the economy: if there is growth, investors will want to be a part of it. So while all the issues noted above need to be addressed, I believe the starting point must be to get our economy back in line with the National Development Plan, and on a growth trajectory. Once that is happening, we can begin to address the other issues.”

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Issue 39