South African banks are in fierce competition to capture the value created by the country’s transition to a low-carbon economy. Estimates indicate the country needs around R4.6 trillion in financing for the green transition until 2035.

This equates to roughly 3% of the yearly GDP in South Africa. Most of this capital would be committed to alternative energy sources, particularly renewable generation projects.

South Africa has committed to a Just Energy Transition (JET), requiring a significant overhaul of its carbon-intensive economy.

This is feedback from Reserve Bank researchers Pierre Monnin, Ayanda Sikhosana, and Kerschyl Singh.

They studied the potential impact of the transition to a low-carbon economy on South Africa’s financial sector, outlining systemic risks and possible benefits.

Transition risks can profoundly affect the income streams and asset values of both businesses and households.

For example, companies heavily reliant on non-renewable energy sources will need to make substantial changes to their infrastructure and business models to meet the demands of a net-zero economy.

In South Africa’s case, this is the vast majority of the economy as around 80% of the country’s electricity comes from coal-fired power stations.

Such companies, especially those involved in the coal industry, are particularly vulnerable to these transition risks due to the significant costs they will incur.

Households that depend on non-sustainable economic activities, like those in the coal sector, are likely to face job losses and wage cuts. Public authorities that rely on tax revenues from these industries or own such companies will also be impacted.

These anticipated economic losses will create credit and market risks for financial institutions. Affected companies and individuals may see their incomes decrease, credit ratings fall, and asset values decline.

This will hinder their ability to repay debts to financial institutions, resulting in higher default rates. In cases of default, the sale of collateral assets will not fully compensate financial institutions, as these assets will have depreciated in value.

The study revealed that over R980 billion of corporate loans from South African banks are tied to companies or individuals exposed to the energy transition.

The green jackpot

Lungisa Fuzile, Standard Bank South Africa CEO

However, this risk pales in comparison to the potential benefit that banks may receive as a result of the green transition in South Africa.

The study noted that South Africa will need about $250 billion (R4.6 trillion) to finance the transition to a low-carbon economy in the decade from 2025 to 2035.

South African banks are already competing fiercely in the space, working to capture the immense value that will be generated from overhauling the local economy.

At a renewable energy roundtable last year, Standard Bank estimated the potential investment opportunity of the renewable energy sector is around R1 trillion.

It said demand from companies and households for alternative energy sources is skyrocketing, with its loans for renewable energy projects rising to four times the amount for fossil fuels.

Standard Bank South Africa CEO Lungisa Fuzile said, “We have to balance addressing the challenge of the energy crisis with the opportunities for the just energy transition.”

The bank estimates the value of the energy transition in South Africa to be R1 trillion, and it wants to capture a significant portion of the value.

“When we are successful, Standard Bank can capture a significant portion of the estimated R1 trillion renewable energy investment opportunity,” Fuzile said.

“We ought to be the go-to financial services provider for the energy transition in Africa as the continent’s largest bank.”

Charles Russell from Standard Bank Securities outlined how the bank arrived at the R1 trillion valuation for South Africa’s renewable energy transition.

Russell’s analysis showed that of the 1.6 million South African bondholders, roughly 1 million could comfortably take on additional credit.

If each of these households spent R250,000 on solar panels or other alternative energy solutions, banks would see a total credit opportunity of R250 billion.

In South Africa, corporations and businesses account for 80% of electricity consumption, while households use the remaining 20%.

However, certain industries, such as mining, are financially robust and do not require loans for their energy needs.

Russell predicted that corporations and businesses would invest three times as much in energy solutions as households, resulting in a R750 billion investment.

“This represents an approximate 25% increase in the total loan stock in South Africa, demonstrating that funding alternative energy solutions is a significant matter,” Russell commented.

SOURCE:South African banks battling over R4.6 trillion green power bonanza – MyBroadband