Futuregrowth: Allocating Capital to Renewable Energy Investments

While the debate over the use of nuclear power continues, the renewable energy sector is quietly forging ahead and independent power producers are adding much-needed capacity to the grid. Since the Department of Energy (DoE) embarked on its alternative energy drive in 2012, capital investments in renewables have totalled almost R200 billion.

South Africa has some of the best natural resources available for solar and wind power. This, together with a reputationally strong and well-run independent power procurement programme, has created opportunities for institutional investors like Futuregrowth − who is now a leading funder of the programme. 

Investment into this renewable energy asset class is motivated by:

• The reality that South Africa needs more megawatts on the grid to support and grow our economy.
• The need to reduce our carbon intensity – South Africa is one of highest carbon-producing countries in the world.
• A need to transition South Africa to a sustainable energy mix and a greener economy.

THE POWER OF STRONG PARTNERSHIPS

The growth of the renewable energy sector reflects the success of the DoE’s Renewable Energy Independent Power Producers’ Procurement Programme (REIPPPP). In addition to the 6,327 megawatts (MW) which is under construction or already in production, Government has confirmed that it plans to procure a further 6,000 MW from independent producers over the next couple of years, doubling the currently contracted renewable energy capacity. 

This programme is a strong model for private-public participation, and that has a lot to do with Government’s commitment to transparency and the efficiency with which it is run. All the projects in the programme have a 20-year power offtake agreement with Eskom, in which the parastatal will purchase all power generated. This provides producers with the revenue stream to repay the debt and shareholder funding that has been used to build the power plants. Approximately 70% to 80% of the almost R200 billion invested in the 92 projects under the programme so far, has been funded by debt, with most of this having been provided by the private sector. 

South Africa has historically been dependent upon electricity generated by coal-fired stations. Given the economic growth since 1994, the country’s power demand has increased significantly and Government estimates that the installed capacity will need to grow by 40 gigawatts (GW) (i.e. double) over the next 20 years to meet forecast demand. 

Government’s Integrated Resource Plan (IRP), updated in 2011, leads the way for the energy sector in South Africa. It outlines the proposed new power generation roll-out requirements and the mix of generation technologies, including procurement from independent power producers. 

Approximately 17.8 GW (42%) of new generative capacity over the period to 2,030 is targeted from renewable energy, split between solar photovoltaic (PV) generating 8,400 MW, concentrated solar power (solar CSP) generating 1,000 MW and wind generating 8,400 MW.

FUTUREGROWTH’S PARTICIPATION IN REIPPPP

Futuregrowth is one of the largest fixed income institutional investors in the REIPPPP and was the first to invest in scale from commencement of the procurement programme. So far, Futuregrowth has funding commitments to 23 renewable projects, including solar PV, wind and solar CSP technologies in Limpopo, Northern Cape and Eastern Cape. These projects were awarded preferred bids by the DoE in rounds 1 to 3 of the REIPPPP and, to date, 17 projects have achieved commercial operation and are generating power to the grid.

ROBUST CREDIT ANALYSIS

To date, more than 50 projects across bid rounds 1 to 4 of the REIPPPP have been considered by Futuregrowth for investment and were subjected to our credit assessment and due diligence process. Of these, more than 21 projects did not meet our credit criteria. 

Included in our analysis is a combination of financial and nonfinancial issues, such as environmental, social and governance (ESG) factors that are relevant to our credit risk analysis process. The key motivating factor for Futuregrowth is to understand the risks associated with each project in order to price for and appropriately mitigate these risks. We see ourselves as a longterm funding partner and, as such, we take a view on which issues could materially impact the sustainability of each project, to better understand the overall risks.

CLEAN AND RENEWABLE GENERATION

Renewable energy projects do not use fossil fuels, nor do they create toxic emissions or hazardous waste. With the cost of fossil fuel-generated electricity rising all the time, it is vital that we invest in cleaner, alternative energy sources.

• Each project requires an Environmental Impact Assessment (EIA) as a key criterion of the bid. This looks at the suitability of a proposed site and the impact of the project on the surrounding area, the environmental resources and the community.
• Projects have to meet the Equator Principles (a risk management framework used by financial institutions worldwide to assess a project’s environmental and social risks).

EMPLOYMENT AND SKILLS TRANSFER

Important qualifying criteria for projects under the REIPPPP are the creation of sustainable local jobs and the transfer of skills to communities surrounding the project sites. This includes:

• Job creation

- Employing local labour to build and maintain the plants. 
- Short- and long-term job creation. 
- SMME development through employing contractors.

• A high level of mentorship and skills transfer from international developers.
• Local technology and subcontractors to be used in all projects according to Government’s minimum requirements.
• International developers partnering with local firms that have a strong knowledge of the South African market.
• There is a minimum requirement of 40% of local procurement for every project and this threshold is anticipated to increase in later bidding rounds.

INFRASTRUCTURAL INVESTMENT AND EMPOWERMENT

• There is a strong emphasis on investment by the projects into local socio-economic infrastructure and services, as well as employing local labour to build and maintain the plants.
• Many of the projects are in remote, arid areas and civil engineering is needed for the construction and operation of the project (including access roads). Every project has aminimum BEE equity requirement that must include participation by a trust representing the local community.
• Projects are required to report on their SED spend and milestones each quarter with termination points given if targets are not met.