‘Investors will shun coal-fired power plants’

Futuregrowth’s Andrew Canter says government’s failure over clean energy is ‘diabolical’




Arena Holdings PTY


Business | Opinion

Andrew Canter, chief investment officer of Futuregrowth, one of the country’s largest asset managers, says they’d be mad to invest in refurbishing and prolonging the life of South Africa’s coalfired power stations. Electricity minister Kgosientsho Ramokgopa has called for “bold and decisive” private investment in Eskom’s ageing plants to alleviate the electricity crisis. “To wade into that as a private equity investor would be a thankless task,” says Canter. “You’ll end up as the majority holder of a very defunct power plant in need of major capital expenditure, or in some sort of partnership with Eskom where they remain as the shareholder.” At the least there would have to be absolute alignment on goals, economics and efficiency, which would be highly unlikely. “In an environment where you do not have alignment, where there are agendas for political aspirations such as job preservation or patronage networks, it’ sa non-starter. Why would you do that? Be in partnership with a failing or sick SOE, and a political football?” Pumping fresh capital into the refurbishment of coal-fired plants would be just as problematic for institutional investors, with end investors such as retail unit trusts and pension funds telling them: “We need to stop channelling money into the old stuff and start channelling money into the new stuff, wind, solar, hydro, even nuclear. That’s where money wants to go,” says Canter. “Towards clean, not towards dirty.” In 2016, Futuregrowth announced they would not fund any new coal-fired plants after government proposed procuring two of them as part of a broad energy strategy. “The environmental standards were nonexistent and it ran counter to what we saw as a proper transition to cleaner energy.” Others in the private sector, including the banks, have since taken the same position. “There’s a common understanding now that no new coal-fired power plants can be funded in South Africa by the private sector, debt or equity. “Should the government choose to do so it would be diabolical in the face of a global and necessary transition. “We can’t stop them, but from the private sector, from the banking sector, from the investor market, from the global capital markets, nobody will fund a new coal-fired plant in South Africa.” He’s “guessing” the Chinese government funds all its new coal-fired plants off its own balance sheet but this isn’t a likely option for the South African government. “If you did the right cost of capital those things would be uneconomic. You’d be better off funding cheaper capital into wind, solar, batteries, hydro, rather than coal.” Ramokgopa and energy minister Gwede Mantashe are pushing to reopen Komati coal power station in Mpumalanga, which they say was decommissioned prematurely and has another three to five years’ life in it. Canter says if the government feels it is “suitable” in the course of keeping the country powered to channel capital into that, “I get it.” “But as a private sector player we’re not going to fund it, either with debt or equity. I don’t want to own it, I don’t want to own it in partnership with government, I don’t want to channel money into dirty power plants.” The last example of a private sector player taking over “a crappy old power plant that seems to have some life left in it” was Kelvin, in Johannesburg, and that didn’t end well, he says. “The burden of running it and fixing it is just enormous; the economics are terrible. And that’s before you get into the politics of your workforce figuring out ways to steal money from you and if they don’t like your politics throw wrenches into the generator to break it.” He says they’ll lend money to the government “if need be”, and if some of it is allocated to Eskom for an ageing coal-fired plant “I’m not going to second guess that too deeply, though I’d hate to see them build a new coal-fired plant”. Shouldn’t private sector loans to the government be more conditional? “There’s not a lot of conditions you can attach to loans when you buy government bonds.” he says. As for the economic consequences in terms of carbon taxes, “the overarching thing for me right now is to keep the damn lights on. You cannot run a factory if you don’t have power, you cannot run an economy if the lights are going off every two hours for two hours.” At this point, it’s not about the impact of carbon taxes on exports, he says. “The bigger damage to exports is simply not being able to run your factories or pipelines.” This is not to downplay the need to cut carbon emissions. He goes back eight years to when South Africa’s renewables programme was “going like a freight train. We’d done over 100 projects to create clean green energy.” And then the government stopped it. “That was diabolical. We could probably have 4GW or 5GW of additional power on the grid right now if they hadn’t stopped it.” He says he understands the need for just transition, preserving jobs in coal and letting them run for the lifespan of the workforce. “But by now this could have been solved five or 10 years ago with some reasonably decisive, intelligent and forward-looking leadership. It’s diabolical that the government failed to do that.” He also understands the need for baseload capacity. “But by now we could have built the alternatives to be a much bigger percentage of the grid so that the base load would be a much smaller amount.” Referring to Ramokgopa’s plea for private sector investment in fixing power stations, he says Futuregrowth’s experience as a minority shareholder of Airports Company South Africa convinced him that “to be in partnership in any way, shape or form with a political entity under this government is a big mistake”. “I wouldn’t do that in power, roads, ports or anything with the government as a majority shareholder. It is death from an investor’s point of view.” But if the government gets a grid company set up as a legal entity with majority private sector ownership the private sector will be there – “for those and other deals, if you let us run them”. “Just don’t try to sell me a crappy old broken coal-fired power plant like you ’re doing me a favour.”