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South Africa’s financial sector is ready to pump “billions more” into the Renewable Energy Independent Power Producer Procurement (REIPPP) programme – and says that water infrastructure can be built with the same model.
“We do not see any immediate end to the appetite. Many more billions can be placed,” said Absa’s head of project finance, Theuns Ehlers.
Absa is lending R22 billion to 12 of the 27 new private renewable projects that had been stalled for years by Eskom, but were finally given the go-ahead by Energy Minister Jeff Radebe in April.
The REIPPP represents a large-scale privatisation of what had been the exclusive domain of a state-owned monopoly, Eskom.
It also represents the arrival of a new sector in the financial services industry.
“The secondary market of institutional investors is quite actively trading our loans. This asset class did not exist a few years ago. Now there is R120 billion in the market,” said Ehlers.
“These assets are very sought after by institutional investors such as pension funds, which like consumer price index-linked products,” said Ehlers.
“It is an alternative to government bonds.”
The REIPPP is South Africa’s model public-private partnership and has been responsible for more than R200 billion in private power investments in the country since 2011.
That excludes the R56 billion related to the 27 long-delayed projects that are now going ahead.
The renewable energy programme has proceeded through “bidding windows”, where developers bid against each other, to built power projects.
The preferred bidders in each round get 20-year power purchase agreements (PPAs) with Eskom which are fully guaranteed by Treasury, making the guarantees largely risk-free.
The REIPPP has, however, come under sustained attack from former Eskom executives, unions representing coal workers and, more recently, the Economic Freedom Fighters (EFF) as an expensive handout to private companies.
The initial rounds of the REIPPP did commit South Africa to very expensive PPAs spanning 20 years, while more recent projects have been far cheaper.
The first solar projects had tariffs of R3.65 per kilowatt hour, but the latest ones came in at only 62c per kWh. Promoters of the programme say these are simply the “school fees” that had to be paid to create an entirely new sector.
The cost of buying the renewable project’s power is automatically passed on to consumers through the Eskom tariff.
Eskom has argued that the obligation to buy all the REIPPP power, regardless of whether there is a power surplus, is wasteful.
The developers themselves had complained about the high cost of finance in the initial REIPPP rounds.
Ehlers said the finance costs, like the technology costs, have come down as the REIPPP has matured.
“The bank margins have definitely come down,” he told City Press.
“We were cautious back then and more conservative on the pricing,” he said.
“Now the market is more mature and we had no deals experience any material issues. Things have gone, by and large, smoothly.
“Instead of fixed interest rates, we now do CPI-linked loans. These are really more applicable to these deals,” he said.
WHAT NOW?
The scale of future renewable projects will be determined by the new Integrated Resource Plan (IRP), which was approved by Cabinet this week, but not released at the time of writing.
The new IRP is widely expected to increase South Africa’s commitment to renewables – and drastically cut back existing plans for nuclear power.
The last iteration of the IRP, under former president Jacob Zuma, was controversially manipulated to boost nuclear by overstating renewable costs and arbitrarily setting a cap on how many renewables to build.
That IRP was released in November last year.
“We are eagerly awaiting the IRP,” said Ehlers.
Renewable projects are easily funded by local banks because they are so much smaller than coal baseload stations.
“The cost of R1 billion to R2.5 billion is very digestible for a single bank,” said Ehlers.
An independent power producer programme for gas is in the works already and poses a larger, but still relatively manageable, funding challenge.
“Gas is more bulky. You’re talking about $2 billion to $2.5 billion (R29 billion to R36 billion) per deal. A single bank can’t do that,” said Ehlers.
Bhavtik Vallabhjee, Absa’s head of power, utilities and infrastructure, said that the next big candidate for REIPPP-type deals is water infrastructure.
“If it is structured the same way, you can do it for water. The REIPPP had a good structure and a good team.
“Water will be very exciting. The water crisis is even bigger than the power crisis.”
There is, however, one crucial difference.
Unlike electricity, for which there is one monopoly buyer, the water sector involves countless state entities that procure infrastructure, mostly municipalities.
“It is not as easy as power with its one buyer, but it is still possible to ring-fence some parts of that, like a dam,” said Vallabhjee.
There have been suggestions that South Africa should employ the REIPPP model to finance everything from university buildings to hospitals, but there has not been much traction for these ideas.
Even toll roads, the pioneers of private infrastructure in South Africa, have tapered off.
Financing considerations inform the structure of the programme.
The PPAs for the renewable projects are 20 years long, even though the useful life of a fast-evolving technology such as solar panels is probably less than that.
“You could say that 20 years is too long, but a short tenure of 10 years would be too expensive,” said Vallabhjee.
