Renewable energy projects seeking to be licensed in South Africa
under allocations granted in terms of IRP1 will need to raise
estimated capital of between R20 and R30 billion in the course of
the next two years. Only a proportion of this capital is likely to
be provided as equity by sponsors. The bulk will have to be raised
via project finance – using the anticipated cash flows
generated by each project to fund the borrowings required.
Consequently different approaches to project financing will be
Many funders will be the usual commercial banks who have
traditionally done business in Europe, the US and latterly, the
Asia-Pacific countries. However, financial institutions other than
commercial banks are increasingly entering this field, bringing a
different and effective focus to the challenge of raising the large
amounts of capital required.
Whilst commercial banks can be expected to continue focusing on
maximising returns to shareholders and minimising the attendant
risks, developmental institutions and multilaterals have at their
core a desire to foster something more than profit –
socio-economic development – and it seems they are making
their presence felt when it comes to renewable energy projects.
In a recent briefing to clients, Norton Rose Group says that
increased levels of participation of these institutions in recent
times has meant that "... solutions have been developed to
deal with the inter-creditor issues which invariably arise between
them and commercial banks. Commercial banks now accept that such
institutions insist upon certain unilateral rights, such as the
right to take enforcement action if there is a breach of certain
covenants (for example, compliance with environmental
law)". They urge sponsors to be tolerant of the
"policy" issues raised by developmental financial
institutions because "... the practical reality is that
the institutions will stick with you, and if anything goes wrong,
are far more likely to be accommodating than a commercial lender
looking to quickly recover their funds or get the project off a
A unique aspect of renewable energy project financing in South
Africa will stem from the requirement that independent power
producers will need to incorporate a black economic empowerment
(BEE) element as a precondition to obtaining an electricity
generation licence. It is anticipated that many BEE partners will
be looking to developmental finance institutions such as the
Development Bank of Southern Africa (DBSA) to provide much of the
funding necessary to acquire BEE partners' stakes in the
project, and the DBSA, for example, will more than likely insist
that critical BEE implementation mechanisms are built into the deal
structure, and honoured by all parties.
Interest in the South African renewables market by Chinese
developers and financiers will also add a different dimension and
different options for sourcing finance for developments. By all
accounts, the Chinese approach is a more strategic one –
not necessarily concerned with (or responding in the conventional
manner to) the same commercial risks that commercial banks usually
take into account – and very much focussed on supporting
Chinese outbound investment and the sale of Chinese manufactured
renewable energy equipment such as photovoltaic panels and wind
It is not unusual for Chinese developers or equipment
manufacturers to bring their own finance in line with a strategy of
supporting Chinese renewables projects until they are bankable, at
which point conventional funding from commercial banks can be
The above means that developers using Chinese equipment and
finance can go where other developers might find it difficult to
follow, due to difficulties with project bankability in terms of
conventional criteria. Whilst this may be seen to be a significant
advantage in one respect, when it comes to exiting the project, the
local developer may find limited interest from non-Chinese sources
of capital to the extent that such projects have not been
structured along conventional lines.
Exactly how different the approach to project financing around
renewable projects will be over the next period of two years is
hard to predict – but what seems certain is that there
will be new ways of dealing with the challenges faced by developers
and funders, and that the South African market will develop its own
quirks and nuances.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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