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Storage presents African utilities with opportunities to rekindle investor appeal

12th June 2019 BY: Simone Liedtke
Writer

The advent of renewable energy and new storage technologies presents Africa’s utilities with an opportunity to increase capacity and efficiency, while rekindling their appeal to investors, Standard Bank said on Wednesday.

The “clear and rapid” evolution in Africa’s energy and energy infrastructure landscape over the last decade has seen new technology challenge the traditional dominance and relevance of the continent’s utilities.

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“New storage and peaker technologies, which are able to augment renewables during off-peak periods, present African utilities and renewable energy projects with an opportunity to reinvent their relevance as both competitive energy suppliers and attractive destinations for global capital,” Standard Bank power and infrastructure head Stephen Barnes said.

He explained that the advent of renewables, which are quickly taken up and adapted to the continent’s rich solar, hydro and wind resources, drove the evolution of decentralised, off-grid solutions.

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However, Barnes said that, recently, the energy revolution, which combines new storage technologies with renewables has delivered “truly innovative ways” to provide sustained energy to rural communities and the industry.

The result is that the global capacity for energy storage is expected to reach 8.6 GW by 2022, which is enough to power about six-million homes.

“This presents an obvious opportunity for utilities to partner with or acquire energy storage system companies,” Barnes added.

Looking ahead, combined storage technologies are likely to result in “renewables moving towards a possible baseload proposition in Africa for the first time,” Standard Bank power head Rentia van Tonder commented.

She explained that these new technologies had profound implications for how energy and infrastructure were funded in Africa as well as how the continent’s existing utilities were structured, managed and generated 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.

Although, 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.

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,” Barnes noted.

According to Moody’s Investors Service, 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,” Barnes quoted.

He added that, 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.

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”.

However, for now, Barnes believes the performance of new combinations of technologies cannot be predicted with certainty.

He added that “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”.

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.

As a result, jurisdictions that allow private renewables generation and private offtake 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, Van Tonder suggested, highlighting that the shared independent power producer (IPP) model allowed 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 in their decision-making structures to support, identify and structure renewable partnerships and access global funding to support transitions.”

As renewables become ever-more relevant as a potential baseload 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,” Van Tonder elaborated.

“These technologies provide a critical life-line for Africa’s existing utilities to leap-frog into a renewable age of greater efficiency, reduced cost and renewed investment relevance,” Barnes concluded. 

EDITED BY: Chanel de Bruyn Creamer Media Senior Deputy Editor Online
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