R130 billion green deal can lead to billions in clean energy

The R130 billion green deal can translate to a R500 billion clean energy shift for South Africa. This concessional climate finance the US, UK, Germany, France and the European Union (EU) promised at COP26 could be a boost for the country’s Just Energy Transition to decarbonise its energy sources.

Although the details behind these financial commitments, such as the timing and conditions are not known, James Formby, CEO of Rand Mutual Bank (RMB) says he is optimistic about the potential substantial decarbonisation benefits for South Africa that will move the country closer to globally accepted emission targets.

This finance will be used to help Eskom ultimately retire its coal power stations and build the renewable energy sector to prevent up to 1-1.5 giga tonnes of emissions over the next 20 years. Formby says that the initial commitment of $8.5 billion (R130 billion) for the first phase of financing could “crowd in” up to a further R390 billion of local and foreign private investor capital.

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Debt funding for clean energy

He explains that, due to the fairly predictable cash flows, debt funding can be as much as 70%-80% of the total financing required.

“Assuming 75% of debt and assuming the R130 billion (25%) comes in as grant money or can be back ranked to commercial lenders, this means up to R390 billion could be unlocked in the form of debt funding from South Africa’s banking and savings industries.”

However, it will be important that the terms of this $8.5 billion enable this. According to Formby this also assumes an appropriately capitalised and separate “gridco” which would make lenders confident that the power produced would be paid for, without requiring further government guarantees.

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Changes to regulation 28 of Pension Funds Act

Pointing out that infrastructure assets are an ideal long term asset match for the liability profile of pension funds that need the yield to preserve wealth for pensioners, Formby says this explains 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 South African savings industry had non-bank assets under management of about R11 trillion at the end of 2020, mostly invested in equities and therefore Formby believes that the country has the capacity to help unlock this transition.

He says 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.”

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How to create a greater impact with the green deal

It will also 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. While this will not solve Eskom’s debt burden and capital structure, the green deal was very positive news for South Africa, he says.

“As we once again struggle with load shedding, it is clear that Eskom needs urgent help with accelerating the decommissioning of coal plants and replacing them with renewables, gas bridging and storage.”

Formby emphasised the importance of ensuring a Just Transition that supports affected people as well as benefiting and uplifting local communities. This funding can unlock new opportunities in clean energy for South Africa, for example in green hydrogen and electric vehicles.”