Access to low-cost capital would accelerate South Africa’s renewables investments

5 July 2023: South Africa needs to generate 45% of its electricity from renewable energy by 2030, if it hopes to keep its international commitments to level off its carbon emissions. Small-scale renewable energy plants can contribute to this, but high funding costs are holding back much needed investments to finance these projects.

Sakhile Dube

Rustmo1, Northwest province’s first solar farm exemplifies successful funding approaches for small-scale renewable energy projects. The solar farm was established in 2012, with a capacity of 7 megawatts and emerged under the Renewable Energy Independent Power Producer Procurement Programme (REIPPPP). It was funded through a combination of 30% equity (approximately R40 million) and 70% debt, provided by Nedbank and the Industrial Development Corporation (IDC).

A decade later, a similar-sized project, Heineken’s solar facility, a 6.5-megawatt plant located at their Sedibeng brewery in Midvaal, south of Gauteng was established in October 2022. It required a substantial financial commitment, with an estimated investment exceeding R100 million. The project was made possible through a private collaboration involving Solar Group, African Infrastructure Investment Managers (AIIM), and Nedbank.

These cases highlight successful funding strategies for small-scale initiatives. However, when examining the costs of these projects over a 10-year timeframe, it becomes evident that there has been limited progress in reducing the capital expenses associated with renewable energies. This issue is particularly significant considering that South Africa need to generate 45% of its renewable share by 2030, if it hopes to keep its international commitments to level off its carbon emissions. Small-scale renewable energy plants can contribute to this, but high funding costs are holding back much needed investments to finance these projects.

Heineken’s Sedibeng solar plant was built as an effort to achieve net-zero emissions by 2030.

Bridging the gap to low-cost capital

According to Eskom’s latest grid assessment, there is a pipeline of 66.5 gigawatts of energy projects seeking grid access – enough to resolve the electricity crisis and fulfill the country’s 2030 climate ambition. However, to access this grid, South Africa needs more than $30 billion of renewable energy, according to the African Development Bank. While the government has allocated funds for the initial 3.6 gigawatts of renewable energy, it is clear that this amount will not be sufficient to cover the remaining gigawatts, especially considering the existing structural challenges in the country.

Currently, most of the energy-supported grid are big REIPPP type projects, such as the Redstone solar plant in the Northern Cape with a capacity of 100 megawatts and costs over $US700 million. The high costs associated with large-scale projects highlight the need for accessible financing options for smaller-scale initiatives like Rustmo1 and Heineken’s Sedibeng solar plants.

Creating an enabling environment for small scale projects is crucial to reduce risks and lower financing costs. Nick Hedley, an independent climate change researcher notes that this entails “providing clarity on the rules and costs of transferring power from a generator to the end user.” It could also involve establishing a national feed-in framework, and or green development bank akin to Australia’s Clean Energy Finance Corporation, “Such a bank could offer concessional funding and mitigate project risks” Hedley says.

Small-scale projects can also be supported by pooling resources from public entities, blended finance, public-private partnerships, and government guarantees. Expanding this approach to include transmission infrastructure, green hydrogen, and other energy investments could yield promising outcomes, particularly considering Eskom’s unstable financial situation, says Hedley.

However, the main challenge with private sector participation lies in the perceived risks associated with renewable energies. “These projects often require substantial upfront investments before generating revenues, making it difficult to find enough capital and investors,” says Joseph Matola, an economist at the South African Institute of International Affairs (SAIA). “However, by properly structuring arrangements, the government, regional bodies, and multilateral development financing institutions can assume these risks, enabling both public and private participation in green financing” highlights Matola.

Rustmo1, Northwest Province’s first solar farm located in Buffelspoort, 22 kilometers outside the city of Rustenburg.

SMMEs are integral to the success of small-scale projects.

As major energy corporations flood the market with renewable energy solutions, it becomes increasingly important to involve small, medium, and micro-sized enterprises (SMMEs) in the process. Bridging the gap between those with the financial means to support sustainable energy initiatives and those lacking such resources hinges on the active participation of SMMEs.

According to Gaylor Montmasson-Clair, a senior economist at Trade and Industrial Policy Strategies, an independent, non-profit, economic research institution, “inclusive access to renewable energy funding is imperative. Ensuring that the benefits of such investments are widely distributed and accessible to all should be a priority. South Africa must focus on scaling up long-term investments that offer sustained profitability while also catering to SMMEs and community-led projects,” he says.

To this end, the IDC has allocated a $1 billion fund to the AFD Green Energy Fund. This fund supports smaller-scale renewable energy and energy efficiency projects, as well as the manufacturing of green products in South Africa. The IDC’s investments in renewable energy have already contributed 900MW of power to the national grid.

According to Emrie Brown, CEO of RMB, the government will require between R130 billion and R177 billion to fund such programmes alone over the next three years. While these programmes are highly bankable, they will likely to be funded through debt comprising 80% to 85% posing a significant challenge to their sustainability. Montmasson-Clair points out that not only the cost of capital needs to be carefully considered, but also the type of financing available. Strengthening facilities that offer financing options will be crucial in reducing costs.

Financial institutions are stepping up to align their decisions with energy transition objectives. They are providing support to companies, including SMMEs, by granting access to low-cost capital for renewable energy projects. For example, Absa offers energy subsidies of up to R50 million through its Green Asset Finance lending solution. This program finances solar installations, including batteries, to generate electricity for SMMEs. However, such funding options are limited.

Ronnie Mbatsane, the managing executive for SME Business at Absa’s Relationship Banking, clarifies that the grant offering is currently limited to SME customers who bank with Absa and have properties financed by the bank. Nonetheless, Absa remains open to considering renewable energy financing requests from all customers and follows its normal application process.

Rustmo1 solar farm has a capacity of 7 megawatts and the was financed in public-private partnership.

Alternative approaches to reduce renewable energy costs.

There are notable international commitments to fund small-scale projects such as the Climate Finance Accelerator (CFA) which is a global technical assistance programme funded by the UK government to directly support climate projects to access finance. CFA directly responds to the urgency and scale of the climate crisis by supporting promising climate projects to become more bankable and appealing to investors, so that they can secure funding more readily. Projects such as these need to be escalated to cater for more small-scale renewable sources.

The Green Climate Fund, managed by the World Bank and established by the United Nations, has received contributions exceeding US$10 billion. However, such funds will be difficult for developing and emerging countries to access, due to perceived project risks or concerns surrounding investments, according to the Human Sciences Research Council. Without access to such funds, South Africa’s self-funded transition to renewable energy by 2030 would be unaffordable.

Exploring more power purchase agreements (PPAs), such as the Rustmo1 solar farm can also help reduce the cost of renewable energy. Speaking of the challenges and lessons learnt on successful PPAs, Sibanye Stillwater’s Investor Relations and Corporate Affairs, James Wellsted notes that while “a PPA structure offers several benefits in terms of capital allocation and calls from a buyer perspective, the PPA market is still relatively immature in South Africa and the terms between developers and projects are often bespoke, leading to lengthy negotiations on debt arrangements and developing timeframes”.

Wellsted, highlights the need for standardization of PPA terms and financing arrangements. A matured market with streamlined processes would facilitate quicker resolution of PPAs, accelerating the financial closure of projects.

This story was produced with support from Internews Earth Journalism Network.