JOHANNESBURG — South African Energy Minister Jeff Radebe recently signed agreements with 27 independent power producers after more than two years of delays. The deals promise to revive the nation’s renewable-energy program that was once the world’s fastest growing, but has floundered amid the delays. The projects being signed will release R56 billion of investments over the next two to three years. Roggeveld, a 140 megawatt wind farm project recently reached financial close under the fourth round of this programme. Biznews’s Alec Hogg caught up with RMB’s Mphokolo Makara to get inside this R4.4bn deal. – Stuart Lowman
This special podcast is brought to you by RMB. Today we’re going to be talking to Mphokolo Makara, a Transactor at RMB about the Roggeveld Wind Farm Power Project.
Mphokolo, good to speak to you. Just to give us a little bit of background about Roggeveld. Where exactly is it?
Roggeveld is a 140-megawatt wind farm project situated in the Karoo, that was developed under the SA Renewable Energy Independent Power Producer Procurement Programme (REIPPPP) driven by the Department of Energy with Eskom as the purchaser of power generated from the power plant. The key sponsor for this project is Building Energy, a long-standing client of RMB. PIC acted as equity investors into the project, along with Old Mutual, H1 Capital and a Community Trust, known as the Roggeveld Wind Power Trust. It was a big milestone given how the Renewable Energy Programme had developed in the country over the past few years.
How big is it?
The project generates gross energy of around 147 megawatts, of which 140 megawatts is sold into the grid to Eskom. From a project cost perspective, the project cost R4.4bn.
Those are big numbers. Just to give us an understanding. A wind farm – are these big, modern windmills, those three-bladed contraptions that one sees dotted, pretty much all over Europe?
That’s pretty much it. These three-pronged blades drive Nordex turbines. They are quite common across Europe and more recently in SA as a result of various projects having been developed since the first round of the REIPPP Programme.
So how many of those turbines are included in this Roggeveld project?
We effectively have 47 turbines – 40 of those are 3.15 megawatt turbines, and seven
3 megawatt turbines.
So you’ve got 47 of these individual structures, modern windmills, if you like, in the fields?
How big is the area that they take up?
It’s pretty big. As you can imagine, you need space to put up the masts, on top of which these turbines and the wind blades are erected. Then you also need adequate space in between each mast to make sure that you don’t get a disturbance of the wind shear, as they call it, across each of these separate turbines and masts.
We’ll get into the funding of the project in a moment, but is the Roggeveld area very windy? Is that the reason why it was selected as the venue for the farm?
That’s pretty much the reason why we funded Roggeveld. The site is situated within a nice channel of wind, which gives it one of the highest wind speeds in the country.
Because we do hear from people in other parts of the world to say that SA is blessed with its natural energy resources, wind clearly being one of them.
Yes. This project was lucky to procure a site that has this advantage.
The site is one thing, the wind is another thing, but the third thing is to have a relationship with the buyer and how does Eskom come to the party here?
I’m not sure how familiar you are with the REIPPP Programme. The Programme was spearheaded by the Department of Energy to get a long-term strategic view of what the country’s energy needs are, and how those energy needs will be met in terms of different technology and resources.
Historically South Africa has predominantly generated most of its power using coal. The world has since become a lot more environmentally cautious and conscious, which is why renewable energy is becoming a part of the energy needs of the country.
Government has been driving REIPPPP since around 2011 when the first round of renewable energy projects started. It has since been driven systematically with different allocations being awarded under each round, up until this fourth round that we’ve just closed.
Eskom as a state-owned entity, is responsible for generating power in SA, which will purchase the power and therefore, have an obligation to make payment to the Power Project. There is an element of Government support, which is through the Department of Energy and ultimately, the Minister of Finance, to specifically cover the eventualities for payments that are due to the Power Project.
You’ve got a guaranteed purchaser on the one hand in Eskom and a guaranteed supply that comes out of the Roggeveld Wind Farm, but you now need to put that R4.4bn together. How do you as a banker look at a project like this? Where do you start?
