26 March 2013 – Over the next 20 years South Africa’s energy generation capacity will need to grow by more than 40,000 MW, and will have to be twice as much as what is available today. Asset manager Futuregrowth Asset Management believes that renewable resources could make up nearly 18 GW, or 42% of new generation capacity if the government sticks to targets set out in the Integrated Resource Plan (IRP), a 20 year plan to add additional megawatt capacity to the grid. The asset manager has provided R2.5 billion in debt funding so far which offers investment opportunities in new solar and wind projects for clients’ funds under management.

Paul Semple, portfolio manager at Futuregrowth Asset Management, says renewable energy projects funded by private sector capital can play a major role in meeting the urgent need for new generation capacity to alleviate the current energy constraints. "Investing in renewables is a growing asset theme in South African capital markets, offering a unique opportunity for our clients to access a pool of assets not normally available to institutional investors," he says.

“A unique aspect of these projects is the social impact that they will have on local communities. They will own a minimum 2.5% stake in the projects and payment for this will be generated from dividend payments.” This is combined with a minimum local content and preferential procurement requirement in respect of each project which will support small enterprise development and job creation.

The Renewable Energy Independent Power Producer Procurement Program (REIPPP) has been designed by the Department of Energy (DoE) to procure private-sector participation in power generation through a competitive process of various bidding rounds occurring approximately every six months. “Given the on-going drive to reduce the carbon footprint of South Africa, of which thermal energy generation contributes about 47% of the country’s carbon emissions, there is an urgent need to develop clean energy.” The renewable energy projects will also be constructed far more quickly than the new coal-fired plants, Medupi and Kusile, and are a great opportunity for South Africa to increase the energy capacity of the country in a short period of time.

Under the first round of the programme, 28 renewable energy projects awarded preferred bid tenders totalling around R45 billion and financed mainly by private finance institutions including Futuregrowth, reached financial close in late 2012 and are being constructed around the country. “This is a large undertaking,” Semple says, “and a great opportunity for South Africa to put material megawatts on the grid in a relatively short amount of time.”

Drawdowns under the financing arrangements are made monthly on each project as construction progresses, first for purchasing equipment, then for laying the foundations. Once the electricity produced starts feeding into the national grid, the tariffs paid to the energy projects by Eskom will be utilised to begin repayment of the debt over an average of 15 years
In 2102, the government awarded preferred bids to a further 19 projects under Round 2 of the REIPP programme, comprising an aggregate project value of around R30 billion, in respect of which Futuregrowth is currently considering various investment opportunities for its pension fund clients.

“The growth in renewable energy is driven by a number of factors, including the fact that renewable energy technologies are increasingly competitive with fossil fuel options.” According to the International Renewable Energy Agency (IRENA), which promotes the accelerated adoption and sustainable use of all forms of renewable energy, the Levelised Cost of Electricity (LCOE) is declining, especially for solar photovoltaics (PV), concentrating solar power (CSP) and wind power. This has encouraged governments and the renewable energy industry to adopt effective and ambitious policies to promote renewables.

More importantly, says Semple, it is an example of the efficacy of public-private partnerships (PPP). “The roll-out of the REIPP program is an example of the government and the private sector working hand-in-hand to fulfil a real need, when procuring alternative sources of energy was in danger of becoming increasingly difficult and costly for government.” REIPP projects have a Power Purchase Agreement (PPA) with Eskom that guarantees payment of an agreed tariff for power generated, on a take or pay basis, i.e. Eskom will pay for energy generated by a renewable plant irrespective of power demand by the grid.

While electricity supplied by renewable energy developers is more expensive than conventional power, it will not be a significant contributor to consumers’ increasing energy costs. "The so-called grid-parity — the price at which tariffs for coal- and renewable-based energy intersect — is not that far off," Semple says. "Given the cost of building the new coal-fired plants at Medupi and Kusile plus the maintenance of existing plants, the tariff for wind power will achieve grid parity by 2015 and solar power by 2019."