Financial Mail - Investors Monthly
CAPITAL OUTLAY
Many factors have combined to cut the costs, writes Pedro van Gaalen
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.