• Joint account

    The surge in large-scale renewables plants means significant capital investment is required to fund the continent’s energy mega projects

    Joint account

    The past decade has seen the restructuring of energy sectors in several countries, which has opened up opportunities for private investors in the generation and distribution sector, according to an EY media release on investing in energy to power Africa.

    ‘A combination of monetary and non-monetary incentive schemes have also allowed the sector to encourage return-seeking investments,’ it states. This includes automatic tariff adjustments in Kenya, which have allowed private generation companies to manage risk against foreign exchange, inflation and global energy prices.

    There has been a move among SADC countries towards an interconnected energy market, which in turn has meant there is a larger market to distribute to.

    ‘The co-operation between South Africa, the Democratic Republic of Congo, Zambia, Botswana and Zimbabwe on the Grand Inga hydropower project, for example, illustrates the benefits of an interconnected network,’ according to EY. ‘Similarly, the 6 GW Great Renaissance hydropower project in Ethiopia is targeted at regional energy export.

    ‘Furthermore, governments in East Africa are open to public-private partnerships to construct new plants, particularly those powered by renewables. There are significant opportunities, with Rwanda aiming to reach an electrification goal of 60% by 2020, from the current 17%,’ according to the authors. It should be noted that Kenya is the only sub-Saharan African country to make the top 40 list (ranking 37) in EY’s latest (Issue 53) Renewable Energy Country Attractiveness Index. In Issue 45 (2015), South Africa claimed 12th spot on the list but is nowhere to be seen in the latest iteration, which may have been due to the stalling of the Renewable Energy Independent Power Producer Procurement (REIPPP) programme in the past.

    All this electricity to be generated requires substantial energy-producing infrastructure and, of course, capital investment to fund these mega projects. This is where entities such as the Development Bank of Southern Africa (DBSA), the African Development Bank (AfDB) and other corporations, including Nedbank, Standard Bank and Investec, enter the fray. For example, during investment Round 4 of the REIPPP, in South Africa, the DBSA provided project finance for more than 14 renewable energy schemes, including landmark projects, such as the Sirius Solar, Dyason’s Klip 1 and Dyason’s Klip 2 PV projects, which were developed by Scatec Solar. The Scatec Solar projects were funded through a combination of equity and debt raised from the DBSA, commercial banks and local asset managers.

    Other projects the DBSA invested heavily in include the 140 MW Roggeveld wind project, for which it provided ZAR951 million in debt funding, and the 102 MW Copperton wind project (ZAR1.2 billion in debt funding by the DBSA.) The DBSA is currently involved in 33 renewable energy projects amounting to around ZAR17 billion in investment.

    The AfDB was the lead arranger and senior co-lender involved in the US$680 million Lake Turkana wind power project

    ‘Ultimately, as Africa continues on its growth trajectory, it is those organisations that understand the nature of the power challenges the continent faces – as well as the opportunities to address them – that will succeed in their African expansion plans,’ states EY. ‘For the African power utilities, these disruptive threats can be translated into opportunities, by engaging with new players entering the sector for collaboration towards implementing new ways of generating power.

    ‘Critical to unlocking the investment in the power sector in Africa is the attainment of cost-effective revenue streams. This is transversal across the entire power sector value chain, and remains the key policy enabler to the long-term sustainability of the sector.’

    One such project is the Lake Turkana wind power project, which involved the construction of a 310 MW wind farm east of Kenya’s Lake Turkana. The wind farm comprises 365 wind turbines each with a capacity of 850 kW. While providing Kenyans clean and affordable energy, the wind farm also connects the landlocked Great Rift Valley region through the infrastructure linked to the farm, including road, fibre-optic cables and electrification facilities.

    The project cost US$680 million (excluding a 438 km transmission line from Lake Turkana to the Susua sub-station near Nairobi) and included upgrading 208 km of public road infrastructure, for which finance was provided in the form equity debt (25%), mezzanine debt (5%) and senior debt (70%). The AfDB was the mandated lead arranger and senior co-lender, and provided a long-term senior loan of US$150 million.

    Detailing the finance structure, the AfDB explained that the African Development Fund applied its first partial risk guarantee to the associated transmission line to mitigate delay risk, which was otherwise covered by delay payment obligations of the Kenyan government to the project company and its lenders.

    The AfDB also used its B-Loan structure, allowing participant banks to benefit from its preferred creditor status. The European Investment Bank – with guarantee structures from the Danish Export Credit Agency (political and commercial cover) and the two South African banks, Standard Bank and Nedbank (commercial cover) – could leverage EUR200 million into the project. The application of the EU-Africa Infrastructure Trust Fund (EU-AITF) financial instrument, which blends development finance institution monies with grant monies from the European Commission, was crucial in filling the equity gap, the AfDB explains. ‘The Lake Turkana project showed some innovation in how the liquidity risk was managed. [This was done through] a combination of letters of credit and escrow account arrangements, which demonstrated some out-of-the-box thinking by government, sponsors and lenders.’

    In West Africa, the Côte d’Ivoire government announced its intentions in November last year to generate 150 MW of solar by 2020. The country currently produces most of its 2 200 MW of power from oil and gas. Sabati Cissé, energy director for Côte d’Ivoire’s Ministry of Oil and Energy, said the country expects an annual output of 150 MW from four of its solar plants in the north of the country.

    ‘We are encouraged by the fact that the installation cost of solar plants is more accessible than in previous years,’ he told Reuters. Speaking in 2018, the minister said that the first 25 MW power plant, built by a subsidiary of Moroccan-based Nova Power in the northern city of Korhogo, was to be operational before the end of 2018. Furthermore, the government received EUR27 million from the German state development bank, Kfw, and EUR10 millions from the EU to build a 37.5 MW solar power station in Boundiali.

    In April this year, Nedbank listed its Renewable Energy Bond on the Johannesburg Stock Exchange and placed ZAR1.7 billion in bonds to fund renewable energy projects. This was three times oversubscribed as they received bids totalling ZAR5.5 billion. ‘It demonstrates strong investor appetite for good-quality environmental, social and governance-focused assets,’ says Bruce Stewart, head of debt capital market origination at Nedbank Corporate and Investment Banking.

    The bank has been a key participant in South Africa’s REIPPP programme, funding 42 transactions, totalling ZAR40 billion, during the four rounds to date. Speaking on the success of its bond listing, Stewart says ‘there was a diverse spread of investors in the book, which included domestic asset manager participation and participation from impact funds set up by foreign investors. Due to the green nature of the bond, Nedbank was able to attract new intentional investor appetite in addition to traditional investor appetite. At least 18 investors participated, including the African Local Currency Bond Fund and the WWF [fund]’. This response from investors indicates a growing appetite within global investment circles for opportunities to achieve reliable returns while doing good for the planet. ‘Ultimately, a sustainable society is fast becoming a pre-requisite for sustainable investment returns.’

    Quoting statistics from the World Bank, a Rand Merchant Bank 2019 report on investing in Africa notes that the lack of sufficiently developed infrastructure shaves up to 2.6% off the continent’s average per capita growth rate and places significant strain on human development overall. ‘But here’s the good news,’ it adds. ‘This shortfall represents an overwhelming opportunity for those businesses involved in the development or financing of infrastructure projects.’

    By Sven Hugo
    Images: Alamy, Gallo/Getty Images