Director: Corporate-911
Before President Cyril Ramaphosa could even open the BRICS Summit, which took place in Sandton last week, Electricity Minister Kgosientsho Ramokgopa pointed out that South Africa urgently needs over R200 billion to resolve Eskom’s maintenance challenges. And it seems as if he went to the Summit hat-in-hand after it emerged that China would offer financial assistance.
BRICS was formed in 2010 with a lot of promise, and the interest shown by other countries to join the group indicates that BRICS has the potential to one day challenge Western hegemony and their traditional economic dominance. However, it is about more than economics; BRICS has influential members and the opportunity to make critical policy decisions that can demonstrate that the block is genuinely invested in addressing social issues.
As a progressive democracy, South Africa should be pushing towards the development. It therefore boggles the mind why South Africa is so hell-bent on only securing funding for Eskom when it could use the Summit to urge other countries to accelerate their movement to become Net Zero Economies.
A low-level view
There are simple reasons South Africa focuses on Eskom over renewable energy.
It will take a similar time frame to build renewable energy projects that will take some of the pressure off Eskom; it may even come in at the exact cost. However, maintaining and revitalising existing infrastructure will be much quicker than establishing bills that will sluggishly move their way through Parliament to be passed eventually. Bureaucratic red tape is very much alive in Mzanzi.
There is also the fear of the unknown. South Africa has been growing its economy through Eskom for 100 years. So, our politicians and economists are familiar with the policies and actions that are needed to facilitate the levers of economic growth. On the other hand, the same politicians are ‘still determining’ the levers that will grow a green economy and the opportunities they present.
Let’s hope this assessment does not have a five to ten-year time frame, as they can turn to plenty of literature discussing these benefits.
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Greenployment
The article points out that people are attracted to innovation and solving the world’s most challenging problems. Silicon Valley is a product of the information age, in which semiconductors and computing power changed how we communicate.
The same brain power is now shifting to sustainable technologies. This competitive drive is creating new market opportunities and future unicorns. I foresee that green collar jobs will become a leading indicator of not only innovative companies across multiple industries, but also the revenue prospects of their local communities.
Greenification
The article adds that differentiation and structural competitive advantages are central to a sustained growth rate. According to McKinsey, the average company grew roughly 2.8% per year between the Great Financial Crisis and the Covid-19 pandemic. Only 12.5% of the companies they studied increased revenue at a double-digit annual growth rate.
Multiple sustainable megatrends have the potential for accelerating revenue, and companies that strategically position themselves in the green economy could be propelled from startups to high-growth darlings or reinvigorate a mature business model.
For example, according to the International Energy Agency, renewables are set to account for almost 95% of the increase in global power capacity through 2026. There are plenty of businesses in the value chain of renewable energy that could benefit. Those who actively scale, build intellectual property and forge competitive advantages will grab a larger slice of the growing pie.
Greenium
The article points out that the higher the perceived growth rate of future revenue, the more market value an average investor is willing to ascribe to your company. Positive sentiment is about the future prospects of the industry when the rate of growth is more attractive relative to other investable options.
Defining this premium involves financial measurement tools, such as valuation multiples, that evaluate one metric as a ratio of another to make a group of firms more comparable. A proper peer group means all participants are exposed to similar macroeconomic forces, have similar product lines and compete for the same customers.
One valuation approach often used for a young industry is the revenue multiple method using a cohort of companies competing in the same business. A good analogy would be the price of homes in the same neighbourhood tend to sell for a similar price per square foot, all else equal. Similar to a desirable neighbourhood, the valuation of companies with a greater percentage of their revenue tied to the green economy may trade at a premium due to their above-average growth prospects.
Greenulus
The article adds that fiscal stimulus is when governments increase subsidies or create tax incentives to boost growth and adoption of specific goods and services. Recent examples of green stimulus in Europe and the US have been consistently packaged in a shade of green.
The Inflation Reduction Act of 2022 represents the largest federal-level clean energy legislation in U.S. history. Combined with certain parts of the Infrastructure Investment and Jobs Act and CHIPS Act, there could be as much as $1 trillion earmarked for green economy industries, based on our analysis of the legislation. Incentives spur innovation, which can enable the commercial viability of multiple environmental solutions.
Clean energy, storage, transportation and building are examples of industries with strong economic tailwinds that could spur investor interest around the world. Countries are competing to create more incentives for companies to attract their green business and take advantage of this accelerating transition.
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Debunking concerns
Outside of a reluctance to formulate and roll out progressive economic policies, there is no reason that South Africa cannot move towards a green economy.
Vietnam, a country that has a strong communist past and a devastating war that was fought with the USA, currently produces 92 billion kilowatt hours through renewable energy. Further, the country has plans to ramp this up to 131.8 billion kilowatt hours by 2028. The total electricity demand in Vietnam is 226 billion kilowatt hours. Assuming this demand will remain the same over the next five years, renewable energy will make up nearly 59% of the country’s total electricity production.
South Africa is nowhere near achieving these benchmarks, and we do not have a communist past or a debilitating war. And we cannot use an excuse that developing countries will struggle to embrace renewables because of cost.
The next concern is job creation. South African politicians will say they prefer backing the fossil fuel horse because they know it can create jobs. In contrast, job creation in a renewable energy-enabled economy still needs clarification. However, a research paper referencing a study by Fehri et al. (2020) points out that that the renewable energy sector in Morocco (another developing economy) could create 163 000 new jobs by 2030 (seven years from now), particularly in areas associated with renewable energy. Politicians will then argue that Eskom is a significant employer. Well, so will the renewable energy sector, provided a major drive exists to upskill the labour force.
It is getting to a point where Government is quickly running out of excuses to explain its reluctance regarding renewable energy. Plenty of evidence suggests that the benefits of renewable energy far outweigh the risks. Why is there so much reluctance?
Robin Nicholson is the Director of Corporate-911 and is a Senior Business Rescue Practitioner.
