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De-risking South Africa’s transition to a new energy future

10 May 2019 Aon South Africa

On the African continent, there is appetite for major infrastructure developments that are only hampered by challenges of capacity, whereas the picture is almost inverse in South Africa at present.

“We are sitting on a GDP growth rate of 1.5% at present that affects infrastructure investment, which is further exacerbated by an investment freeze as businesses adopt a wait-and-see approach ahead of the elections in May,” says Tshepo Mofubetsoana, Broker Centre Manager - Construction & Engineering Division at Aon South Africa.

“While there is no disputing the economic facts and constraints right now, there is a dire need for infrastructure development in the energy sector in South Africa, especially in light of Eskom’s current capacity woes that are adversely affecting the entire economy,” he adds.

While government is working to address operational, structural and financial challenges surrounding Eskom, there is a clarion call from all stakeholders to transition to renewable and alternative energy sources where feasible to do so. Major renewable energy projects in the Northern Cape and Kimberly are currently nearing completion, but there has been little movement in this space in the rest of the country, largely due to a lack of policy direction and failure to leverage the potential of independent power producers (IPPs). Labour relations are also strained with unions adding their voice on the topic of job preservation amidst government’s decision to unbundle Eskom into three separate operating units.

“There is no denying the fact that renewable energy is a major disruptor in the sector, but instead of seeing it as a threat, it offers an opportunity for the labour market to upskill in order to offer meaningful participation in the renewable energy sector, embracing the job creation aspects of this change in mindset. Whether we expect Eskom to be the supplier to the national grid, or we change our attitude, everyone should be trying to find a workable solution,” adds Michael Viterenwa, Account Executive for construction and engineering at Aon South Africa.

The global sentiment is supporting green energy, while reinsurers have gone so far as to re-evaluate their stance on coal mining. The Paris Agreement signed in 2015 by United Nations members called on all members to reduce emissions of greenhouse gases as quickly as possible. This led to insurance giant Zurich announcing that it would stop offering insurance to mining and power generation companies receiving more than 50% of their revenue from coal, joining a growing list of global insurers taking steps to distance themselves from the ravages of coal in the wake of climate change concerns.

South Africa is currently behind the curve of investment in renewable energy, however, this is set to change with the President’s recent announcement of Eskom’s unbundling into three units of generation, transmission and distribution.

“This bold move paves the way for Independent Power Producers (IPPs) to sign power purchase agreements with the new ‘transmission’ company that will evolve from Eskom’s unbundling. While it will take a few years for the new transmission business to be fully operational as a separate entity, it will launch South Africa on the path to renewable energy infrastructure development, which will be well-received by the construction and engineering sector that currently has the capacity to undertake these major and complex projects,” says Michael.

The reality is that the Renewable Energy Sector will continue to grow significantly faster than any predicted national and international economic growth indices, providing significant opportunities for developers and operators alike. Demand by governments and individuals for a secure supply of cleaner and cheaper alternatives to fossil fuels is escalating, along with the introduction of tightening emission reduction targets. But renewable energy projects come with significant and complex risks and in most instances, massive financial requirements and contractual liabilities due to the debt financing models in place.

“Seamless insurance cover is a key requirement of any renewable energy construction project, right from the planning and early works stages and between marine cargo transits, construction All Risks, delay in start-up, operating property damage and business interruption, as well as all third-party liability exposures. Renewable energy insurance products cover the main lines of insurance such as property, engineering, marine and liability while additional special types of insurance can be made available such as credit, political and weather risks, errors & omissions, and directors & officers cover,” explains Tshepo.

“The traditional engineering/construction and property insurance markets have embraced the renewable energy sector as a growth area and have created significant capacity and competition. Consequently, there is a wide choice of markets and coverage options. The reality is though that renewable energy projects pose some specific risks and barriers. Technologies applied are relatively new and the available expertise and actuarial data is still low. Thus, there are few standard products in this sector and risk management is primarily done on a case-by-case basis which is why it’s essential to have a risk partner with global infrastructure and capability, along with local experience of country specific conditions and requirements,” adds Tshepo.

Aon South Africa, in conjunction with Aon’s Renewable Energy Practice has developed a specialised facility, the Aon Renewable Energy Facility, to cater for the insurance and risk management requirements of renewable energy projects in onshore wind energy, solar energy (photovoltaic, concentrated and thermal installations) and bio energy (biomass, biogas and waste to energy plants).

“This is where the value of an expert broker in the construction, engineering and energy field really comes to the fore. Our global insight and experience in multiple geographies enables us to provide the players in this relatively new field of operation with workable frameworks and perspective on tried and tested approaches that can be implemented locally. Our team includes experts from across Europe, the Middle East, Africa, North America, Asia and Australia. This global presence allows us to manage strategic relationships with clients and insurers worldwide and to leverage our combined expertise to the benefit of our clients,” concludes Michael.

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