Case Study: Using Competitive Auction to Finance Renewables
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South Africa’s Renewable Energy Independent Power Producer Procurement (REIPPP) program represents an innovative public-private partnership model that promotes sustainable energy solutions in South Africa, with a target of producing 17.8 GW from renewable sources by 2030. The program is closely linked with the country’s Integrated Resource Plan, which aims to renew South Africa’s commitment to renewables.
By creating a secondary market of investors apart from government bonds, the program has initiated a new model of financing and large-scale privatization of energy developments that had been previously held by state-owned public utility Eskom. Since its implementation in 2011, the REIPPP program has been responsible for more than $10 billion in private power investments in the country.
The program operates through competitive auction, establishing bidding windows in which developers bid for the right to monetize renewable energy projects. Selected bidders earn a 20-year power purchase agreement with Eskom, which is backed by the National Treasury, and consequently, largely risk-free. The cost of buying the project’s power is then passed on to consumers through tariffs, with initial solar projects carrying a tariff of $0.20 per kilowatt-hour (kWh)and more recent projects carrying a tariff of $0.033 per kWh.
To stimulate private sector involvement in the power domain, several domestic banks have offered advantageous financing instruments for IPPs participating in the program. Rand Merchant Bank, for example, has financed 39 utility-scale projects throughout the country, representing more than 2.7 GW of power and a market share of nearly 45%. Its inflation-protected debt product has become a pervasive solution in the renewable investment sphere, while its equity funding offerings have enabled the entry of new local players into the market. Meanwhile, Absa Bank has lent approximately $1.18 billion to 12 of the 27 new private renewable projects that previously had been delayed by Eskom.
Financing Renewables in Sub-Saharan Africa
The African continent boasts extensive renewable potential within residential, commercial and utility segments, and as a result, a diversity of financing instruments has been deployed. The Africa Renewable Energy Fund, for example, finances small-scale hydropower, wind, geothermal, solar, stranded gas and biomass projects across Sub-Saharan Africa.
Through its Sustainable Energy Fund for Africa, the African Development Bank has anchored a $95 million commitment to support the development of small-scale renewable energy projects, providing for technical feasibility studies, legal due diligence, environment and social impact assessment, quality assurance and risk management. On the institutional side, the GET FiT program, sponsored in part by Deutsche Bank, enables African governments to create conducive regulatory environments to attract investors to renewable energy projects.
While the size and scope of renewable investments continues to rise across the continent, barriers to funding still remain. Loans from African banks, for example, are often accompanied by exorbitantly high interest rates, limiting access to domestic financing for smallscale developers. In terms of external financing, development finance institutions have shown strong interest in supporting large-scale renewable projects on the continent, yet clear policy frameworks are still needed to ensure that renewable energy funding remains viable in the long-term. Meanwhile, small-scale programs tend to encounter difficulty in accessing financial markets due to inadequate financial records and the size of smaller projects being less attractive to financiers.
In terms of the bankability of smallscale renewable projects, off-grid and micro-grid solar solutions have demonstrated the strongest potential through pay-as-you-go home systems, which make financing more secure by connecting payment with usage and lowering credit risk in the process. These types of innovations are revolutionizing the way in which investors are approaching energy distribution projects, as a new segment of low-income customers emerges and the previous method of collateral-based loans becomes outdated.