Global sustainable energy consultancy, K2 Management in partnership with specialist insurance broker and risk consultant, JLT Speciality, launched a report titled “Pre-construction projects: The battle to reduce uncertainty and improve business case bankability,” in emerging markets.
The report launched on Tuesday at the Africa Energy Forum, in Mauritius, identifies trends and developments in the early phases of projects in the fast-growing renewables sector.
This is based on data gathered from some of the most innovative wind and solar projects in Africa and globally. Read more: Global energy practice to guide project developers
The report highlights the strong investment demand for renewable projects in Africa, particularly in relation to the amount of capacity which has so far been tendered by the continent’s governments.
At the end of 2016, 102 renewable energy projects were selected under South Africa’s REIPPPP, procuring a total of 6,376 MW.
However, 460 bids were received, which equates to a total of 26.7GW of capacity.
In 2017, Botswana called for an expression of interest for a proposed 100MW solar power project, to which 166 responses were received.
“It is apparent from the report’s findings that the success and confidence in the renewables sector hinges on clear policy signals, governance and regulation; and on enabling an adequate framework that is consistent across the continent to accelerated renewables deployment,” said Hebren James, country director at K2 Management, South Africa.
James added: “Unlocking investment, both locally and internationally, will kick-start economic growth and support development in the region.”
Political challenges in South Africa stalled the renewables market for almost three years, but a switch in leadership saw the market begin to flow again almost as quickly as it stalled.
The report highlighted that this is a prime example of how political factors can impact not only projects but the whole industry.
Despite attractive rates of return, investors can still be preoccupied with political risk, including changes to regulatory and tax regimes, currency non-recoverability and tariff changes.
Vanessa Anniss from JLT Specialty’s renewable energy practice said: “The availability and cost of risk transfer solutions for both traditional insurance programmes and political risk products is key to the outcome of any successful project.
“Proactively seeking advice and support during risk and insurance contractual negotiations can produce positive cost side value and protection, especially in emerging markets, and therefore make a significant contribution to the economics and profitability of any project.”
Backing PPAs in emerging markets
Based on learnings from developed markets, embedding early risk mitigation measures in governments’ Power Purchase Agreement (PPA) strategy, encourages international investment due to lower financial risk.
Despite the South African renewables market being in its infancy in comparison to well-established markets, South Africa is ahead of the curve in this regard, as PPAs in the region are underwritten by Treasury, ensuring a backing in the event payment delays are experienced for power, as per an agreement.
In some markets, the utility doesn’t want to issue bonds or warranties for payments in exchange for energy, but this can hinder investment as most international lenders won’t invest without a warranty.
“Renewables is playing an important role in countries including South Africa, Ethiopia, Kenya, Morocco and Egypt, who are leading the effort to incorporate renewable energy into their countries electricity mixes. Some other African countries continue to set ambitious renewable energy targets with a growing number following suit,” said Anniss.
Many African leaders have seen the opportunity that renewables present for their nations, and have announced national energy plans and targets to reflect this vision. In particular, South Africa recently announced plans to open a new round of bidding in November 2018, leveraging renewables to facilitate a cost-effective transformation to a more secure and sustainable power future.
“A clear message from the top needs to come in the form of non-discriminatory market access, allowing for both private and community-based investors to engage effectively in the energy transition. This will open up the market in terms of investment, as well as benefit economic growth through a supply of competitively-priced clean and sustainable energy,” James concluded.
To learn more about the report click here