Financial Mail - Investors Monthly
SPECIAL FEATURE
Renewable energy
Eskom’s failure to build its next-generation coal-powered generation fleet on time and within budget is providing renewed impetus for the renewable energy (RE) sector.
The utility’s precarious financial situation has also resulted in above-inflation price escalations.
To plug the supply gaps and mitigate future price shocks, President Cyril Ramaphosa pledged during his state of the nation address to renew investment in the Renewable Energy Independent Power Producer Procurement Programme.
Hulisani CEO Marubini Raphulu says: “SA was a leading global destination for largescale renewable energy utility projects. Our world-class programme attracted significant investment, as it offered government-guaranteed, [consumer price index]-linked real returns, which reduced the cost of funding and made projects bankable.”
However, in 2015 Eskom’s then CEO, Brian Molefe, halted the programme, and government’s RE policy shifted. “Investors dislike uncertainty and were unwilling to transact in this environment.
“As a consequence, international investors invested in renewables projects in countries such as India, Mexico and the US,” Raphulu says.
As a result of this, some of SA’s large-scale RE project pipeline dried up, and the country lost critical sector-specific skills, he says.
Fortunately, following Ramaphosa’s announcement that Eskom will be unbundled, the local RE sector seems poised for a new dawn.
Raphulu says: “Feeding renewable energy into the grid becomes a more feasible proposition with an independent state-owned transmission company. Greater policy certainty about government’s commitment to [the RE programme] has also restored investor confidence.”
Accelerating SA’s shift towards a new, cheaper and more sustainable energy mix as part of the 2018 Integrated Resource Plan will, however, require innovative funding. The private sector will lead a large portion of these investments, as banks, lenders and funds have the appetite to finance largescale utility projects, affirms Andre Wepener, Investec CIB’s head for power and infrastructure finance. Wepener says: “Investec’s role is to provide project financing in the form of long-term limited or nonrecourse funding, with a mandate to act as co-developer to make equity investments.”
Amid greater policy certainty, Wepener expects significant scope for investments in solar, wind and hydro-generation projects, given SA’s climate and environment.
Raphulu says securing the senior debt funding portion from banks and a growing universe of institutional investors is the easy part. “As project risks have declined and stable returns realised, banks and equity partners have also sold down exposure to insurers. They have increasingly done so earlier in a project’s life cycle as the risks involved are better understood.”
The challenge, says Raphulu, has been securing equity for the BEE portion of the funding structure. “Projects require a minimum 20% empowerment shareholding, but where does this money come from? SA’s equity market is relatively small, with limited capital for BEE transactions outside of development funding institutions. Developers will generally take free carry in a project and some bank debt, which they will use as equity. The industry desperately needs more funders to support empowerment if we hope to realise the country’s renewed RE ambitions.”
Wepener also expects a rise in demand from the private sector for funding for off-grid solutions. “As the costs of solar photovoltaic panels have plummeted and battery storage technology advances, more businesses are considering utility-scale and rooftop installations,” he says.
The mining sector and commercial and industrial property owners are the main adopters at present, with many looking to structured finance to make implementation commercially viable. “We believe private sector RE projects are moving towards augmented grid-tied solutions, and lenders will increasingly need to provide funding that meets these demands,” adds Wepener.
Additional equity funding options include Section 12J Venture Capital Companies (VCC). Jonty Sacks, a director at Jaltech, says: “We expect an increase in deal flow.
“Section 12J VCCs typically fund smaller-scale off-grid projects and rooftop solar that generate up to 5MW due to legislated limitations that stipulate that a fund cannot invest more than R50m into one qualifying company.”
Sacks adds that contractors and developers can also consider forming their own Section 12J VCCs to gain access to competitive funding options.
“These structures offer a lower cost of equity capital due to the upfront tax deduction offered to Section 12J investors if they remain invested over the five-year lock-in period.”