‘Forget localisation, just add megawatts’
Unrealistic rules just delay renewable energy projects, says RMB’s James Formby
James Formby, the outgoing CEO of Rand Merchant Bank (RMB), the biggest investment bank in SA, says that instead of obsessing about localisation, the government should be obsessing about adding megawatts to the grid. “Lack of electricity is the greatest threat to SA’s economic growth. We all know that economic growth creates jobs, so obsessing about adding megawatts to the grid should be a collective priority across business, government and labour.”
Localisation rules add unnecessary costs and complexities to renewable energy projects and delay their rollout, he says.
“We need to make sure there is nothing standing in the way of adding megawatts to the grid.”
Lifting the licence threshold for private generation to 100MW has unlocked huge potential for mining houses and industrial consumers of power to produce their own and take pressure off the grid, he says.
“We’re at the client end of this as a financial partner to many of these companies and they’re actively progressing these projects. There’s a whole pipeline of them that are going to come to final approval stage and construction phase soon. But what is critical is that we fasttrack all approvals necessary.”
It is critical to get these projects through to financial close and shovels in the ground within the next six months. Once construction begins it should be 18 months on average before 3,600MW of extra power starts feeding into the grid.
Eskom CEO André de Ruyter said this week there is a supply gap of between 4,000MW and 6,000MW that needs urgent plugging.
However, not a single renewable energy project under the government’s independent power producer procurement programme has reached financial close since the fourth bid window in 2015.
Formby blames the government’s localisation drive.
“Localisation creates uncertainty and noise at a time when you want bidders to have certainty so they can bring these bids to financial close as quickly as possible. There’s been an escalation of costs due to localisation, also shipping and commodity costs, but localisation has added complexity to this.”
The priority right now should be megawatts on the grid, growing the economy and creating jobs, he says, not localisation.
“Over the medium to long term we support a local industry in SA, but the way to create it is not by forcing complexity into the bid windows. The way to create it is to create visibility on a pipeline of renewables, which allows commercial forces to play, and to add tax breaks and other incentives for local production.”
The close of a new round of independent power producer procurement, bid window 5, has suffered serial delays because of unnecessary complexities.
There’s plenty of investor interest in these bid windows and the capacity to build renewables across private power, emergency power (the risk mitigation independent power producer procurement programme mooted in 2019 but yet to be finalised) and bid windows, he says.
“The constraint is not capital. There is ample capital out there, both international and domestic, to achieve a significant tilt in our energy production towards renewables.”
The government should be obsessing about adding megawatts, he says.
“That may be stating the obvious but it’s a key message to get out there. I would hope that people see the importance of prioritising this because for growth in SA it is absolutely critical.”
There has been progress, it just needs to be greatly expedited. There needs to be deep thinking about how to do that.
“The commercial conditions, in the form of cost escalations, have changed, and we need to think about how to make sure bid window 5 closes as quickly as possible. There is good stuff happening here but we’ve got to make it happen a lot faster.”
Localisation rules are working against that.
“They’re too onerous for these bid windows.”
SA also lacks the required productive capacity.
Localisation requires skills the country has lost in certain sectors, including construction, he says. Meanwhile, the department of home affairs is making it more difficult to import skills.
“Attracting skills to SA is critical. It has a positive multiplier effect on economic growth because it allows you to create more skills.”
Why hasn’t business made more noise about this?
“This is something business has communicated to the government repeatedly. We’ve highlighted the importance of having a flexible skills regime, and the president has highlighted the importance of it too.”
Is there a need for what the president says to filter down to his ministers and senior civil servants?
“What we see is that the process from presidential direction to execution in the form of regulation takes time. That it happens faster is critical. It’s the same point we need to keep making about getting megawatts onto the grid.”
Load-shedding doesn’t impact only growth, he says. It impacts confidence, which impacts investment.
“You have to have confidence to invest, whether in a renewable project or capital expansion of a factory.”
SA needs to get economic growth up to at least 3% as soon as possible.
“Otherwise the economy is going to drift back into a 1.7%-2% range again. So the time to do these reforms is now.”
What would he tell President Cyril Ramaphosa if he were in the presidency?
“There are many examples across the economy of red tape impeding investment. If we could fast-track investment and really have a crack team to help drive that investment and make sure it goes from rands committed to rands delivered in terms of productive capacity, that would really be powerful.
“Things would turn around more quickly than people might expect because of the
Localisation requires skills the country has lost in certain sectors, including construction
[symbolic] power of these measures. We often underestimate the multiplier that can create.
“Because we’re a small and open economy on a world scale we can actually tilt it quite quickly by doing the right things and attracting capital more quickly.”
A strong investment case from SA would make global investors take note, he says.
“By expediting reforms you could have a positive multiplier more quickly than people imagine. Eighteen months to two years.”
Formby, 52, announced last week that he would be stepping down in October after seven years as CEO, but not retiring.
“It’s good for organisations to have new leaders and new ideas, and I think the time is right for that.”
He will be succeeded by Emrie Brown, who is currently head of RMB’s banking division.