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Moody's puts spotlight on IPP investment potential

Sep 20 2016 18:57
Lameez Omarjee

Johannesburg - Moody's regards South Africa’s renewable energy plans as a positive in terms of diversifying its energy mix. According to a credit opinion last week, the ratings agency indicated that loan guarantees to independent power producers (IPPs) have potential to attract private investors and shift the energy mix to renewables.

Globally, Moody’s has seen a rise in demand for renewable energy debt as there is an increasing drive towards implementing climate change goals in government policies. This is according to Christopher Bredholt, vice-president and senior analyst of public project and infrastructure finance. He was speaking at Moody’s 11th Annual South African Credit Risk Conference in Sandton on Tuesday.

"In South Africa, there are a number of infrastructure bottlenecks that impact growth negatively,” said Bredholt. Support for renewable energy producers is linked to the employment opportunities the sector can create.

South Africa is the continent’s largest renewable market. In 2015, the country’s market size had grown by over 300% from a low base, ranking behind Germany. “South Africa is doing well in terms of market size,” he said.

The country remains dependent on coal, as it provides around three-quarters of South Africa's energy. The renewable energy policy aims to reduce dependency on coal and government aims to increase the country's renewable capacity to around 17.8 GW by 2030, compared to 1.9 GW in June 2015.

The pace of meeting these goals depends on grid infrastructure, which may impact government’s implementation plans.

Previously, local banks and development finance institutions have dominated funding. In the long term institutional investors are a possible source of funding, following a trend seen in Europe.

Institutional investors control a substantial amount of resources, but are currently underinvested in infrastructure, he explained. As a result, global policymakers are tapping into private capital to “plug” infrastructure debt.

The positive drivers of renewable energy are expected to draw traction from institutional investors to support renewable energy funding, he explained. These include a significant fall in renewable electricity costs and the growth of independent renewable power producers.

South Africa is expected to follow suit in broadening its capital supply for renewable energy. There is a shift away from high subsidy levels. This is helped by a drop in the price of equipment and installation costs and the country's abundant natural resources, particularly solar power, according to a statement issued by Moody’s.

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