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Banks playing key role in launching SA’s renewables future

31st May 2013

  

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By: Mike Peo

The finalisation of Phase II of the South African government’s Renewable Energy Independent Power Producer Procurement Programme (REIPPPP) on May 9 represented the passing of another important route marker on the country’s journey towards a future powered increasingly by green energy.

The signing, by the Department of Energy and Eskom, of the second tranche of power purchase agreements will ultimately unlock another 1 040 MW of ‘clean’ energy, on top of the 1 416 MW previously facilitated through Phase I of the programme.

However, while the end of Phase II demon- strates the significant strides that have been made in successfully implementing the REIPPP for the approved energy providers and, indeed, the country as a whole, the journey towards a renewable-energy-powered future is still in its very early stages.

For most of the approved independent power producers, that money is available primarily as a result of the support they have received from many of the country’s forward-thinking financial institutions.

Interestingly, in all the excitement that has been generated during the course of the REIPPPP thus far, the vital role played by South Africa’s financial institutions in helping to realise the vision of a greener future has been largely underplayed.

The reality is, however, that the South African commercial banking and development finance banking sector has been highly instrumental in getting the REIPPPP to the point it has now reached – and this support by the financial sector will continue to play a key part in the sustainable success of the programme going forward.

The importance of financial institutions in realising the vision of a renewable-energy future for the country is immediately evident in the fact that about 80% of the capital for the 47 projects approved in phases I and II of the programme was provided by domestic financial institutions through the provision of project finance, equity investments in projects themselves, the funding of equity participants and the provision of hedging instruments.

When one considers the massive investment required to get any renewable-energy project off the ground, it’s not hard to see why this would be the case. In fact, the second-round projects alone have been valued by government at around R30-billion, bringing the total value of projects on the programme so far to close to R80-billion.

Without the support and investment of South Africa’s financial institutions, the finalisation of these two phases simply would not have been possible. The potential offered by the REIPPPP – not only to add real green energy into the local power mix, but also to deliver thousands of sustainable job opportunities and the localisation of industries – would almost certainly have been severely undermined.

Given the high-risk nature of investing in what is undeniably a new sector of our country’s economy, the support of most banks has been based on comprehensive due diligence and viability studies into the projects they have agreed to back.

This brings an important extra layer of robustness to the entire programme by minimising the risk of project failures or delays in the future, and generally raising the accountability requirements of those independent power providers who now also have their financial partners to answer to in terms of the progress and success of their projects.

And once the construction phase is completed, the innovation behind many of the bank’s financial support offerings to REIPPPP projects will also become more readily apparent as the broad-based financial benefits of South Africa’s fledgling renewable-energy sector are realised through institutional investment into the successful businesses that will, by then, underpin it.

In some instances, the innovation demonstrated by banks in their support of the country’s renewable-energy future is already delivering tangible financial bene- fits for all its citizens. Nedbank’s Green Savings Bond is a case in point. The invest- ment vehicle is structured in a way that ensures it offers individuals and institutions the opportunity to achieve compe- titive long-term investment returns, while, at the same time, contributing to the green future of the country as a significant portion of their invested capital is applied to fund renew- able-energy projects.

Ultimately, the buy-in by banks to the entire REIPPPP, and the support that they will undoubtedly continue to offer, demonstrate an understanding by the country’s financial institutions that, while they may not be contributing to climate change to the extent that high-carbon- emissions businesses do, they can have a profoundly positive influence on environmental sustainability.

In addition, the REIPPPP has allowed South Africa’s banks to truly step up and take the strong position they should as key drivers of the country’s green future.

 

Peo is head of infrastructure, energy and telecoms at Nedbank Capital - mpeo@nedbankcapital.co.za

Edited by Martin Zhuwakinyu
Creamer Media Senior Deputy Editor

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