How SA’s financial sector supercharged renewable energy

SA has emerged as a leader in private renewable energy investment in Sub-Saharan Africa. The rapid growth of the renewable energy sector is an example of how in pursuing commercially sustainable businesses, banks contribute to the achievement of social and economic development in the country.

From zero in 2011, SA procured 112 renewable energy independent power projects with a total installed capacity of more than 6,300MW, by 2015. Key to the success of the Renewable Energy Independent Power Producer Procurement Programme (REIPPP) has been the deep involvement of SA’s financial sector. SA commercial banks, development finance institutions, institutional investors and private equity firms have provided the majority of capital for these projects and have worked closely with government and the private sector to ensure the continued sustainability of the renewable energy sector.

Independent power projects are primarily project-financed, requiring the establishment of special purpose vehicles (SPVs) that are mainly funded by equity and debt. Most of the projects’ debt was provided by SA commercial banks. Local development finance institutions the Industrial Development Corporation and the Development Bank of Southern Africa financed most of the black economic empowerment and a significant part of the community shareholding. A small portion of debt was also provided by foreign development finance institutions. In total, SA financial entities provided 91.7% of the total project debt.

SA entities own, on average, the majority (52%) of equity in the projects. The REIPPPP is also known, globally, for the relatively fast pace of project execution and the high realisation rate. Projects from bid windows one to three took on average 38.6 months to reach commercial operation from the date that bidders were announced. The REIPPPP furthermore featured an exceptionally high realisation rate, with only a single 16.5MW biomass plant failing to reach financial close. This is significantly higher than the completion rate for auctioned projects in countries such as Brazil, Italy, France and the UK.

Despite the delays in signing the bid window four (BW4) power purchase agreements from 2015 to 2018, all reached financial close in 2019 and three started commercial operation by Q1 2020. The remarkable level of project realisation success can be largely attributed to the prominent role played by funders — in particular lenders — in working with government to ensure the continued bankability of the programme, guaranteeing project quality through thorough due diligence, and supporting developers during the critical construction period.

Economic development outcomes

A defining feature of SA’s REIPPPP is its incorporation of socioeconomic and economic development (SED) outcomes. Projects were bid and assessed based on 70% for price and 30% for a basket of SED indicators. Projects have mostly committed to doing more than what was expected of them, and based on official reporting from the Independent Power Producers Office (IPPO), they have outperformed even those commitments on key metrics. For example, more than R18.8bn has been committed to communities surrounding the projects, and at least 65,000 job years have already been provided (IPPO, 2021).  On average, 34% of REIPPPP projects that have reached financial close are owned by black South Africans. Black community ownership exceeded the 5% target, accounting for 9% of projects that have reached financial close. IPPs under construction have furthermore committed to a local content spend of 45% of total project value.

Unlike the previous rounds, there was no local content target for BW5 while the minimum threshold remained unchanged. The value of local content spend in BW5 was 44% and shareholding by black South Africans was 34.7%. BW5 also saw the introduction of designated local content, which ensures that bidders procure certain components locally, according to the SA Wind Energy Association. There has, however, also been wide acknowledgment that this is one of the areas of REIPPPP where far more can and should be done to improve performance.

Enterprise development spend is calculated as a percentage of project revenue and accounts for 5% of the economic development score. This is aimed at attracting funding for exempt microenterprises, qualifying small enterprises, black women-owned businesses and black-owned businesses. The target for enterprise development spend is 0.6% of revenue over the 20-year project life (IPPO, 2021). Awarded projects from bid window one to four have committed more than R7.2bn to enterprise development in SA. Of this total commitment, R5.6bn is going to local communities in which IPPs operate.

Socioeconomic development funding accounts for 15% of the economic development assessment, with the objective of ensuring that IPP projects have a positive socioeconomic impact. This includes funding improvements in healthcare, education and infrastructure. In evaluating this criterion, special emphasis is placed on “recognition for localness”. Calculated as a percentage of project revenue, each project’s socioeconomic development contributions have a minimum threshold of 1% and a target of 1.5%. These have remained unchanged from bid windows one to four. In BW4, a total of R9.3bn was pledged by bidders over the project life. This is a significant increase from the R2.3bn secured in BW1. For BW5, R2.53bn was pledged in socioeconomic, enterprise and skills development commitments.

It is difficult to over-emphasise the impact of the REIPPPP in changing SA’s energy landscape. The country's energy market has been transformed from a highly monopolistic one where all generation assets (more than 90% coal) were owned and operated by the state-owned, vertically integrated utility Eskom. The market has opened up more to private sector generation with the licence threshold being lifted from 1MW to 100MW for embedded generation projects, and it is moving to a more open, competitive scenario where private sector power generators will be able to sell energy directly to consumers.

The private sector, enabled by significant funding from SA financial institutions, can restore the country’s energy security and enable the transformation, and indeed democratisation, of power generation in the country. This has already started, with investments by commercial and industrial consumers of renewable energy now representing significant new installed capacity.

This is only the beginning. In time, the momentum created by these processes will enable the fundamental transformation of SA’s entire energy system. The financial sector will remain a key partner and enabler of this transformation.

• The authors are researchers at the University of Cape Town’s Power Futures Lab. This article was commissioned by the Banking Association SA as part of the Transformation in Banking Report, which aims to show how banks contribute to the broader ongoing transformation and development of SA society.