• Building a powerful future

    Fasken Martineau has the know-how to give invaluable legal advice and assistance to clients that are adopting off-grid energy solutions.

    Building a powerful future

    Africa’s development has been hampered by an energy deficit, with an estimated 70% of people in sub-Saharan Africa without reliable access to electricity. As a result, many consumers who require reliable power supply to ensure uninterrupted operations have had to move to off-grid energy solutions.

    Apartment blocks, hospitals, shopping malls, mines and manufacturing plants were among the first consumers to opt for off-grid energy solutions. They have since been followed by body corporates, home associations and office parks.

    The lack of access to the grid in rural and undeveloped areas, as well as a lack of reliable energy in many places, has driven these organisations to find off-grid energy solutions. The high prices of on-grid energy has also compelled consumers to find other options.

    Historically, consumers faced with load-shedding or electricity-supply interruptions were forced to either reduce their operations or choose costly energy solutions, such as diesel generators. None of these were desirable options. Nowadays, companies can choose to implement far better long-term off-grid solutions.

    There are a number of important issues consumers need to consider when deciding whether to opt for an off-grid energy solution.

    Securing debt financing for the initial investment in off-grid infrastructure is often difficult. Project financing is not always a viable option for these investments as many funders are not comfortable with their risk profile, given the issues around bankability and appropriate risk transfer.

    However, the traditional project finance structure of financing a single project with a secure long-term off-take, has paved the way for hybrid financing structures. These combine components of project finance and corporate finance. Consumers with strong balance sheets may also consider financing, building, operating and maintaining off-grid infrastructure independently.

    Over time, the focus has shifted from developing micro-finance solutions (which seek to finance each household or energy user) to developing financing solutions for energy-service companies. This shift may resolve certain financing challenges.

    Some energy service providers may opt to pre-finance the development of the project and use bank loans to refinance their initial development costs. One of the most viable financing solutions is portfolio finance. This allows developers to seek funding for a combination of projects, while prospective lenders are able to assess risk in relation to a cluster of projects, rather than a single project.

    Lenders often require the registration of security as part of their lending terms. This involves fairly high costs, and involves further costs if the security documents have to be amended if new projects are added. By avoiding registrable securities, such as general notarial bonds, special notarial bonds, and fixed and floating charges, these costs can be mitigated. Post-construction refinancing may also offer a more economical solution. Projects are typically de-risked post-construction and offer the possibility of procuring financing without needing to provide any registrable securities over the assets.

    The assets being financed could also be housed in an insolvency remote company that owns equipment. This refers to a company set up in a corporate group in such a way that should it become bankrupt, it would have little impact on other entities in the group. This type of company could use its balance sheet to procure corporate financing.

    Many off-grid solutions employ modular technologies that are easily redeployed. As such, there is less need for very large initial investments and debt profiles as projects can be up-scaled (or redeployed), depending on the demand.

    Consumers wanting to move their power supply requirements off-grid may run into regulatory issues, as in many cases the existing legislation has not yet caught up with the industry requirements.

    There is a need for enabling legislation to promote the development of sustainable, fast and efficient off-grid electricity. Policy reform is increasingly important as off-grid energy solutions are being included in national electrification strategies.

    Consumers might also find the lengthy process of procuring the relevant permission and licences an issue as the protracted process generally equates to higher transaction costs. A central issue is the requirement that all energy suppliers, irrespective of their size or the nature of their operations, have to adhere to the same compliance standards. Smaller emerging projects require a different approach, with a dedicated tariff and less onerous requirements.

    Some jurisdictions, such as India, have adopted this approach. However, many other jurisdictions, including South Africa, still need to revise existing legislation. Regulatory standards should be realistic, affordable and enforceable, with protections extended to both consumers and investors.

    As off-grid energy solutions are becoming more prevalent in the African market, the legislation and financing options should start to catch up, making this an increasingly attractive option.

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