[Column] Ana Hajduka: The role of utility, challenges of creditworthiness, infrastructure and capacity
The lack of creditworthy offtakers is a key factor deterring investment in Renewable Energy (RE) in SADC region, resulting in a vicious circle of falling investment, higher cost of capital, and poor power system performance.
This both slows and limits the pipeline of RE Independent Power Producers (IPPs) in the region and limits the involvement of commercial financing for RE IPPs, which is needed alongside development financing to achieve the scale required to address the significant supply deficit in the SADC region, climate change and to meet the Sustainable Development Goals (SDGs).
However, growth of RE generation is a challenge for most markets, particularly with intermittent generation, such as solar. Traditional power projects have typically sought to isolate themselves from factors outside the project itself. Integration of RE is therefore done in a sub-optimal manner, with the onus to manage the integration being placed on the host utilities and fixed contracts that neither reward nor incentivise more efficient behaviour and can create tension over time. In a future where the share of RE within the energy mix is increasing, national and regional system flexibility becomes ever more crucial.
Introduction to GreenCo
GreenCo, through its operating entities in SADC, acts as an intermediary buyer and supplier of renewable energy, purchasing power from renewable IPPs and on-selling the energy bilaterally to utilities and private sector offtakers (i.e. commercial and industrial (C&I)) and to the Southern African Power Pool (SAPP) Competitive Markets as the first member of the SAPP under the recently created ‘Market Participant’ category.
GreenCo mitigates the risk of purchaser default on payments through its liquidity facility and an operational ability to secure alternative buyers or by utilising the SAPP Competitive Markets trading if there is such a default. Through its participation in the SAPP Competitive Markets, GreenCo promotes cross-border power transactions and a more dynamic and liquid power market. Such a market ultimately stimulates the supply of, and demand for finance for energy projects, facilitating the mobilisation of private sector capital more efficiently towards critical and transformative capacity addition. Recognising the challenges faced by national utilities across SADC and the unsustainable burden placed on national governments in providing sovereign guarantees in respect of their national utility’s obligations to IPPs, GreenCo aims to facilitate the evolution of power markets in Southern Africa into a dynamic multi-seller, multi-buyer model. Additionally, as a way of catalysing access to clean electricity through private sector investment, for projects where GreenCo acts as the buyer, the requirement for sovereign guarantees for power purchase payment obligations is removed as GreenCo does not need fiscal guarantees for power purchase obligations.
GreenCo’s vision is to lead in sustainably transforming RE markets in Africa with its innovative approach to addressing offtaker creditworthiness, the single most important obstacle to unlocking private sector investment in new RE generation capacity on the continent.
GreenCo Regional answer to problem
GreenCo is an exciting investment opportunity that takes a market-based approach to support renewable energy generation in Southern Africa. By doing so, GreenCo helps with the continued development of the power markets in Southern Africa to deliver a more robust and efficient electricity system and market. GreenCo is aligned with country and regional power sector developments that seek to enhance open-access regimes to encourage more private sector investment into the electricity sector.
On 20th June 2022, Africa GreenCo announced its intention to procure an additional 80MW of renewable power from Zambia and up to 500MW of renewable energy from other SAPP countries, as it accelerates its plans for regional development. Through such procurement programs, GreenCo is responding to the growing activity across the region, where many developers are eyeing opportunities to sell power from their projects to SAPP to avoid single offtaker risk. Additionally, banks are looking at GreenCo as a way of reducing liquidity risk for C&I focused developers.
The announcement that South Africa will purchase power from the SAPP has also shown the potential benefits for first movers. GreenCo has been engaging in South Africa, where it commented extensively on the Electricity Bill published earlier this year. The company aims to build on its regional model in the country, procuring power from multiple IPPs and selling to municipalities and large C&I customers. GreenCo Power Services was incorporated in South Africa in July. GreenCo hopes to provide access to SAPP markets for South African customers and other players in the South African ESI.
Importance of market development
GreenCo has already impacted certain market developments through its activities, particularly in Zambia, Namibia and, more recently, South Africa, to ensure that intermediaries/traders, such as GreenCo, are recognised in the market developments that have occurred recently. The Pilot Project in Zambia is also driving the development of many underlying arrangements that the market requires to allow for open access. Whilst such activities have benefitted GreenCo, they will also benefit other players that will hopefully follow GreenCo’s pioneering work.
Over time, the SAPP Competitive Market has demonstrated that it is a viable option for power sales, with market risk within acceptable levels. SAPP requires members purchasing from the SAPP Competitive Markets to make an upfront security deposit into the SAPP clearing accounts before trading. The market operator has complete visibility of these accounts and continuously monitors them for members to continue trading. Any purchasing member whose account balance drops below the level required for their trading activities will be suspended from trading until the account is replenished. This mitigates the payment risk from the SAPP Competitive Markets.
GreenCo was established to address the key obstacle of risk and bankability. The creditworthiness of GreenCo as a long term offtaker stems from the significant liquidity buffer it provides, linked to its practical and operational ability to diversify, and mitigate risk by adopting a portfolio approach, selling both to bilateral C&I customers and through the SAPP Competitive Markets.