City of Cape Town provides some insulation from load shedding

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SIMON BROWN: I’m chatting now with Quintin Rossi, CEO at Spear Reit. Spear is a Cape Town-based Reit. They’ve their pre-close presentation at 12 o’clock today. It will be on their YouTube channel. That’s for financial year 2023.

Quintin, I appreciate the time today. Almost certainly, as much as everyone else, you’ve been I suppose weaning yourself off Eskom to a fair degree for the properties that you’ve got down in the Western Cape. How many are you taking away from Eskom, either off-grid or perhaps onto diesel backup?

QUINTIN ROSSI: Morning, Simon, and morning to your listeners. Thanks for having me. I think the load shedding definitely causes us to look at life differently. Currently Spear owns 30 assets in the Western Cape, and I think one of the kind of competitive advantages of our portfolio is that we have only two of our 30 assets currently supplied by Eskom. The balance of our portfolio is all supplied by the City of Cape Town, so  there is already a layer of insulation from a load shedding protection mechanism.

But what we’ve done is we’ve taken an approach that we want to try and cover as much of us of our assets in PV solar. So at this point in time, if you look at total portfolio need, we need approximately 20MW to 22MW of power across our business in terms of needs. We currently have about 5.3MW of PV solar plant installed across our portfolio, and  that’s going to be scaling up to about 7.5MW to 7.6MW.

So unfortunately we do still need Eskom and extensive capital to play a role in our lives, but we are on this journey to prepare life far less reliant first of all on Eskom, and second of all on fossil fuel-generated electrical supply.

SIMON BROWN: Is it practical? Can you get that full 20MW to 22MW from renewables? Is that actually a viable option?

QUINTIN ROSSI: Unfortunately I doubt it. For Spear and for any company or any person needing to run a feasible business, we need base load, and the base load, unfortunately, does not necessarily get supplied by renewables. The energy mix – I think renewables is a component of a viable, modernised energy mix but unless batteries become significantly cheaper – and with the move of technology, batteries do become cheaper over a period of time – the business case is still very difficult to make to install batteries in conjunction with your solar.

Also probably one of the challenges with load shedding is that you can have all the best intentions in the world to cover as much as possible of your roof space in solar, but if that solar is grid-tied without a battery backup, you again succumb to the darkness of load shedding when load shedding does hit, and it then provides very little relief.

But one has to look at load shedding and battery investments and diesel-generated investments over a 10- to 20-year period, and one needs to see how to allocate capital prudently and correctly, either through kind of maintaining a below-100% payout ratio or by assets, kind of capital allocation of capex over and above your normal kind of reinvestment into property, and see what the business case looks like going forward.

But one of the things that’s very attractive from a Western Cape perspective is that on the City of Cape Town grid there is a general undertaking from the city. We enter into curtailment agreements on our large industrial assets, and then all our tenants on those complexes agree to reduce their load, which then means that they do not get load shedding, which creates business continuity.

Unfortunately on an Eskom supply you are basically exposed to the national grid. If you look at the city of Cape Town, the city of Cape Town requires about 2 200MW of electricity. The city will be bringing on by 2024 an additional 500MW of own supply, which means that it will actually provide continuity between Stage 1 and Stage 4 for City of Cape Town customers. That means it’ll only become exposed to load shedding from Stage 5 onward, which I think is a phenomenal achievement by the City of Cape Town.

SIMON BROWN: It is. My next question was going to be: is your putting in renewables a competitive advantage? And of course it’s different, a hospitality. At  your The Capital 15 on Orange there is power demand pretty much 24/7, less so perhaps in some of the industrial [properties], but actually the competitive advantage is almost at city level rather than at your assets.

QUINTIN ROSSI: Hundred percent. That’s absolutely true. And in the pre-close this morning or this afternoon, one thing that I’ll be touching on is that we always say that real estate is about location, location, location, and I think now more than ever properties that are located within the city of Cape Town supply actually have the competitive advantage of being able to keep the lights on for longer, which means that when people are looking for real estate solutions – and I’m talking provincially now – they would be inclined to look at the City of Cape Town because if you weigh up the loss of productivity, the additional labour cost, plus the cost of your diesel when you’re on an Eskom supply versus a City of Cape Town supply; even though the City of Cape Town’s kilowatt/hour charge is slightly higher, the business continuity is there.

One of the reasons why the City of Cape Town’s kilowatt/hour charge is slightly higher is because they’re actually reinvesting into infrastructure, electrical infrastructure and a better renewable mix. It kind of makes it a lot more digestible when you see a slight uptick in your cost-to-income ratio because you know at least where the money’s going, and there’s an undertaking by the City not only for the 500MW, but an additional R120 billion will be invested by the City of Cape Town over the next decade towards water and sewage upgrades because of the growth in semigration and the growth in the population of Cape Town.

There is pressure on all those services, but at least you know that your rates and your additional charges on consumption are going not into just a black hole, but actually going into infrastructure.

SIMON BROWN: I take that point. You actually get something back. You don’t mind paying if there’s something at the end of the tunnel, rather than paying where the end of the tunnel is just a black hole. We’ll leave it there.

Quintin Rossi is CEO of Spear Reit. As he said, that pre-close presentation is at midday today. Quintin, I appreciate the early morning.

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