After many delays, SA is set to profit from the power created by its sun-drenched interior and wind-swept coastline. Renewable energy is now officially cheaper than the country’s coal-fired power, and has been sparking ever-more competitive procurement auction rounds and innovative funding partnerships. Government’s Renewable Energy Independent Power Producer Procurement (REIPPP) programme – which kicked off in 2011 but stalled during Bid Window (BW) 4 in 2015 and only opened BW 5 in 2021 – announced the cheapest cost yet for clean energy.

The lowest bid was 37.5c/kWh for solar PV and even less for onshore wind power (34.4c/kWh). This refers to the all-in cost, including construction, maintenance and operation (M&O) of the solar- or wind-energy plant to supply renewable energy into the Eskom grid.

The 25 preferred bidders of BW 5 (with a combined investment value of R50 billion) were announced in October 2021, with the weighted average bid price at R473.94/MWh, according to Department of Mineral Resources and Energy (DMRE) figures. Eskom’s cost for buying coal is reportedly 42c/kWh, but that excludes construction and M&O of power stations. ‘The average price [for renewables] would have been even lower if it was not for the grid constraints that prevent some of the cheaper projects from being selected as preferred bidders,’ notes the DMRE. ‘More investment in grid infrastructure is a critical requirement to ensure participation by cheaper renewable projects in future, especially in those areas with higher solar-radiation yield.’

With the appointment of the BW 5 preferred bidders, available grid connection capacity in the Northern Cape has been ‘fully’ – and in the Western Cape ‘almost fully’ – saturated, the ministry states. Both provinces are historically popular sites for renewable energy – the expansive, arid Northern Cape for solar and the blustery Western Cape (together with the Eastern Cape) for wind.

The country’s ambitious clean-energy expansion plans rely on private investment, as the current 5.4 GW of solar, wind and battery projects connected to the national grid will see at least 20.4 GW being added within the next three years. This, according to journalist Nick Hedley, is the combined gigawatt amount from REIPPP BWs 4 to 7, government’s risk-mitigation programme, as well as storage, municipal and mining-sector projects.

‘Investors should start thinking about decarbonising their investment portfolios; but we must also consider the real-world infrastructure investments in, for example, renewable energy, needed to achieve net-zero targets over the next three to four decades,’ says Robert Lewenson, head of responsible investment at Old Mutual Investment Group (OMIG). ‘We are in the top 5% of the world in terms of the quality of both our solar and wind resources; and modelling has been done to show that our base load peak demand can be met with renewable energy.

‘SA’s private-sector developers and funders, in partnership with government, already have a solid track record of bringing solar and wind power projects on-stream, quickly. All that is needed for SA to meet its 2050 net-zero emissions target is to scale our renewables response.’

According to Wikus Kruger, research lead at the Power Futures Lab, UCT Graduate School of Business (GSB), ‘South Africa has one of the most onerous and expensive bidding programmes in the world […] to guard against unrealistic bids being made. The country’s rate of successful bids that translate into projects is more than 95% – one of the best in the world. In short, there is no reason to believe that new projects will not reach commercial operation because of prices’.

Along with the progressively decreasing renewable-energy costs, funding for REIPPP deals has also evolved fundamentally since the early bidding rounds. ‘As the programme has become better understood, the perception of risk has decreased and, as a consequence, so has the pricing,’ says Daniel Zinman, head of power and renewables at RMB, which together with Nedbank, Standard Bank, Investec and Absa, is among the key funders of the REIPPP programme. ‘In addition, all terms have been squeezed as the competition between lenders has mirrored the competition between bidders. Bid Window 5 opened almost six years after the previous bid window, resulting in pent-up appetite for REIPPP megawatts, and for private-sector finance of independent power producers.

‘Bid Window 5 was nearly four times oversubscribed – that shows how much pent-up demand there was in the market. That in itself created such competition that equity returns and debt prices plummeted. Each aspect of these projects has been cut to the bone to the extent that South African renewable-energy prices, while not necessarily at the absolute lowest in the world, are getting into that realm.’

Funding models and structures are constantly evolving and norms challenged in order for lenders to remain competitive, says Zinman. ‘Ultimately, the consumer will benefit from lower tariffs, once these deals close.’

The bidders themselves obviously also benefit, but Kruger explains that while only a small number of bidders were awarded the lion’s share of the latest REIPPP auction, it’s not true that this has resulted in market domination by large international players.

‘A number of medium-sized companies have also been successful,’ he writes in the Conversation. ‘Lead bidders represent only one part of the project value chain. Over the years, an extensive ecosystem of service providers and suppliers has grown around these projects. In addition, lead bidders aren’t the only shareholders in these companies. South African shareholders, including [BEE] partners and community trusts, own 49.4%, on average, in these projects.’ He adds that an increasing number of project developers, advisers, lenders, investors and service providers compete in the REIPPP programme, providing local business opportunities for SA companies.

