German government-owned KfW Development Bank and Rand Merchant Bank (RMB) on Thursday signed an agreement that establishes South Africa’s first specialised debt fund vehicle for small-scale renewables projects.

Known as the Facility for Investment in Renewable Small Transactions (First), this independent, special purpose facility will make finance available for small-scale renewable energy projects that have found it challenging to access affordable funding from commercial investors.

These include both traditional standalone, utility-style projects, as well as corporate and industrial projects.

RMB has committed R1-billion in senior debt to the fund for first close. The fund is in the market to raise an additional R700-million in the coming year, with growing interest from other banks and lenders who seek to enter this fast-growing market.

The German government, through KfW, is providing R350-million in first close financing that will mitigate the risk that had, up until now, kept many lenders from venturing into the small-scale renewable energy space.

It will also provide a further R80-million in grant funding for a technical assistance facility.

According to German Embassy head of cooperation Volker Oel, the joint venture forms an integral part of German–South African cooperation in the field of promoting a green economy.

“A greener South Africa needs a stable political environment, courageous investors, as well as public–private partnerships to mobilise local resources. With its innovative approach, the facility will further stimulate investment in the renewables space and can also serve as a model beyond South Africa,” he said.

Initially designed to provide senior and mezzanine debt finance exclusively to projects under the South African Department of Energy’s (DoE’s) Small Project Independent Power Producer Programme, which were unable to access funding from traditional commercial sources, First’s mandate is now considerably broader in response to changes to the DoE’s renewable energy commitments and policies.

Based on an expected loan portfolio of R2-billion, First’s portfolio should include between 20 and 25 utility-style projects spread across solar photovoltaic, wind, biomass and small-scale hydro, with clients coming from the South African corporate and industrial sector, as well as municipalities.

Individual loans provided by the fund are expected to be between R50-million and R300-million.

The first loan is expected to be concluded within the next six months.