Banks are jostling for a stake in South Africa’s promising renewable energy sector. Will this be the next best thing for the project finance market, asks GTR deputy editor Shannon Manders?
SA switches on
South Africa is fast becoming a top renewable energy investment destination for both public and private sector investors as it reduces its reliance on coal-based power generation.
Last year the country launched its Independent Power Producers (IPP) procurement programme, outlining the government’s strategy for future electricity generation.
The scale of the programme has led local bankers to refer to this as the most exciting time for project finance in South Africa for more than a decade.
The landmark project is designed to stimulate the country’s renewable energy sector and to generate 42% of all new electricity from renewable energy sources including solar, wind, biomass and hydro over the next 20 years.
What’s more, it gives the banks that finance power plants the opportunity to quit coal and redeem their image as supporters of dirty energy.
In December, the Department of Energy revealed 28 successful bidders for phase 1 of the programme. Projects named under the US$12bn package included 18 solar photovoltaic projects, eight onshore wind projects and two concentrated solar power projects, representing a combined potential capacity of 1,415MW.
In early March, bids will be called for the second round of renewable energy projects, in which an estimated R60bn-worth of projects will be approved.
“Deal flow from the renewables programme is possibly 10 times what the market provided annually before,” agrees a project financier at an international bank in South Africa.
“All the large deals are being project financed and local banks have huge appetite. The big question is whether they will continue to show this appetite as the programme continues.”
These new developments not only herald a step-up in financing, but also a rethink in strategy as the country looks to ease its dependence on its coal power stations.
Furthermore, in November last year, South Africa began requiring that all new buildings – schools, homes and offices – have solar water heaters or heat pumps, improved insulation and better ventilation systems. Tougher green-building laws will be phased in over the next decade.
All of these measures should please the group of NGOs who last year got together to deliver a study on banks’ involvement in coal financing and drafted the first climate ranking for financial institutions.
The organisations – Germany’s urgewald, South Africa’s GroundWork and Earthlife Africa Johannesburg, and international group BankTrack – named coal-fired power plants as the major culprit in the fight against climate change.
“In spite of the fact that climate change is already having severe impacts on the most vulnerable societies, there is an abundance of plans to build new coal-fired power plants. If banks provide money for these projects, they will wreck all attempts to limit global warming to 2 degrees,” said one of the representatives.
The study entitled “Bankrolling Climate Change” examined the portfolios of 93 of the world’s leading banks and looked into their support for 31 major coal-mining companies and 40 producers of coal-fired electricity.
The report did not note that it may be the duty of the governments and companies that sponsor the power plants to take responsibility for their environmental impact.
While attempts to combat environmental challenges are not futile, it is fair to say that banks will continue to meet the demands for power and for financing. And if the demand lies in renewable energy, as it does now in South Africa, this can only result in a favourable shift of their portfolios to energy efficiency.
With coal-fired power plants meeting fierce resistance all over the world, are banks beginning to feel the heat?
Is this South Africa’s most exciting decade for project finance?
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