SA’s COP26 green deal could translate into a R500bn boost

South Africa’s R130 billion concessional climate finance ‘green deal’ secured at COP26 in Glasgow last week with the US, UK, Germany, France and the European Union, could translate into a R500 billion boost to help the country’s ‘just energy transition’ to decarbonise its sources of energy.

That’s the word from RMB CEO James Formby, commenting on the green deal commitments on Tuesday.

He says the initial commitment of $8.5 billion (around R130 billion) for the first phase of financing, could ‘crowd in’ up to a further R390 billion of local and foreign private investor capital.

“We are yet to see the details behind these financial commitments such as the timing and conditions, but overall we are optimistic about the potential substantial decarbonisation benefits for South Africa that will move us closer to globally accepted emission targets,” says Formby.

According to RMB, the finance is earmarked to help Eskom ultimately retire its coal power stations and assist the state-run power utility in building the renewable energy sector.

This could prevent up to 1 1.5 gigatonnes of emissions over the next 20 years.

The banking giant points out that: “Because of the fairly predictable cash flows, debt funding can be as much as 70-80% of 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 that up to R390 billion could be unlocked in the form of debt funding from South Africa’s banking and savings industries.

“It will be important that the terms of this $8.5 billion enable this. This also assumes an appropriately capitalised and separate ‘gridco’ which would give lenders confidence that the power produced would be paid for, without requiring further government guarantees,” adds RMB.

Formby notes that infrastructure assets are an ideal long term asset match for the liability profile of pension funds, which need the yield to preserve wealth for pensioners.

“This is why there are 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,” he says.

Read: Treasury listens to industry on Regulation 28

According to RMB, the non-bank assets under management of the SA savings industry totalled approximately R11 trillion as at December 31, 2020.

It points out that most of this is invested in equities, so “SA has the capacity to help unlock this transition”.

“Banks play a key role in structuring the transactions and assuming risk during the development phase of the projects,” RMB further highlights.

Formby adds: “Having this financing to anchor projects will create great confidence in private investors to invest in these green transition projects.

“It will 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 won’t solve Eskom’s debt burden and capital structure, the [green] deal was very positive news for South Africa,” notes Formby.

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

Read: Eskom in dire straits: Maintenance lags as utility overspends on emergency diesel

“We also need to ensure that there is a just transition that supports affected people as well as benefitting and uplifting local communities,” Formby adds in a comment seemingly directed to allay some of the fears expressed by Mineral Resources and Energy Minister Gwede Mantashe around potential job losses in coal mining towns.

“Let’s hope that the headlines can translate quickly to renewable projects that can pivot South Africa’s energy mix,” he adds.

“In addition, this funding can unlock new opportunities for South Africa, for example in green hydrogen and electric vehicles.”

Listen to Ryk van Niekerk’s interview with Eskom CEO André de Ruyter as aired on RSG Geldsake (or read the English transcript here):