Current developments in South Africa’s energy sector, particularly in renewable energy, are galvanizing potential investors and sending powerful signals to other African nations seeking to attract energy investment.
There is no doubting the success of the country’s fi rst bold steps towards encouraging private sector participation in energy investment. As South Africa’s Energy Minister announced at the recent Energy Indaba 2012 in Johannesburg, international investment worth about R50 billion has already been pledged for the Renewable Energy Independent Power Producers Bidding Programme.
What’s more, three more bidding windows are still on the horizon. Considering the eagerness with which investors participated in windows 1 and 2 of this programme, there is every reason for optimism about the next three phases, due to proceed later in 2012.
Investors, advisors, sponsors and environmental specialists, among others, have fl ocked to take part in the Bidding Programme. This is a clear reflection of the Department of Energy’s capable handling of an extremely intricate bidding process.
In August 2011, the Department invited private investors to submit proposals for fi nancing, constructing, operating and maintaining renewable energy generation facilities. The fi rst two bidding windows, which closed on 4 November 2011 and 5 March 2012 respectively, focused on solar and wind energy projects. In the remaining three windows, other technologies will also be explored, such as biomass, biogas, landfi ll gas, cogeneration and small hydro.
Flawless execution inspires investor confidence
So far, the programme has been immaculately executed, with industry watchers noting the Department’s comprehensive bid specifi cations, inclusive consultation process and disciplined approach to deadlines, not to mention the integrity of the process of selecting preferred bidders.
This administrative effi ciency has gone hand in hand with high-level political support throughout, viz the Minister’s speech at the Energy Indaba. This speech showed a keen understanding of the importance of creating an inviting environment for investors through policy stability, clear and consistent regulation, and the creation of viable opportunities for achieving sound investment returns.
The Minister said government was in the process of facilitating the establishment of the Independent System and Market Operator AFRICA LEGAL BRIEF SERIES | MARCH 2012 SAs energy success story could spark a chain reaction across Africa By Greg Nott, Director (ISMO) through legislation. She said ISMO’s role would be to procure power from the Independent Power Producers so as to level the playing field and eliminate conflict of interest between the buyer and seller of electricity. This would protect all players from potential market abuse and achieve efficiencies not normally associated with monopoly utilities.
Government should always be the champion in setting the scene for private sector participation and in this case certainly, it has fulfilled that role well. By creating an enabling environment, the authorities have ensured that investors will come – and in impressive numbers too. No fewer than 53 bidders responded to the first bidding window and 28 preferred bidders were selected. The second window attracted 79 bids, with on announcement on the selection of preferred bidders still pending at the time of writing.
The ripple effect of South Africa’s success
The deft handling to date of the Renewable Energy IPP Bidding Programme has definitively showcased African ability to mobilise and orchestrate an extremely complex bidding process. The significance of this exercise goes well beyond the borders of South Africa: if it can be done so competently in South Africa with a cutting edge field such as renewable energy, there is no reason why this success story cannot be mirrored elsewhere in Africa - and sooner rather than later.
The need to roll out affordable, accessible energy in Africa is understandably a pressing priority on a continent where energy poverty is so widespread. According to the World Energy Council, up to 70% of the population of Sub-Saharan Africa still lacks access to electricity. This affects all facets of people’s lives, from health and education to housing and the ability to earn a living.
Small wonder, then, that energy poverty is so high on the African agenda, continent-wide.
According to the World Energy Council, which used the recent Energy Indaba as a platform to release the results of its survey among African energy leaders, energy poverty is seen as a more critical issue in Africa than in any other region.
The survey also found that Africa is the region showing the most concern about the use of water - an extremely scarce resource on the continent - in electricity production. The concern is that the use of water-cooled energy generation could deplete water supplies to the point where there will simply not be enough water for people and power plants.
Strong interest was noted in renewable energy and energy efficiency among African leaders. However, leaders acknowledged various constraints that could hold back the development of renewable energy projects, including the dearth of appropriate skills, governance issues, corruption and, of course, the ever-present challenge of funding.
Among other things, energy leaders voiced concern that the poor global economic outlook had deflated investor confidence in energy projects, which are capital-intensive, especially in renewable energy.
Time for innovative approaches to funding
The magnitude of the funding needed for African energy projects is massive. In Nigeria, it is estimated that between $85 billion and $90 billion will be required in the next few years to bring the country to the power provision level of South Africa. In turn, South Africa is planning an investment in the order of R300 billion for its energy sector, which is on the verge of unprecedented change given the limitations of the national energy utility.
Traditional sources of funding from the banks will clearly not be sufficient to raise the vast amounts required and African countries will have to devise innovative ways to raise financing. Not only will the types of financing have to be diversified, but so will the funding players and the way they participate. The emphasis will have to be on African-oriented funding solutions that fit African scenarios – bearing in mind that Africa is a continent of 54 countries, not a single amorphous mass where one size fits all.
Again, South Africa serves as an example of how things can be done differently. While all the major banks are involved in the Renewable Energy IPP Bidding Programme, other agencies such as the Development Bank of Southern Africa (DBSA) and Industrial Development Corporation (IDC) have also stepped in. Both the DBSA and IDC have come to the table with substantial funding to support black economic empowerment entities and partners, as well as a number of international investors.
Certainly, private investment will be an increasingly important part of the African energy mix, not just as a source of capital but also skills and technology transfer. As South Africa’s Minister of Energy pointed out at the Energy Indaba, the continent is well endowed with renewable energy sources such as solar and wind. The challenge now is to develop these resources to their full potential.
To do so, African governments must continue paying close attention to creating conducive investment conditions in their countries. Investors emphasise political and regulatory stability as a major consideration when making investment decisions. They want to know that no matter what political or economic change might occur, their investments will be protected through a genuine commitment to the rule of law and the existence of clear legal frameworks that have the backing of the courts.
It is not change in itself that deters investors but arbitrary change. Experience shows that investors are comfortable with change as long as it occurs through a legitimate, predictable process.
Increasingly, African countries are responding to these expectations by implementing regulatory reforms to attract foreign direct investment. For example, 12 of the 15 member states of the Southern African Development Community (SADC) have a specific laws governing private investment or have established a one-stop investment promotion agency.
Countries such as South Africa, Lesotho and Botswana have no specific FDI legislation, but have liberal investment regimes. FDI legislation is under review in Namibia, Seychelles and Zimbabwe, while Botswana’s Industrial Development Act, which deals with licensing, is also under review.
As a continent with enormous natural resources of solar energy, wind and hydro-electric power, Africa’s energy sector is ripe with opportunity. Allied to the excitement around renewable energy is the discovery of gas fields in several parts of Southern Africa, including Mozambique, the Namibian coast and Tanzania. Indeed, indications are that gas could be the next big gold rush.
Through its Renewable Energy IPP Bidding Programme, South Africa is pointing the way for countries throughout Africa to capitalise on their natural energy resources and attract private sector investment. While there is no single magic formula in a continent as diverse as Africa, South Africa has shown that following a few simple ground rules can give investors the reassurance they seek and open up pathways towards achieving energy security for citizens.
Written by Greg Nott, Director at Werksmans Attorneys