Absa Corporate and Investment Banking (CIB) has successfully closed debt financing worth R22 billion for 12 renewable energy projects as part of the Department of Energy’s latest bidding round under the renewable energy independent power producer programme (REIPPP).
These projects, comprising seven wind, four solar and one biomass project, will add a combined 1 200MW to the Eskom grid. This brings the total projects financed by the bank to 33 or a combined 2 900 MW from the start of the programme since 2012.
“By winning these mandates, Absa has demonstrated its dominance in funding renewable energy projects in South Africa. Our aim is to finance independent power projects that can provide reliable and affordable power,” says Bhavtik Vallabhjee, head of Power, Utilities & Infrastructure at Absa.
The REIPPP has resulted in more than R200 billion in direct investments and has the potential to reshape the South African energy landscape. It has also earned international recognition for the professional manner in which it has been rolled out.
Absa is looking beyond South Africa, with interest coming from countries such as Ghana, Zambia, Kenya and Tanzania. The reduction of costs in renewable energy provides a lot of opportunities for investors.
“The recent material reduction in the cost of renewable energy makes this form of power even more relevant for the African continent, where affordability remains a key challenge for the many power utilities on the continent,” says Vallabhjee.
“The latest round of renewable energy projects in South Africa has demonstrated that it is relatively and comparatively cheaper to produce energy from renewable energy plants. The bulk of the projects will deliver power at below R0.70 per kilowatt hour (KWh), compared to the cost of thermal power plants which are typically much more expensive,” says Vallabhjee.
Millions of people across Africa do not have access to energy and companies in industries such as mining and manufacturing also need reliable and affordable energy supply.
“Several countries are actively promoting investment in this sector. There is opportunity for investors to invest in renewable energy, which they can possibly do with hybrid power plants,” says Vallabhjee.
Evolution of funding structures
Financing for renewable energy projects is an important focus area for Absa, not only from a pure debt financing perspective, but also from an economic development perspective. The bank has become a major player in field as the institutional funding market of such projects has evolved in recent years.
“It is important for us to keep ahead of the game when it comes to financing structures and innovation, as the debt financing component plays an important role in a competitive bid tariff, which in turn helps our clients to be successful when they submit their bids as part of the renewable energy auction programme,” says Theuns Ehlers, head of Resource and Project Finance at Absa.
In the past, the project finance space used to be dominated by commercial banks that provided the vast majority of funding for projects. The banks remain important in the deal structuring process but many fund managers looking for debt instruments to match long dated pension liabilities have started participating.
The banks have also introduced more innovation in the type of funding instruments used, such as inflation-linked debt, which not only provide a natural hedge for the project’s inflation-linked revenue streams, but also an inflation-linked return to investors.