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Rand Merchant Bank (RMB) and KfW Development Bank (KfW) recently closed the Facility for Investment in Renewable Small Transactions (FIRST), which was originally structured to enable the funding of small renewable energy projects.

The fund’s mandate has now been broadened following changes to the Department of Energy’s renewable energy commitments. 

The projects fall into the Small Projects Independent Power Producers (SPIPP) programme, a renewable energy programme led by the department and aimed at small and medium-sized enterprises and new entrants to the renewable energy sector. After two rounds of bidding, the programme has a list of preferred bidders aiming to finance and build the projects.

The government formed the SPIPP to encourage smaller and new businesses to enter the burgeoning renewable energy market, rather than merely addressing South Africa’s broader energy supply mix. RMB was enthusiastic about applying innovative ideas to this initiative to help previously unbankable participants in the sector and to build local skills and job capacity.

The fund aims to overcome the hurdles that small projects typically face when trying to attract funding

RMB contributed senior debt to the fund while KfW set up a first-loss debt facility as well as grant-type funding to fill the development finance role in the fund.

The fund aims to overcome the hurdles that small projects typically face when trying to attract funding. New entrants traditionally do not have the track record and balance-sheet support to raise finance from commercial banks. In addition, a small project of 5MW or less will incur the same transaction costs as a 50MW plant, which a small project cannot afford. 

FIRST tries to overcome these challenges by having the development funding included in the debt mix, as well as having a fund manager to conduct the detailed project assessment and build up a portfolio of projects that could share the burden of closing the financing. The fund was structured and closed to make R1.3-billion of funding available for preferred SPIPP bidders. 

Following former minister of energy Mmamoloko Kubayi’s announcements on her department’s procurement programmes – including that no programmes’ power purchase agreements (including the SPIPP), other than round four of the Renewable Energy Independent Power Producer Procurement programme, would be signed by Eskom until after the Integrated Resource Plan was completed – RMB does not expect to see any SPIPP projects requiring funding for at least a year. As a result, the fund is now broadening its target market.

RMB and KfW expect a surge in the market for private power projects and captive plants, which aim to sell power to corporate and industrial users.

Given that private power plants are not traditionally very big (less than 10MW and potentially no more than R100m in capital costs), and because the power purchase agreements are not backed by National Treasury guarantees, the projects in this arena are also traditionally less likely to attract funding terms that will enable a market-based tariff to be charged.

However, with the first-loss facility and lower transaction costs that FIRST offers, it is expected that private power plants will find FIRST a useful funding partner that could enable projects that otherwise may not meet board approval for the electricity off-takers or allow independent developers to achieve a suitable equity return.

ABOUT THE AUTHOR: Hugh Hawarden is a transactor at Rand Merchant Bank
ABOUT THE AUTHOR: Hugh Hawarden is a transactor at Rand Merchant Bank

Corporate and industrial power users have traditionally been driven by green objectives and commitments to global warming. But, as the price of renewables begins to achieve parity with Eskom’s Megaflex tariff, private consumers now prefer to take a long-term price and supply view on their power supply, or at least a portion of it, to lessen their reliance on utility-provided power with its opaque price trajectory and uncertainty of supply in the long term.

FIRST is also potentially looking at rooftop solar power and other renewable energy projects being procured by metros and municipalities, as opposed to the Department of Energy.

While initially intended to finance 10 to 20 projects based on size, the fund is expected to grow and attract other lenders once a portfolio of renewable energy projects is receiving steady cashflow and has built a track record.

Renewable energy has a crucial role to play in South Africa’s energy future, and the country needs practical and implementable funding projects to facilitate this. FIRST hopes to be such a platform and, together with RMB and KfW, will help unlock a sector that has struggled to break into the growing renewable energy space.

This article was paid for by RMB.

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