CAP­I­TAL OUT­LAY

Many fac­tors have com­bined to cut the costs, writes Pe­dro van Gaalen

Financial Mail - Investors Monthly - - Contents -

Many fac­tors have com­bined to cut the costs of go­ing green

SA’s com­pet­i­tive ten­der-based Re­new­able En­ergy In­de­pen­dent Power Pro­ducer Pro­cure­ment Pro­gramme is con­sid­ered one of the most in­no­va­tive glob­ally.

Since 2011, the pro­gramme has stim­u­lated sig­nif­i­cant in­vest­ment from in­de­pen­dent power pro­duc­ers (IPPs).

Tar­iffs have fallen sharply over the ten­der bid­ding rounds, to the point where round-four projects are among the low­est­priced grid-con­nected re­new­able en­ergy (RE) projects in the world.

Nu­mer­ous fac­tors have driven down these costs. “The hard­ware has be­come cheaper and more ef­fi­cient. For ex­am­ple, so­lar pho­to­voltaic (PV) pan­els are now up to 20%-30% cheaper,” says Daniel Zin­man, se­nior trans­ac­tor: in­fras­truc­ture fi­nance at RMB. “IPPs can also de­liver up to 50% more out­put for the same rel­a­tive cost of round-one projects.”

Ad­di­tional fac­tors in­clude in­creased lo­cal ex­per­tise, reli­able grid in­te­gra­tion and, im­por­tantly, the cost of cap­i­tal and the in­no­va­tive mod­els used to fi­nance projects. The net ef­fect is that so­lar PV and wind en­ergy have sur­passed Eskom’s av­er­age sup­ply cost from base-load tech­nolo­gies.

Heleen Gous­sard, head of un­listed in­vest­ment ser­vices at RisCura, ex­plains that nu­mer­ous fund­ing mod­els can de­liver a suc­cess­ful project out­come. “When the [project was] launched, fund­ing costs were high due to the first-mover na­ture of the en­ter­prises and the as­so­ci­ated risks.

“But fund­ing costs have de­creased over sub­se­quent rounds as lo­cal ex­pe­ri­ence and ex­per­tise in the value chain has ad­vanced.”

Zin­man says: “As the mar­ket ma­tured, a bet­ter un­der­stand­ing of the sec­tor and the as­so­ci­ated risks was for­mu­lated. This has boosted the in­vest­ment ap­petite among banks and in­sti­tu­tional in­vestors.”

He says RMB has been able to ap­ply fund­ing struc­tures on RE in­fras­truc­ture deals to bring about large cost ef­fi­cien­cies, thereby in­creas­ing the lev­el­lised cost of en­ergy and driv­ing down the tar­iff.

RMB’s fi­nanc­ing of the R4.5bn Roggeveld Wind Project is a case in point. The model that was ap­plied helped to achieve the low­est bid tar­iff to date across RE tech­nolo­gies in SA, says Zin­man. RMB struc­tured and pro­vided tra­di­tional funded and un­funded longterm debt fa­cil­i­ties for the 147MW project al­most en­tirely from con­sumer price in­dex- linked se­nior debt.

“This negated to need for hedg­ing. We also did sig­nif­i­cant back-of­fice struc­tur­ing. In­stead of fund­ing a stan­dard debt ser­vice re­serve ac­count, which can be a drag on up­front eq­uity and debt fund­ing re­quire­ments and earns low-level in­ter­est while held in an ac­count, we pro­vided liq­uid­ity through a con­tin­gent fa­cil­ity. This re­duced costs and helped the project re­alise a lower tar­iff.”

RMB pro­vided an Eskom guar­an­tee fa­cil­ity when the guar­an­tee’s quan­tum in­creased ex­po­nen­tially in round four.

“In previous rounds, projects used cash as col­lat­eral to com­ply. How­ever, this was in­ef­fec­tive given the amount re­quired.”

Gous­sard says a larger por­tion of fund­ing is now also avail­able from feeder and pri­vate eq­uity funds, and new fund­ing lines are emerg­ing.

“More in­vestors want to in­clude RE in­vest­ments in their strate­gies to meet shift­ing man­dates around the in­clu­sion of [en­vi­ron­men­tal, so­cial and gov­er­nance] or im­pact in­vest­ments,” she says.

While some in­vestors make direct in­vest­ments, this re­quires ac­tive man­age­ment and a high level of skill.

“In these in­stances, the fund it­self con­ducts the req­ui­site due dili­gence and man­ages how it de­ploys cap­i­tal.

“Other funds choose to out­source this func­tion to a spe­cial­ist con­sul­tancy with the req­ui­site sec­tor ex­pe­ri­ence and skills to man­age the as­so­ci­ated risks on their be­half.”

The lat­ter model is ideal for pen­sion funds, which are in­creas­ingly con­sid­er­ing RE in­vest­ments, says Gous­sard.

“The sta­ble, long-term re­turns of in­vest­ments in op­er­a­tional RE projects which are un­der­pinned by tan­gi­ble as­set values and in­fla­tion-linked re­turns aligns with the li­a­bil­ity pro­file that pen­sion funds re­quire.”

Hulisani CEO Maru­bini Ra­phulu says life in­sur­ers now also have a bet­ter un­der­stand­ing of the sec­tor-spe­cific risks. “Many now feel com­fort­able buy­ing bank-backed project debt be­fore the op­er­a­tional stage, while oth­ers take direct po­si­tions due to the favourable risk pro­file.

“This dis­in­ter­me­di­ates the banks, which can bring down fund­ing costs,” he says.

Ra­phulu adds that in­ter­na­tional en­gi­neer­ing, pro­cure­ment and con­struc­tion com­pa­nies are of­ten will­ing to pro­vide con­struc­tion fi­nance, which is gen­er­ally the riski­est part of any build project.

“Con­struc­tion com­pa­nies now man­age that risk, which al­lows banks or bond hold­ers to take on the debt por­tion.

“The project can then be re­fi­nanced at the com­mer­cial op­er­a­tion in­cep­tion stage, with bridg­ing pro­vided on day one as part of a pre-agree­ment on take-out with the bond holder. If every­thing works out, the bridge can be sold out, which makes the cost of fund­ing even cheaper,” he says.

Daniel Zin­man

Heleen Gous­sard

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