Signing of delayed power purchase agreements to go ahead; increased liquidity in renewables debt capital market spells possible lower tariffs
After nearly two years of stalling and uncertainty, South Africa’s Public Enterprises Minister Lynn Brown announced on Friday 2 February that the signing of power purchase agreements (PPAs) for 27 wind and solar renewable energy projects will go ahead.
These projects have a total value of around R60 billion ($5,000 billion) and relate to projects in Rounds 3,5, 4 and 4 of the country’s Renewable Energy Power Producers Procurement Programme (REIPPPP).
Mark van Wyk, Head of Unlisted Investments at Mergence Investment Managers, welcomed the development, saying it meant that renewables would continue to form a “sensible and meaningful” part of the South Africa’s long-term Integrated Resource Plan.
Recent news from Mergence spells further good news for the sector, following the fund manager’s successful first exit from an investment in a solar energy project housed in the Mergence Renewable Energy Debt Fund I. This fund was the first of its kind in the sector, set up in 2013, when there was a lack of finance for renewable energy projects which were little understood and perceived as high risk.
In 2016 Mergence came alongside Deutsche Bank in a R213 million loan to Solar Capital De Aar 3 Proprietary Limited to complete the construction of a 90 megawatt project in the Northern Cape.
Following the successful commissioning of the plant it was possible to negotiate a better loan rate, “refinanced” in late 2017 by Standard Bank, allowing Deutsche Bank and Mergence to exit their investment successfully.
“More efficient lending in the sector, as illustrated by this deal, means that the end consumer of alternative energy should start to benefit from lower tariffs as the cost of capital comes down for renewable energy projects”, said Mr van Wyk.
”Lowering the cost of capital will lead to a potential lower tariff from the plant whose output is governed by a power purchase agreement with Eskom, to the benefit of the consumer. Solar power rates are very competitive with coal,” he said.
Benefits also flow to Mergence’s instituitonal clients as the fund manager has returned capital plus interest at a rate of CPI + 5% to retirement fund institutional investors by realising an investment within the first four years of the debt fund’s existence. (The mandatory investment term is 15 years).
Mr van Wyk says the development of a more liquid and efficient capital market within the REIPPPP bodes well for the industry as a whole. The nature of the asset is starting to be understood, competition is increasing among lenders and the cost of capital will be reduced for independent power producers (IPPs).
“The potential ready supply of capital for projects bodes well for the future of the alternative energy industry in South Africa. Combined with Friday’s news signalling the end of a delay in further rounds of the REIPPPP, this brings the programme back on track,” he said.
Contact: Lucy Reyburn, PR for Mergence on email@example.com or +27 82 922 7483
Or Mark van Wyk, Head of Unlisted Investments, Mergence Investment Managers, on firstname.lastname@example.org or +27 21 433 2960 or +27 82 689 0327
Mergence Investment Managers
Mergence Investment Managers is an independent specialist boutique asset management company based in South Africa.
We provide investment management services for institutional investors within southern Africa (SADC), as well as a select product offering for individual investors.
Mergence Investment Managers has dual capability across both listed and unlisted investments.
Our investments span equity multi-asset class funds, infrastructure, debt and private equity.
We have 39 staff and offices in Cape Town, Johannesburg and Windhoek.
Mergence Renewable Energy Debt Fund I
As a pioneer in impact investing, Mergence Investment Managers was an early investor in the REIPPPP. The firm launched the first debt fund in renewable energy in April 2013, the Mergence Renewable Energy Debt Fund.
The fund has currently R1,3 billion invested via senior and mezzanine debt in 12 projects from Rounds One and Two of the REIPPPP, all of which are completed, commissioned and selling electricity into the grid (65% solar and 36% wind). All projects are located in the more remote parts of SA requiring development and job creation.
The debt fund is a closed-ended fund. At end December 2017 since inception it had returned 10,79% to investors, beating it benchmark of JIBAR + 3% (at 9,57%).
In 2017 Mergence launched the Renewable Energy Debt Fund II which houses i.a. its investments in the REIPPPP “Smalls Project” which encourages the development of new smaller participants into the energy sector.