Looking at the players in the fifth bidding round, 19 of the 25 winning projects are led by or include foreign investors. Yet the overall benefits for SA are massive, with 34% of the projects black-owned, 44% local content and R2.7 billion committed to local development.

The Ikamva Consortium, headed by Mainstream Renewable Power, came out top. It will develop 12 projects (six wind and six solar PV) collectively producing 1.27 GWh of renewable power – equivalent to a third of the annual electricity demand of Cape Town. The Ireland-headquartered company says it has a ‘100% African team of over a hundred professionals’, and at financial closure, ownership of the 12 projects will transfer to the equity consortium of Mainstream (25%), Globeleq (26%), H1 Holdings (23.25%), Africa Rainbow Energy and Power (AREP) (23.25%) and community trusts (2.5%).

Norwegian company Scatec was awarded three solar PV projects in this round, in which its local BEE partner H1 Holdings will own 46.5% of equity and a community trust 2.5%. Scatec has a long presence in SA where it connected the country’s first utility-scale solar PV project, Kalkbult, back in 2013. The SA division of French energy firm Engie was also awarded three solar PV projects, while Cape Town-based developer Mulilo, in a joint bid with French TotalEnergies, will develop one solar PV project.

On the wind energy front, EDF Renewables South Africa, an offspring of the French multinational, will develop three wind farms on the boundaries of the Eastern and Northern Cape provinces, together with its local partners H1 Holding and Gibb-Crede. The company has been awarded 800 MW in 2021 alone, including the private tender (with its partner Pele Green Energy) for a 100 MW solar PV plant at Amplats’ Mogalakwena mine – the first of this size since the raising of the licensing threshold in August 2021.

The remaining three wind projects in BW 5 are being developed by SA IPP Red Rocket.

The structuring of the finance is complex in both the public and private procurement of clean energy, and involves SA’s large banks and institutional investors as well as local and international development finance institutions. In addition to debt funding, there are now opportunities in REIPPP re-finance, and also in equity funding for shareholders already involved in – or looking to buy into – these projects. In the REIPPP, the risk for lenders is significantly lowered by the programme’s contractual certainty that preferred bidders will obtain 20-year power purchase agreements (PPAs) signed by Eskom.

‘One of the longstanding features related to the official IPP programme is that national government has been standing behind the off-take and termination payments due by Eskom under the PPA, which was a requirement for investors and financiers to achieve bankability,’ according to Bhavtik Vallabhjee, head of power and renewables, and Theuns Ehlers, head of resource and project finance, both at Absa Corporate and Investment Banking.

Outside of official government-run programmes such as REIPPP and the related Risk Mitigation IPPPP, funding is also being unlocked for renewables projects driven by private sector agreements, especially in the mining, industrial and property sectors.

‘Banks will evaluate the credit quality of the private sector off-taker in their assessment but, in most cases banks are prepared to take a long-term view on the financing as the projects are value-enhancing and typically result in cost savings compared to current electricity tariffs of power procured from Eskom,’ they say. ‘Self-generation would displace expensive power procured from the utility and help ensure energy security.’

In line with this, Absa has partnered with billionaire Patrice Motsepe’s AREP to launch African Rainbow Energy – an African-led renewable-energy investment platform with roughly R6.5 billion in gross assets.

‘The fund will provide investors with exposure to utility-scale, commercial and industrial sector clean-energy investments, building a platform of scale in South Africa, and will seek selected, bankable projects in Africa,’ says AREP CEO Brian Dames, who is a former chief executive of Eskom. ‘African Rainbow Energy is engaging with other investors to increase its equity base and fund further growth with the aim of listing on the JSE in future.’

AREP is heavily involved in BW 5 as part of the winning Ikamva Consortium and also owns 40% of the SOLA group that is behind the country’s first solar PV wheeling project (for Amazon). Speaking at the sidelines of the 2022 World Economic Forum, Dames said that, ‘renewables provide an ideal opportunity for a company like ourselves, given the resources Africa has got and the significant reduction in renewable prices to really expand that, not only in South Africa but across the continent and that will be our focus. As we make investments, these are investments that you should see cash flows in three years or less’.

Timing is crucial, because the delays in bringing clean energy online have already decimated local suppliers and continue to damage the economy through load shedding. A new report by Meridian Economics notes that 96.5% of load shedding in 2021 could have been prevented, had an additional 5 GW of renewables been installed as originally planned. Eskom CEO André de Ruyter clearly stated that the solution to SA’s energy problems does not lie with Eskom and government alone, and that the private sector must step in on a decent risk-and-return basis.

‘This could be a win-win solution,’ he said in a recent interview. ‘Investors get their return – which increases the tax pool for the government – and the country regains energy security and grows job opportunities.’ Not to mention the reduction in carbon emissions, which would be a win for SA’s just transition and climate goals. But that’s a different conversation.

By Silke Colquhoun
Image: Gallo/Getty Images