Significance of the topic
Recent calls for renewable energy bids by the South African Department of Energy have revealed support by SA banks to fund green projects. According to a report from Nedbank, for example, the bank has put their weight behind just over 30% of bidders in the DoE plan. This is quite a positive move and will ensure that renewable energy generation becomes a reality and that the South African renewable industry becomes prominent in the African and world landscape. But really how bankable is renewable energy? Is there a sound financial return for business or private sector?
Very few renewable energy solutions, in South Africa, have been bankable until the Department of Energy, in South Africa, made a deliberate effort to open the procurement process of renewable IPPs with a non-predetermined tariff. This opened a completely new chapter on the supply side of the power equation. Many a financial institution, and in particular the big four in South Africa, are investing heavily in the South African renewable energy space.
Renewable energy was always bankable in a majority of the first world countries because of the off-take tariff regimes in these countries.
DEFINING BANKABILITY
Financial services organisations have the ability to finance innovation and turn the climate challenge into market opportunities. The commitment from our banks strongly suggests that building the country’s renewable energy sector is the right way forward, so exactly how bankable do they believe renewable energy projects are right now?"
The dictionary definition of the word bankable in a business context is something that is considered powerful enough to ensure profitability but bankability is perceived and managed differently among stakeholders. The various players in this market seem to agree on the importance of bankability but there is no common understanding of its meaning. While banks typically emphasize the impact of stable cash flows on the project’s long-term debt service, equity investors tend to focus on their expectations on investment re-turns, possible tax incentives and their portfolio strategies. Yet, to ensure a project’s soundness, diligence in legal, technical and economic matters is imperative for both stakeholders.
A bankable renewable energy project has four key features:
• Proven technology
• Reliable fuel supply
• Revenue certainty
• Grid connection on reasonable terms.
The first two can be addressed to a large extent by due diligence and adequate governance. The second two are where the government’s and CEFC’s attention should be fixed. According to Dennis Dykes, chief economist at Nedbank’s economic unit, the process and slow delivery of projects is the barrier to success, not the financing of the infrastructure sector.
Financial backing from a renowned bank usually signals trustworthiness to installers and commercial investors and it also gives companies and their partners’ financial security. However, to achieve this greater degree of financial security, manufacturers have to be considered as ‘bankable’, ideally not only by one financial institution, but by a number of banks. In December last year, financial services group Investec and the European Investment Bank (EIB) contributed €100m to the renewable energy fund to promote clean energy generation and energy efficiency. The partners each contributed €50m to the facility, which was unveiled on the sidelines of the global climate negotiations in Durban.
According to Investec, its sector specialists and credit committee will evaluate projects in accordance with additional investment criteria set by the European Investment Bank to ensure that projects deliver environmental benefits and abide by certain business, environmental, social and labour practices. Soitec, a manufacturer of semiconductors and solar products has been financed by Investec in one of the largest projects using concentrated solar photovoltaic technology. An unusual project of this magnitude, being financed so quickly in an emerging economy is a positive step for South Africa and Soitec. Jenny Chase, head of solar analysis for Bloomberg New Energy Finance estimated that the project might cost between $150 million (R1.16 billion) and $300 million.
The risk focus of banks is rightfully on each product brand and that brand’s ability to manufacture a high-quality product, not on the industry as a whole or a specific category. In fact, banks do not hand out bankability ‘certificates’ to suppliers without doing a very detailed due diligence analysis. Nedbank remains committed to funding various renewable energy projects from landfill gas, to solar and wind turbine power. Nedbank provided the financial backing for approximately 37% of the more than 1,200MW worth of energy capacity represented by all the bids submitted in the first phase of South Africa’s Renewable Energy IPP programme.
Mike Peo, Head of Infrastructure, Energy and Telecommunications at Nedbank Capital says that investment into renewable energy in South Africa is growing, and this shows that the sector has economic growth potential. Peo also remains positive about the long-term economic and social development potential of the renewable energy programme. He believes that unlike almost all of South Africa's previous infrastructure development projects, the development of the country's renewable energy industry is not a finite project and does not need to have an end date. Peo believes that South Africa can become a renewable energy hub for the African continent and that stakeholders in this fledgling sector should never lose sight of the fact that what we do in South Africa could ultimately be of great benefit to the whole of Africa.
According to Omar Vajeth, head of power and energy at Absa Capital, local banks are looking to put together R40bn to R50bn to fund projects for both round one and two of the South African Renewable Energy initiative (SARi). While Standard Bank gave an underwriting commitment of R19.1bn for the renewable project, Absa Bank also decided to give an underwriting commitment of R10.1bn. Alastair Campbell, Standard Bank Director of Mining, Energy and Infrastructure Finance in Corporate and Investment Banking states that despite the rigid terms and regulation, solar power projects that are run by the South African Government as parts of its Renewable Energy Independent Power Producer Programme are able to thrive because of the financial support provided by the local lending market. Campbell believes that banks should be made the initial source of funding.
All in all, managing bankability is closely related to the concept of managing quality – and today quality is managed actively, with high attention given by companies’ top management, as it serves as a key differentiation factor in global competition across many industries.