According to a virtual discussion hosted by the SA Chamber of Commerce around Bid Window 5 of the REIPPP programme, investing in energy projects in South Africa and Africa is a sound proposition.
The SA Chamber of Commerce hosted a discussion between Bhavtik Vallabhjee, head of Absa corporate and investment banking’s power, utilities and infrastructure team, and Amanda Mapanda, lawyer with Freshfields Bruckhaus Deringer, an associate in their energy, transportation and infrastructure team.
While both had questions, they were also positive about Bid Window 5 to procure energy under the Renewable Energy Independent Power Producer Procurement (REIPPP) programme finally opening, almost six years after the last bid window opened.
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Amanda Mapanda pointed out greenfields projects are of obvious interest to their clients such as international developers, financiers and credit agencies: “There is something to be said about all the projects that have matured and are now operational and largely derisked.”
She wondered whether anyone had ever thought of packaging the projects into groups of assets to make them attractive for foreign direct investment. While she appreciates that the REIPPP programme has broader objectives than straight investment, the fact is the SA government is also trying to create an environment conducive to foreign players, who have taken note.
Thus, she thinks long term growth prospects in this sector are looking good, but advises companies from outside SA to partner with local players and engage advisors who understand the local investment climate.
Empowerment and localisation
Moderator Peter Attard Moltalto, the SA Chamber of Commerce director, said while no one has yet seen the request for information for Bid Window 5, the hints from the Department of Mineral Resources and Energy suggest greater weight will be placed on black female equity ownership, management and skills development.
Moltalto thinks the commoditisation of this specific type of black economic empowerment is well understood because it has been well-communicated in previous bid rounds.
Bhavtik Vallabhjee, pointed out REIPPPP has the makings of a great programme for South Africa and Africa because it is well-structured and tariffs are still lucrative. He shared that although changes in the programme have been seen: “returns have come down due to tariff compression. That makes the market more attractive to the large developers who can stomach lower returns.”
He added: “There’s always a trade-off between local content and tariffs, something has to give. I don’t think South Africa stands out topmost as a low cost developer.” He therefore believes some sort of leeway from the SA government to allow local content creation in the form of locally manufactured parts could bolster localisation would result in expensive tariffs.
He sees the tradeoff between localisation for creating local jobs and competitive tariffs as a balance that must be carefully monitored. A medium term plan to drive industrialisation and job creation needs partnerships with international companies and a definite, consistent pipeline of future energy projects.
What risk does unbundling Eskom pose to energy investment?
Mapanda reinforced the idea that the sovereign guarantee provided by SA Treasury is still key to the success of the REIPPP programme.
A question she did raise, but could not answer, was “if the worst happens and those guarantees have to be called, what happens then?” She therefore believes the debate should be ‘shouldn’t there be an alternative for IPPs, is one off-taker (Eskom) still the only way?’
She asked whether REIPPPP would change as Eskom unbundles into separate transmission, generation and distribution companies and whether these companies remain state-owned.
In answer Vallabhjee pointed out that, as a South African-headquartered bank ,their view on risk is different to that of a foreign bank. “Eskom has R400 billion in debt, that won’t be alleviated by restructuring. A prerequisite is still to see government support to backstop Eskom because we don’t know what restructuring entails and what the financing will look like post restructure.”
Vallabhjee pointed out there are not many countries hosting renewable energy projects in the last ten years on the scale of bid window 5. “So, inasmuch as there have been delays, I think it’s on the right trajectory. There are many developers internationally, from Europe and elsewhere, looking at South Africa precisely for this reason. If all goes according to plan, there is a lot of scale coming to the market.
“South Africa at its height had more than 90% of power coming from coal-fired generation. From the COP17 days the government committed to reducing its greenhouse gas footprint and embrace clean sources. Now, we have the Integrated Resource Plan, government’s energy roadmap and more clearly over the last several years you can see renewable energy form an increasing part of the energy mix.”
Interest is high but have investment strategies changed to suit the region?
Vallabhjee said Absa’s clients were very interested in the announcement around bid window 5 specifically and especially because of the long time period that has passed since the last bid window opportunity. “A lot of our clients are targeting a host of projects, in excess of ten in some instances. Developers are certainly waiting with bated breath. You can look at the region and there’s not enough of this amount, to scale.”
The structure of the REIPPP programme mirrors closely what happens in emerged markets, but there are couple of nuances to it, peculiar to an emerging market:. “In the latter rounds, the use of CPI-linked debt, that is peculiar to a market with a higher inflation rate. But, by and large, VAT facilities, equity bridge loans, non-funded debt reserve accounts, all these things have already been used. The one thing that stands out, what we haven’t really formed is the bond market coming in.
“That is something, the green bond concept for the renewables market, bonds for sustainable finance, bonds as a take out for construction finance when the project is derisked and has a proper track record. That is something South Africa is ripe for,” Vallabhjee said.
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Future is renewables
For Mapanda, the renewables sector is the future. “Bhavtik touched on it when he referenced that it is unfortunate that coal has made it to the fore. There is no moving away from fossil-based fuels in the immediate future. Governments are still pressured to meet their objectives and will still rely on fossil fuels.
“The challenge will be for the banks to reconcile bankability issues with grass roots issues. The same holds for advisors, the lawyer and technical advisors, environmental specialists, to make sure pitches are fully fit. Even if you are an international investor, there’s a lot of opportunity on the continent for growth and balance sheet and that’s business,” said Mapanda.
Vallabhjee agrees that renewables is the future, but again reminded that Africa has coal: “The reality is, what’s happening with the falling tariffs and the falling cost of technology whether PV solar or wind turbines, you’re at a stage of grid parity where renewables generation is cheaper than coal generation.
“As a banking market our exposure to funding power plant is increasing. The region is awash with mining and that’s our largest exposure. Our exposure to IPPs is a fraction of that. So, there’s a lot of appetite from commercial banks and funds sitting in Europe, to Africa. On a risk return basis Africa poses a strong investment base. The projects are well-structured and financed, and in some cases there’s political risk insurance. The number of projects on this scale that have gone belly up is minimal. The future is bright,” said Vallabhjee.
The SA Chamber of Commerce is an umbrella organisation and conduit for trade, community and investment into and out of South Africa.