Much has been spoken of South Africa Renewable Energy Independent Power Producers Plan (REIPPP) and glowingly so, but there are many companies unable to compete in that space that could also go a long way to resolving the country’s electricity problem.
Evan Rice, the CEO of Green Cape, says the REIPPPP is only one level of the renewable energy space, and only represents projects that can produce a minimum of 5 Megawatts (MW) of power, up to 140MW. These projects, if selected through the REIPPPP bidding process sign a 20-year power purchasing agreement (PPA) with Eskom. This PPA, which is underwritten by a government guarantee, is necessary for the producers to secure funding from financial institutions.
The funding element itself is a major obstacle in the world of renewable energy, says Michael Seeger, the director of GX Energies. Banks only approve loans for the biggest projects because they can absorb the invariably expensive financing costs.
Says Seeger: “The South African banking industry is formed around large scale projects, be it mining, infrastructure development or manufacturing, because the cost of funding, which would include technical, legal and financial consultation fees, is massive. And these are incurred irrespective of the size of the project.”
But for other renewable energy producers, it’s a tougher, often more complicated, process.
For renewable energy project developers operating outside of the REIPPPP, it’s a tougher, often more complicated, process. For these companies, Rice explains, the are two options – either develop projects onsite for companies to generate their own electricity, or generate the electricity and find a who will buy it from you.
The latter involves a process called ‘wheeling’, where the project needs to use the grid to get the power to the consumer. The challenge is that the rules for calculating the wheeling costs have not been established. While Eskom has guidelines in place for wheeling costs on its network, it is more complicated when the transaction involves grids run by multiple entities, because this requires an agreement with each of those parties.
“If, for example, a solar farm operation in Upington would like to supply a business in Cape Town, this may require the wheeling of electricity through the distribution grid of the Upington municipality, into the Eskom transmission grid, and through the City of Cape Town’s distribution grid before it gets to the customer,” says Rice.
Rice says that the National Energy Regulator of South Africa is currently working on developing a standardised framework for these arrangements. Once this is in place, this could open up a significant new market for the renewable energy industry.
Seeger says the costs of such arrangements are prohibitive to small projects and makes them uneconomical, adding that they typically add about 30c per kWh to the cost of producing electricity.
The only company in South Africa that is successfully wheeling electricity and has a license to do so is Amatola Green Power, which buys and sells renewable energy in South Africa. Essentially, they are electricity generators’ only alternative to Eskom in terms of providing electricity indirectly to customers.
Its CEO, Elvin Fredericks, says the company sells green energy to industrial and commercial users, and operates only in the Nelson Mandela Bay municipality, for now, whereby customers pay between R0.80 and R1.40 per kWh of electricity purchased and electricity generators are paid between R0.62 and R1.05 per kWh supplied.
However, he says that the wheeling is not their biggest challenge.
“Our big challenge is finding customers that will sign PPAs with a 10-year term or longer. But the problem, we are finding, especially with multinational clients, is that they are only looking for a maximum of five years. And that is not long enough for the electricity generators when they approach the banks for funding.”
Go directly to the source
Seeger says the biggest opportunity for renewable energy producers is to directly approach the private sector where farmers or miners approach independent producers to produce a solution for them, which they would house on-site and would not require access to the grid.
“We, for example, have gone to a mining company where we have developed a solution – a solar tracking power plant – for the company that allows the office black at one of its mines to operate off the grid,” says Seeger.
However, to get the funding Seeger says KFW development bank, funded their pilot plants. It seems to point to the a need for alternative funding sources, like South Africa’s green fund, for renewable energy projects.
This article is part of a series sponsored by Standard Bank Business Banking. Should you require further information about raising funding for a business in the energy sector please e-mail Moneyweb MD Marc Ashton with details of your project and he will connect you with an appropriate banking resource.