Optimal financing structures needed for private power

24 MARCH 2022

Supporting a pivotal shift in South Africa’s power production

Daniel Zinman, Head of Power and Renewables at Rand Merchant Bank (RMB) recently spoke at Solar Power Africa as part of a panel discussion. Here are some of the key insights that emerged from the discussion.

There are rich opportunities in South Africa’s power generation sector, from independent power producers (IPPs) on the supply side, to corporates looking to purchase renewable energy. With the right financial advice and structuring, it is an opportunity to further develop the South African electricity market and increase the overall generation capacity in a country suffering from chronic power shortages.

RMB has been and is involved in structuring solutions to meet the power needs of a broad spectrum of corporate clients. The most important thing we’ve learned is that funding private power production is not a one-size-fits-all solution, but that the technical solution and optimal financing structure needs to be tailored based on the business’s needs and drivers.

For example, our partners at FNB have been creating innovative offering for clients looking to install solar panels, inverters and/or batteries on a commercial scale. Their leasing model is available for up to 7.5MW, with leasing terms going up to ten years. This is an important development in lowering the cost of solar power for commercial consumption using a more vanilla and easily implementable product.

Renewable energy is a priority for many corporates for a number of reasons, all of which are common to most: from decarbonisation and net zero commitments to energy security and creating price certainty. Across the spectrum of financing solutions, we have seen corporates who want to build, own and operate their own renewable energy plants themselves to a more traditional model which takes the form of a long-term power purchase agreement (PPA) between one (or more) of RMB’s corporate clients and an IPP. Some of our IPP clients have been selected as the preferred bidder under various tender processes run by large corporates, and we are currently looking to close and fund IPPs supplying over 500 MW of private power to mining and industrial clients.

Power is an exciting funding space and one in which we are proud to be active and successful. RMB has led in the market to-date because we have been able to develop our thinking and take a more aggressive view. While corporate borrowers can typically only receive debt funding for 7 – 10 years (at best), we are able to provide funding for longer tenors of up to 18 years to IPPs selling power under long-term PPAs to those selfsame corporates. This enables the IPP to offer a lower tariff to its corporate offtakers. The credit thesis broadly is that in the event of a corporate offtaker becoming insolvent, it is highly likely that there will still be a power deficit in the country for the foreseeable future, and renewable energy will still be sought-after and priced materially lower than Eskom tariffs. The hypothesis is that, given the proliferation of wheeling across the Eskom transmission network, these IPPs should be able to find another client to whom to wheel the power. This thinking has allowed RMB to be very competitive in the space.

RMB is optimistic about the heightened activity in the private power market – it’s developing rapidly and creating a plethora of new opportunities as the market begins to liberalise, from power traders looking to match generators and buyers to fintech platforms assisting with the management of PPAs. in this exciting space, RMB is also considering a multitude of equity opportunities.

In closing, private power is an exciting, fast-moving market in South Africa. As a bank that has funded over R25 billion in power transactions to date, we are proud of the bespoke products we have created and the impact we’ve had on the market. As this space evolves, we will continue to work with our corporate and energy clients in creating products that are in line with their specific needs.

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