Technology disruption presents opportunity for Renewables, African utilities and their funders
The advent of renewables, new storage technologies present Africa’s utilities with an opportunity to increase capacity and efficiency while re-kindling their appeal to investors.
There has been a clear and rapid evolution in Africa’s energy and energy infrastructure landscape over the last decade. While much of this new technology has challenged the traditional dominance and relevance of Africa’s utilities, “new storage and Peaker technologies - able to augment renewables during off-periods - present African utilities and renewable energy projects an opportunity to re-invent their relevance as both competitive energy suppliers and attractive destinations for global capital,” says Stephen Barnes, Head of Power and Infrastructure for Standard Bank Group.
The advent of renewables, quickly taken up and adapted to the continents’ rich solar, hydro and wind resources, drove the evolution of decentralised, off-grid solutions. However, more recently the energy revolution, combining new storage technologies with renewables has delivered truly innovative ways to provide sustained energy to rural communities and industry.
New energy storage systems (ESS) include; solid state and flow batteries, flywheels, compressed air, pumped hydro-power and thermal. Lithium-ion batteries, for example, are becoming the technology of choice for solar-based energy storage systems, largely driven by rapid growth in the electro voltaic market.
The result is that the global capacity for energy storage is expected to reach 8,6GW by 2022, enough to power approximately 6 million homes. “This presents an obvious opportunity for utilities to partner with or acquire ESS Companies,” says Mr Barnes. Certainly, in 2017 the ESS industry had a record year globally in terms of mergers and acquisitions, with utility and energy companies such as Enel and BP focusing on growth.
Looking ahead, the advent of combined storage technologies - augmenting solar, wind and other renewable energy sources with gas generation during down times - for example, “is likely to see renewables moving towards a possible base load proposition in Africa for the first time,” says Rentia van Tonder, Head of Power for Standard Bank Group.
These new technologies have profound implications for how energy and infrastructure is funded in Africa as well as how the continent’s existing utilities are structured, managed and generate income.
The overall long-term objective for the continent will be to increase sustainable energy through a transition towards a low carbon and equitable energy system. In South Africa this general goal is augmented with the social development caveat that the country should achieve this transition, ‘in a just way that ensures the future of those involved in the current energy industry.’
From an environmental perspective, it is becoming more difficult to fund coal projects. OECD guidelines aside, most organisations and investor mandates today have some sort of mechanism to encourage sustainable investment, especially in energy projects.
New technologies mean that commercial and development finance institutions are also challenged to asses risk. This is especially so where, “a demonstrated history of cost and income has not been established and reliable economic models are not available,” says Mr Barnes. According to Moody’s Investor services, an energy storage project that has a long-term contract with a creditworthy counterparty, “provides a lower risk profile from a revenue and cash-flow generation perspective than one using a merchant revenue model,” quotes Mr Barnes. In this rapidly evolving funding environment, “banks need to develop a better understanding of risk appetite, along with the detail of how to structure finance for these new technologies,” he adds. Over time, as the industry experiments on a project by project basis, “we expect to see a more defined structure for project financing emerge in the energy storage space,” he adds.
Since, for now, however, the performance of new combinations of technologies cannot be predicted with certainty, “banks in Africa need to become more creative in funding energy projects with new structures and instruments including sponsor equity, for example, rather than relying on traditional bank debt,” says Mr Barnes.
Either way, as the costs of renewables come down the case for diversified generation and an ever-greater proportion of renewables supplying the national grid become stronger.
Jurisdictions that allow private renewables generation and private off-take from the grid are becoming easier to fund, given the increased focus and commitment by corporates to find sustainable energy solutions. A good way to achieve this in Africa without causing undue disruption to existing utilities is to, “encourage utilities to become equity partners in these renewable projects” says Ms van Tonder. This shared independent power producer (IPP) model allows the utility to own part of new renewable infrastructure projects, benefitting from the earnings and costs savings that these technologies generate over time. The model also brings new technology, skills and infrastructure to Africa’s utilities while broadening the relevance of the continent’s utilities to a broader, more environmentally conscious, global and local investor universe.
African utilities can prepare themselves for these changes, and make themselves more attractive to investment by, “including global renewable experts to their decision-making structures to support, identify and structure renewable partnerships and access global funding to support transitions,” says Ms van Tonder.
As renewables become ever-more relevant as a potential base load proposition across Africa, many of those utilities that have entered into renewable IPPs are considering further procurement in line with declining costs supporting lower tariffs. This supports the fact that renewables are “offering utilities the potential to increase supply, decrease costs and maintain their relevance as viable energy players and investment destinations by entering into IPPs with renewable providers,” says Ms van Tonder.
China provides a compelling case for integrating global renewables technology into legacy coal-based utility infrastructure. The introduction of renewables into existing coal-based generation infrastructure in China has not only reduced emissions but also, “made legacy power infrastructure relevant for future funding,” observes Mr Barnes. Much of the spending that large global renewables providers are dedicating to research and development has, in fact, been made possible by China’s enthusiastic integration of new global renewables technologies into its legacy coal-based energy infrastructure.
As Africa’s largest bank by assets, present in 20 markets, Standard Bank’s Power and Infrastructure team is excited by the opportunities that new renewable, storage and now also Peaker technologies present. “These technologies provide a critical life-line for Africa’s existing utilities to leap-frog into a renewable age of greater efficiently, reduced cost and renewed investment relevance,” says Mr Barnes.