Positive investment case for renewable energy lifts capital spending by private sector

South Africa’s private sector contributed more than 70% to growth in fixed investment, while capital investments by public corporations (state-owned enterprises) remained weak at 11%, with general government capital investments not much higher at 17% for the last quarter of 2023.

Annabel Bishop, chief economist at Investec, said fixed investment remained key to economic growth outcomes, providing many of the structural and productive factors necessary for growth, with April’s Bloomberg consensus for 2024’s economic growth rate at 1.1% y/y, now in line with Investec’s forecast.

In March, the Bloomberg economic consensus for this year’s economic growth was 1.2% y/y, and the same consensus view was held among the surveyed economists in January and February too, while December saw 1.3% y/y economic growth expected for 2024.

“The downwards moderation in consensus has come as progress on resolving SA’s freight and electricity concerns, while gaining traction in some areas, has not substantially reduced the constraints on growth enough to see a lift yet in forecasts,” Bishop said.

Positive shoots not enough to lift growth

South Africans are currently experiencing the longest stretch of uninterrupted electricity supply in two years.

While the lack of load shedding is encouraging, Eskom still faces challenges within its legacy coal fleet and higher demand over the coming winter months, which means that load shedding may not be behind us entirely.

Brad Preston, the chief investment officer at Mergence Investment Managers, said the Transnet Recovery Plan published in October showed just how severe the decline in rail volumes was over the past five years, with freight rail volumes dropping by 34% since 2018.

“Either way, the performance of both Eskom and Transnet remains critical to South Africa’s economy, its listed companies, and the bond market. Given this importance, we put together a dashboard of eight high-frequency metrics to objectively track operational performance at the two utilities and attempt to project what this means for the country and its growth,” Preston said.

Reviewing the performance of metrics including iron ore exports, coal exports, total cargo handled monthly at Transnet ports, total containers handled monthly at Transnet ports, total vessel arrivals, average load shedding levels and unplanned Eskom outages, makes it abundantly clear that performance across almost all metrics remains below 2019 levels; although both Eskom and Transnet have shown improvements from their worst performance of last year and a good trajectory over the past month.

“While these improvements are encouraging, there is still a way to go for both utilities. But if this improvement can be sustained, we could see some positive impact on national GDP,” Preston said.

Key state performance metrics

(Source: Mergence Investment Managers)

The investment case for renewable energy

Speaking at a PSG Financial Services annual conference earlier this week, the former chief executive of Eskom, André de Ruyter, told host Alishia Seckam that the private sector’s willingness to invest in renewable energy, in particular, suggested that companies do see the potential for a good return on investment.

“The latest bid rounds for renewable energy and electricity generation were incredibly competitive. They were so low … that the bidders are struggling to reach financial flows, and a number of them are possibly going to have to forfeit the bid deposits. [However], that says more about the inappropriateness of the Eskom-driven procurement rounds than it does about renewable energy.

“I think what you need to think about carefully is the shape of the cash flow curve for renewable energy, because you have no fuel costs. All of your capital expenditure is spent in the first two three years, which means that if you do your NPV [net present value] calculation, it is really biased towards the front end. [Net present value is how much an investment is worth throughout its lifetime, discounted to today’s value.]

“For example, if you build a gas plant — the higher your cost of capital, the more you discount your future cash flows, which are your fuel costs. From an NPV perspective, you then see that the renewable energy is not as competitive as one would think when you look at a country like the US or Germany, and this is where we can raise additional finance by selling what is currently a liability,” De Ruyter said.

He said the liability would be South Africa’s carbon footprint, and if other countries could be convinced to pay SA for reducing carbon emissions, that could be a source of finance. “There’s some financial engineering that needs to be done in that regard,” he said. DM