Financial Mail - Investors Monthly
DBSA granted funding to help
The DBSA is involved in new funding schemes to support green energy, writes Lynette Dicey
The pressure is on countries around the world to stem the rise in global carbon emissions. The Paris agreement of 2015, to which SA is a signatory, calls on countries to reduce their emissions in an effort to keep the rise in the average global temperature below 2°C.
The UN Framework Convention on Climate Change, which co-ordinates the global response to the danger, has implemented measures to assist developing countries such as SA to introduce climate change programmes.
As part of the UN measures, the Development Bank of Southern Africa (DBSA) has in the past six months been granted funding for the establishment of two critically important green initiatives: the climate finance facility (CFF) and the embedded generation investment programme (EGIP).
The Green Climate Fund (GCF), a global fund set up under the auspices of the UN framework convention to support developing countries in responding to climate change, awarded the DBSA funding of $55m to establish the R2bn CFF and, in a separate initiative, $100m to establish the EGIP.
In addition to helping developing countries limit or reduce their greenhouse gas emissions and adapt to climate change, the GCF aims to promote a paradigm shift to low-emission and climate-resilient development. Its objective is to split funding equally between mitigation and adaptation measures, using public investment to stimulate private finance.
The DBSA is one of only two accredited GCF organisations in SA, and the only entity accredited to provide concessionary finance from the UN framework convention to large-scale projects. Project sponsors can’t approach the GCF directly but have to go through an accredited entity.
This is not the development bank’s first foray into climate mitigation and adaption projects: to date it has financed R15bn worth of related projects outside of the GCF.
CLIMATE FINANCE FACILITY
In addition to the GCF’s $55m, the DBSA is providing R650m to the CFF, a debt facility that aims to address market constraints in the private sector. The facility intends to play a catalytic role with a blended finance approach to increase climate-related investments in Southern Africa.
Under the management and auspices of the development bank, the CFF will cofund climate-related and renewable energy projects and businesses that mitigate or adapt to climate change.
“Once implemented, this will potentially be the first ‘green bank’ concept adapted for developing countries, particularly for Africa,” says Mohale Rakgate, Group Executive: Project Preparation at DBSA.
The CFF, he says, is designed to enable private sector financial institutions to scale up climate finance by crowding in private sector capital.
The fund will focus primarily on infrastructure projects and businesses that mitigate or adapt to climate change, with 90% of its funding focused in this area.
This will be achieved via two main instruments: credit enhancements and tenor extension for projects that show commercial viability but have yet to achieve bankability.
The facility will be extended to projects and businesses in SA and the common monetary area, including Namibia, Eswatini and Lesotho.
“The intention is to crowd in private sector funding and leverage existing funding in order to catalyse between R6bn and R10bn worth of projects,” says Rakgate. The CFF, he adds, is largely agnostic in terms of who it funds with, given that it is not aligned to any particular bank or investor.
Globally the appetite for climate-related investments is largely driven by the private sector and private sector investors, he says. In Europe and the US funders are moving to risk, return & impact models.
“In SA the move to impact-related investments is a little slower but it is happening, and climate is a big part of that trend,” says Rakgate.
The development of the CFF was supported by Convergence Blended Finance, a global network that generates blended finance data, intelligence and deal flow to increase private sector investment in developing countries, and the ClimateWorks Foundation, a global organisation whose mission is to mobilise philanthropy to help solve the climate crisis.
Convergence Blended Finance awarded a design-funding grant to the Coalition for
The intention is to crowd in private sector funding and leverage existing funding to catalyse between R6bn and R10bn worth of projects
Green Capital to support the DBSA with critical business planning, institutional design, financial product support and capitalisation in establishing the CFF.
The ClimateWorks Foundation, on the other hand, provided support for analysis to help the CFF establish its market focus and project pipeline potential.
The CFF enables the development bank to support eight of the 17 UN sustainable development goals and, in the process, support the nationally determined contributions that each signatory to the Paris agreement is asked to establish, says Rakgate.
“The CFF is an innovative financial product that enables the DBSA to crowd in third-party investors and increase our financial support for climate-friendly projects,” says Patrick Dlamini, the bank’s CEO.
EMBEDDED GENERATION INVESTMENT PROGRAMME
Embedded generation — as defined by the EGIP — is the production of electricity from generation facilities that are connected to the national grid, with or without wheeling arrangements. SA wants embedded gener- ation to contribute about 11.5% (2,600MW) of renewable energy capacity by 2030.
The investment programme is a credit support mechanism that will develop a model for funding embedded-generation renewable energy projects in SA, with subprojects implemented by independent power producers and energy buyers such as local municipalities.
The development bank has matched the GCF’s $100m funding, resulting in a total of $200m to establish the EGIP.
Zodwa Mbele, Group Executive: Transacting at DBSA, says about $84m will be focused on providing broad-based BEE funding to enable the participation and ownership of local communities and small, medium and micro-enterprises in renewable energy.
The EGIP will utilise a crowdfunding mechanism to try to generate an additional $104m from local commercial financial institutions.
“Our intention is to reach commercial close by the end of June 2019 and to then start funding underlying embedded generation projects,” says Mbele.
“The first phase of the EGIP will be proving that projects outside of the renewable energy independent power producer procurement programme (REIPPPP) can be viable and commercial without GCF or DBSA funding.”
The proposed investment will add 330MW of new generating capacity to the national grid once all subprojects are in operation, representing a savings of more than 700,000t of carbon dioxide equivalent per year in emissions — a significant contribution to SA’s climate targets.
The DBSA, as the accredited and exe- cuting entity, will be responsible for implementation and management of the programme. In addition, the bank will take responsibility for overall portfolio management, and evaluation and monitoring of all the subprojects under the EGIP umbrella.
The key objective of the EGIP, Dlamini says, is to improve the viability and bankability of the initial projects so that they reach financial close, which will ensure a market for embedded generation in SA.
“We believe the EGIP will create both an enabling environment and a new funding model for continued renewable energy investments outside of the REIPPPP.”
The proposed investment will add 330MW of new generating capacity to the national grid once all subprojects are in operation
OPTIMAL TIMING
As a development finance institution, the DBSA believes its mandate includes helping SA achieve its various climate change commitments and drive the economy towards a low-carbon footprint, says Dlamini.
“Given the government’s fiscal constraints, the challenge is how to drive renewable energy projects. The only way to achieve this is to include the private sector in these projects. Fortunately, there is a growing appetite for clean energy investments from fund managers.”