Andre Wepener, Head of the Power & Infrastructure Finance team at Investec Bank, talks to AOP about financing in the energy sector, especially for renewables.
How does financing for renewable projects differ from that of more traditional power projects like hydro, gas or coal?
There has been a consistent shift from traditional sources of power towards renewable sources in recent years. This is due to growing recognition of the environmental benefits, as well as the reduction in cost of renewable technologies such as wind and solar PV.
As the performance of these projects is dependent on weather patterns, their output is variable and less predictable than baseload projects such as coal or hydro power. This requires more detailed analysis and additional flexibility in the financing package in order to create a buffer for lower performance.
Does a standard project finance model make sense for smaller, off-grid renewable projects? If no, how does this model need to be adjusted?
In order to fund a project, financiers generally require a stable offtaker contracted on a take-or-pay basis in order to be comfortable with the forecast revenues. Smaller, off-grid projects usually rely on groups of individuals or smaller businesses in a community as consumers of the power, with varying levels of credit-worthiness, which is unpredictable. One proposed solution is for such projects to be funded initially through a combination of grant funding or DFI’s, and look for commercial lenders to refinance the funding once the project has a track record and reliable payment history from consumers.
What steps should be taken to make renewable projects attractive to financiers?
Projects are attractive to funders when (i) the procurement and project preparation is presented in a clear and transparent way, within a certain regulatory framework. (ii) There is a stable and credit-worthy offtaker contracted to purchase the power on a take-or-pay basis and (iii) the project parties including developer/sponsor, contractors and other key stakeholders are credible in terms of their experience in the sector.
Which type of finance — i.e. development banks, private equity, traditional banks — are most interested in funding power projects in Africa and why?
All of the above. Projects in Africa are typically funded by a combination of different funders. Given that infrastructure projects by their nature require long-term funding in order to achieve acceptable tariffs, DFI’s will in some cases provide a longer-tenor tranche of funding that sits alongside a shorter-tenor tranche provided by commercial banks. Private Equity players often invest in the equity of the projects, or provide higher-risk tranches of debt such as mezzanine finance.
Power projects in Africa are infamous for taking a long time to go from planning to completion. How do investors cope with these issues? What should governments do to mitigate these problems?
In countries where there is a lack of regulatory certainty, projects can experience severe delays in getting to Financial Close. Project developers are often well received by governments when they are in the initial phases of development, but experience delays once binding decisions have to be made. The most effective way to procure power projects is through a well-structured programme where all regulatory approvals are in place before development commences. This gives developers confidence that the projects will ultimately proceed.
How do you see renewables impacting Africa’s power scenario in the next 10-15 years?
As both GDP growth and urbanization in African continue to rise, the demand for power on the continent will increase exponentially. Renewable power will continue to make up the bulk of the new supply, in particular as (i) Costs continue to drop (ii) battery storage technology becomes more efficient making allowing renewable sources to provide baseload supply and (iii) Renewable projects allow for the flexibility of multiple smaller projects in isolated regions or on mini-grids
Where do you see the greatest opportunities for investors in Africa’s power sector?
The greatest opportunities are in countries where there are well-structured programmes to procure power projects. The REIPPP Programme in South Africa is a great example, and we are seeing similar structures in other countries, most recently in Namibia and Zambia.
The other big opportunity is in remote parts of the continent with large mining operations but no connection to the Power Grid. Where these operations are currently running on diesel generators, there is an enormous opportunity to replace this generation with renewable projects that will be both cost effective and better for the environment.
Andre Wepener will take part in Renewables in the Energy Mix panel at Africa Oil & Power 2018, on September 5-7, 2018. Register online to get your delegate pass.
