Funding renewables - News | Energy Security Game Changer

Funding renewables

29 June 2017

In the last two years renewable energy (RE) has become the cheapest source of new electricity in South Africa. Many businesses are beginning to generate clean energy more cheaply than they can buy from Eskom or their Municipality. Increasingly businesses are trying to understand how to do this and how to fund it.

The first step is an energy audit. “The principle is to reduce energy consumption as much as possible, to become more efficient, and only as a last resort, look to generate your own electricity,” says Duncan Abel, Principal: Embedded Generation at Nedbank.

“These are the two elements in the renewable energy sector – energy efficiency and energy generation,” explains Michael Feldner, renewable energy project finance advisor of the Africa-EU Energy Cooperation Programme, an EU-funded organisation that provides market information and connects renewable energy (RE) projects with financiers in the RE sector in Sub-Saharan Africa.

Energy generation on businesses, farms or households is a new and growing industry in South Africa, with an estimated R2bn invested last year alone.

The challenge with financing energy generation infrastructure is that the asset, namely the PV panels, typically lasts well over 20 years. However, the capital for the installation comes with a hefty price tag. It is unsurprising that many local and international banks are developing financing products to spread the capital cost over a longer period. This allows projects to fund themselves from electricity savings.

The current funding mechanisms fall into two broad categories: funding to the installer or funding the business directly. When the installer is funded, the business buys the electricity that is generated (often at a discount to their current tariff) over a 15- or 20-year period. These models work well with businesses with a long track record.

In the second model, the business borrows the money to buy an asset that will have consistent, measurable repayments. This normally requires the business to be confident that it will be at the same location and will require similar amounts of electricity for the following 10-15 years.

There are new and exciting funding models emerging - one of these is a shared savings contract. In this model, a developer undertakes the implemention of a suite of energy interventions identified in an audit process. These interventions will result in energy savings to the business, with these savings then shared between the business and the developer. The sharing formula is determined by the cost and payback period of the project. The risk is minimal for the business, which is not required to invest any funds but still benefits by receiving some of the energy cost reductions.

A current challenge with RE projects is the cost of the financing process. “One of the biggest impediments to project funding of small-scale RE projects is the cost of due diligence required to allow us to place reliance on the project,” explains Mr Abel. “The cost of a detailed due diligence for a bespoke project can run into the millions of rand, which for a smaller project is non-viable.”

“We’re developing a solution to this premised on standardised sets of contract documents, and building relationships with equipment suppliers, insurance providers, legal and technical advisors, and obviously 

RE developers and installers. This allows us to reduce the cost and complexity of the due diligence for individual projects whilst still mitigating the project risk to acceptable levels. That way, it is possible to engage with and fund a farmer for a 500kWp system using our standardised processes and contract terms and conditions,” says Mr Abel.

If you seek funding for an RE project, it is imperative that you speak to your bank as early in the process as possible.

An energy efficiency audit costs money, but it will inform any decisions going forward and may actually save you a great deal of money in the long run. Only use reputable suppliers, developers and installers, and tap into industry associations.

One valuable resource you can make use of is GreenCape, an agency established by the Western Cape Government that supports green economy initiatives. It publishes market intelligence reports annually which can help you to understand the changing economics and opportunities in the energy services market.

In summary, it makes sense to determine what your broader energy strategy is and the role that energy efficiency initiatives and/or renewable energy can play in your business. It is then a matter of understanding your energy consumption profile and costs, possibly with the help of energy experts, and determining the most appropriate financing model.

With the prices of solar PV and energy efficiency technologies coming down and innovative financing solutions becoming available, it is an optimal time for the agricultural community to benefit from the exciting energy opportunities that are available.   

The Western Cape Government and City of Cape Town launched the Energy Security Game Changer in 2015 to ensure that the Province has a reliable, diverse and low carbon supply of energy. This is being achieved through stimulating the uptake of rooftop solar PV, encouraging energy efficiency and the installation of efficient water heaters, and promoting a diversity of energy sources in the province, including wind, solar, and natural gas. The Province is challenging every person in the Western Cape to contribute to an energy-secure, greener future.