Majority of IPPs said to agree to refinancing initiative

10th July 2020 By: Marleny Arnoldi - Creamer Media Online Writer

A representative from the Department of Mineral Resources and Energy's (DMRE's) Independent Power Producer Office (IPPO) has confirmed that 70% of South Africa’s 64 IPPs have indicated they will participate in the department’s renewable energy project refinancing initiative.

DMRE infrastructure finance head for the IPP Office Elsa Strydom notes that the refinancing initiative of the department bodes well considering that renewable energy projects can help with South Africa’s economic recovery.

She expressed confidence, during virtual seminar hosted by Rand Merchant Bank (RMB) on July 10 in the run up to the Windaba conference in November, that the refinancing of most projects would have progressed well by September.

Strydom explains that the refinancing initiative came about when the Ministers of Mineral Resources and Energy, and Public Enterprises, met with IPPs and lenders in September last year to determine in which way the Bid Window 1 to 3.5 IPPs that are in operation could contribute to lowering the wholesale price of electricity.

A task team was then established for engagements with all relevant stakeholders, made up from nominated representatives from the Banking Association of Southern Africa, the DMRE and the IPPO.

The task team concluded that the most feasible option to reduce the contribution of the Bid Window 1 to 3.5 projects to the wholesale electricity price, is to undertake a refinancing initiative – as such an approach is aligned with project finance principles and will not unduly affect market confidence or undermine the procurement process.

Strydom says there was a general willingness and support for this initiative to stimulate economic growth, by passing any reduction in tariffs back to the consumer and the economy.

The refinancing initiative was approved by the Energy Minister, but on condition that IPPs voluntarily participate in the initiative and that the refinancing gain be shared at least on a 50:50 basis, but higher sharing percentages may be negotiated on a case-by-case basis.

The Minister also required that the initiative should not lead to an increase in contingent liabilities associated with these projects and, naturally, that the outcome of the refinancing should result in a reduction in tariffs over the remainder of the power purchase agreement (PPA) term.

Subsequently, invitations were sent out to all IPPs for them to indicate their willingness to participate.

Strydom says that by the end of May, 70% of South Africa’s 64 IPPs had indicated positive responses.

Strydom mentions that the IPPs indicated timelines for refinancing at between four and six months, with some projects being more ready for this step than others, especially considering the current market circumstances brought about by Covid-19.

In the meantime, the DMRE is ensuring that IPPs follow a standardised approach to preparations and assessments of their refinancing applications. The department issued its refinancing protocols for IPPs on July 9.

RMB senior transactor Daniel Zinman says that, although the refinancing holds benefit for the consumer and the economy, there needs to be a drive for shareholders as well. These are typically increased yield, upfront cash payouts, minimised transaction costs and maximised tariff reductions or net present value (NPV).

Zinman explains that there are various options available for refinancing, including maintaining existing debt levels and structure, but reducing margins; increasing existing debt levels; increasing debt tenor; converting Johannesburg Interbank Average Rate debt to Consumer Price Index debt; replacing reserve accounts with contingent facilities; replacing junior debt with senior debt introducing preference shares; and restructuring existing risk management strategy and hedging policies.

Law firm Webber Wentzel partner Jason van der Poel mentions that no public hearings will be required for the National Energy Regulator of South Africa (Nersa) to confirm revised tariffs, while the IPPO is consulting with Eskom and Nersa to expedite all approvals required.   

He further explains that commercial drivers will be the main determinant of whether many projects from Bid Windows 1 to 3.5 will refinance and reduce their tariffs, including the question of whether there is more to be gained through running new procurements of renewable energy with lower prices unlocked.


Noblesfontein wind farm financial manager Hennie Hanekom says the refinance discourse is motivated by local and foreign investors, the IPPO invitation and change in equity return expectations.

By now, he notes, the IPP projects have already lowered, or navigated, many risks including around fuel – or input, operating, construction, market, economic and political risks.

Hanekom says the biggest incentive for refinancing now is so that an IPP can obtain a new loan that has improved terms, compared with existing loans. These terms include lower financing costs, relaxed covenants, changed variable base rates, changed finance instruments and improved duration of tenor.

“Any change in terms should ultimately lead to an increase in the NPV of the equity holder.”

He further explains that refinancing is an opportunity for the IPP to re-evaluate the project, providing updated internal rate of return and NPV values, which can also be used for possible equity transactions.

A refinancing exercise will also update the projects’ credit rating, creating room for future short-term refinancing opportunities, while providing opportunity for IPPs to consolidate their debt or the number of lenders that are involved in the current loan syndicate.

“IPPs can also consider increasing their leveraging, if they are looking to acquire some additional funding. Looking at the average gearing ratios of the Round 1 to 3.5 projects, these are, in general, already highly geared and there is not much room for additional debt.

“When going into project gearing, additional funding obtained through this increased debt gearing can be used for redemptions of group related debt, which is especially beneficial if the project can achieve a better refinanced debt rate than what is being raised on group level.”

He adds that leveraging can also be useful for capital expenditure purposes, but says there is not always much room for expansion within a project, owing to PPA limitations.

As an alternative option, leveraging can be useful for investment opportunities outside of the project.

The refinancing also comes with its own risks and pitfalls, including putting strain on a project’s solvency and leveraging requirements, which might restrict equity distributions, and increased credit ratings might lead to higher finance costs.

To this end, Hanekom says selecting the right variable base rate for the project is important and will depend on the hedging and interest rate policies that the project has adopted.