Consolidated Infrastructure Group (CIG) is a name that evokes no small degree of pain for a legion of shareholders and creditors — not to mention its founder, Raoul Gamsu.
After all, Gamsu oversaw the creation of a business that went from being a R35m brick and quarrying outfit (known then as Buildworks) to CIG, a power and infrastructure provider worth R4bn. Then a wrenching collapse saw the shares tank — and that business is now in the final stages of business rescue.
Gamsu tells the FM that he grew it too fast.
“We opened up across too many countries. Engineers who were really competent [left], conditions changed and we couldn’t adapt quickly enough. So I’m accountable for both those things: the growth and letting the culture slip.”
It didn’t help that CIG had too much debt, and couldn’t get its cash out of its African business to pay that down. And at home, the plan to expand private renewable power producers floundered during the dark years of the Jacob Zuma regime.
[The impetus] was the pain and suffering from trying to build independent power projects in Africa over the past decade, sitting in anterooms in Djibouti waiting for government ministers to arrive
— Stuart MacWilliam
Now, Gamsu is starting again. He and former CIG executive Stuart MacWilliam have formed a new company called EnergyNow, whose future hinges on helping Eskom plug its energy shortage with renewable energy.
To some extent, says MacWilliam, the impetus was the “pain and suffering from trying to build independent power projects in Africa over the past decade, sitting in anterooms in Djibouti waiting for government ministers to arrive”.
Firms such as CIG would sign a power purchase agreement with a government and raise debt from a development finance institution — but then wait three years for the approvals. And by that time, the project was essentially dead.
Today, though, it’s different. Renewable energy projects are all the rage, and funders are throwing buckets of cash at them — which augurs well for EnergyNow.
As does SA’s own unique situation: Eskom is in dire shape, and the power cuts are only going to get worse before they get better.
The utility has already said it needs to decommission 22,000MW of coal-fired power in the next 14 years — roughly half its nominal installed capacity. This represents a big opportunity for companies able to fill the gap.
Says MacWilliam: “In SA the power sector is going to explode because you’re building for replacement. It has to happen, otherwise the SA economy grinds to a halt. Instead of having times when you don’t have power, it’ll become the times when you do have electricity.”
The cost — and the possibilities — are gargantuan.
To replace 22,000MW with green power would likely require 66,000MW of supply. The cost of producing 1MW is estimated at $1m, so it means as much as $66bn — R1-trillion — must be spent on green energy generation in just 14 years.
And that excludes the money — running into hundreds of billions — that has to be spent on the grid to support new players.
The catalyst for Gamsu and MacWilliam was the government’s decision last year to allow private companies to generate up to 100MW each. As it is, calls are mounting for the state to scrap that limit altogether.
The economics have changed dramatically, too, since Gamsu first dabbled in renewable energy at CIG, back in 2010.
Specifically, the price of electricity has soared, at the same time as the cost of installing renewable energy has dropped. As Gamsu says, this creates a “nice economic gap … any one of us in this market has an economic chance of making a profit”.
Gamsu and MacWilliam put together a proposal in February, and are now speaking to equity and debt funders to raise R900m for their first project — a 50MW solar-powered plant.
At the same time, they’ve been canvassing potential clients — from steel manufacturers to data centres and mining companies — to buy the energy they’ll sell. Their elevator pitch is this: the chance to buy electricity from a renewable power plant, on a short-term basis, at a discount to what you’d pay Eskom.
In the past, anyone buying power would typically have to sign a 20-year agreement, with the legal documents running to hundreds of pages. And this would then sit on a buyer’s balance sheet as a liability.
EnergyNow plans to change this.
“Our whole thesis was: green energy has to happen, but why should it be so complicated and hard for a business in SA to buy green electricity? So we tried to turn it on its head and say, OK, can we just provide a very simple contract, calling it a green energy supply agreement,” says MacWilliam.
EnergyNow’s contract, for example, is only 15 pages and is something that a factory manager can sign, says Gamsu.
“It doesn’t have to go to the board or an investment committee for approval. That’s where we want that buying decision to be made.”
Innovative approach means companies can buy their green energy directly from the Eskom grid — at a better price
— WHAT IT MEANS:
Gamsu’s revelation came when he was speaking to someone whose company spends R500m a year on electricity and was considering going off the grid. But that company figured it would cost, conservatively, $1bn to build its own power supply.
“I thought, hang on a second,” says Gamsu. “As much as he’s committed to getting his own power, he’s never going to take himself off the grid. This market requires multiple inputs: it needs an Eskom; it needs long-term embedded contracts; and it needs guys like us supplying green electricity. There’s enough space in the value chain for all of us to meet our requirements.”
There are other new dynamics that will help such companies as EnergyNow. For example, anyone who exports to Europe has an obligation to prove green energy was used in the production process. As a result, SA exporters are under pressure to ratchet up their “green scores” in the next six years, or face hefty carbon cross-border taxes — particularly in the EU.
“We meet guys now whose jobs are literally dependent on them getting their green scores right,” says Gamsu. “If you’re working for a European multinational as a GM in SA, and you do not get a certain score, you can lose your job.”
But how does EnergyNow raise money when the economy is so fragile — unlikely to scrape together 2% GDP growth this year, even as inflation sits at about 6%? Isn’t that a big risk for funders?
Luckily, says Gamsu, the capital markets have matured too.
“From the first meetings we had with some of the lenders, we got an immediate sense that they have got their minds around lending to a business like ours,” he says.
A group called Sturdee Energy will manage the building of the first EnergyNow power plants, and two potential sites have been identified, at Lephalale and Bela Bela. The sites have to be close to an Eskom substation, which is where the energy they produce will be connected into, and then “wheeled” across Eskom’s grid.
MacWilliam describes the concept of wheeling as follows: “Think of a bathtub: you’ve got a tap putting water into the bathtub to fill it up. It doesn’t matter where you take it out — it’s just water. Electricity is the same.”
How it works is this: EnergyNow — or any firm looking to wheel into the grid — would approach Eskom to pump in, say, 75MW.
Eskom then provides a cost estimate of how much it would cost to build the equipment to integrate this into its line. The equipment ultimately becomes Eskom’s property.
EnergyNow wants to begin providing green power through the Eskom network by the end of next year. To get the licence, however, the company has to sign up customers first.
Once it has done that, it will measure how much electricity it has contributed to the grid, how much its customers have drawn, and then bill them accordingly.
But how, on a daily basis, does a business work out what proportion of the electricity it consumes is green?
“We have access to that customer’s meter, as part of our agreement,” MacWilliam says.
“So we know how much electricity that customer has consumed [and] we know how much we are generating. Then we marry the two. At the end of the month, we tell Eskom we generated 1-million kilowatt-hours in that month — please allocate 250,000kWh to X steel mill in Ekurhuleni and please allocate 400,000 to the citrus farmer in Elgin.
“Eskom then gives them a credit on their bill: [it] says, you bought 5MW from EnergyNow, I will give you a credit for that 5MW off my bill and you will pay EnergyNow for that 5MW.”
It’s a model with much promise. With SA in the grip of unprecedented levels of load-shedding, business leaders are practically begging President Cyril Ramaphosa to throw open the doors to private sector power generation.
But not every business has the cash to emulate Anglo American in going off-grid.
“There’s this mid-market,” says Gamsu. “It’s fine for Anglo; they have a multitude of options. But for that private entrepreneur who’s building a business, who has, say, committed to a R2bn expansion, he hasn’t got $1bn to take himself off the grid.”
That, for EnergyNow, is the sweet spot. “Everyone wants the Anglo contract but who’s going to look after the smaller guy?”
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.