You are very right in the sense that for us to put down the amount of funding required, there needs to be a level of comfort that the project itself can generate the contracted capacity that is due under the Power Purchase Agreement that they would sign with Eskom. Coupled with that is a thorough credit analysis to establish whether Eskom can actually afford to purchase this power over the term of the Power Purchase Agreement. Underpinning these aspects would be to make sure that there’s a primary demand for the power which has been determined by the Department of Energy in terms of the country’s power needs.
In order for us to put together funding for this project, we are cautious that Eskom can pay the payments that they need to within the power purchase agreement period. When you’re looking at the asset life component of the project and the equipment that make up the wind farm itself, you are looking at an average use for life of let’s say 20 to 25 years.
Given the long-dated tenor that you’re looking at and exposure from a debt provider to this project, you want that certainty that Eskom will still be around, over virtually the 20-year PPA term. Coupled with the support from Government it enables one to take a relatively longer-term view than you would ordinarily take for, let’s say, commercial debt advanced to a corporate.
So do the funders look for a higher return for those who are putting the money in, the R4.4bn, than they would get, say from a corporate bond?
Not really. I think it will be the function of the types of funding instruments that you put into the project, which is also then driven by risk and return. So, for example, not everybody will have appetite (using Roggeveld as an example) for a three-year construction period. This means during the three-years there will be no cash flows being generated because the plant hasn’t finished construction and you will only start generating cash flows from year three onwards.
So, I think it pretty much depends on the funding risk appetite for wind technology, compared with, I guess, if you were to lend to a corporate. I don’t like putting any specific company in the spotlight, but if you for example lend to a corporate, you have to know the level of certainty that you’re going to get your money from day one effectively. So, it all depends on what your risk appetite is.
We find that with projects of this nature, some commercial banks and some developmental finance institutions (as was included in the Roggeveld transaction) have an appetite for the long-dated construction risk before they can start seeing cash flows coming in, from year four, which is the first year after the three-year construction period.
All right so that’s the complexity of the whole packaging and you’ve done a lot of these at RMB, in the renewables area. Is this a particular focus of the bank?
RMB is quite large. Our infrastructure finance team’s expertise and appetite lies in funding infrastructure projects in the energy sector such as Roggeveld. We also focus on other infrastructure sectors like roads, ports, airports and the logistic sectors. Anything that has hard infrastructure above ground is what our specific product area has appetite for.
And it is an area that is going to continue to grow. I was reading in The Economist a couple of weeks ago that SA pushes out as much CO2, in fact more CO2 than the UK, which is eight times the size of the economy. It’s clear that those carbon emissions, at some point in time, have to be throttled back. The way you do that is expanding renewables, but SA has got an incredibly good, or a widely admired renewables project around the world, or certainly did. Is that still the case today? Do other countries still come to SA and see the way that the renewables are being put together and perhaps replicate it?
I would say yes, although different markets are probably at different levels of evolution when it comes to renewable energy. We’ve certainly seen a lot of international interest in our market – specifically coming from the project sponsors and developers. I guess the bulk of those are coming from international markets where the activity in their respective renewables markets have developed and they are now looking for opportunities in SA.
I guess for them it makes sense to invest in a country where there is a prolonged trajectory and continuity of the programme. Added to that is the view that you will probably gain more economies of scale in terms of returns as opposed to just investing in one project, which I think is slightly more risky.
Just to close off with, from a broader perspective. Soon after President Cyril Ramaphosa became the President of the country, I think it was within three days that he appointed a new Energy Minister and immediately thereafter the renewables project. The latter which seemed to have been on hold for a while, was kicked back into gear. Is that a relevant issue for you? Were you having to stand on your hands until that occurred?
I guess. We have been involved in this transaction since August 2014, we are now in 2018. The preferred bidder was awarded in 2015, so there has been a time gap of at least two-and-a-half to three-years since the preferred bidder was announced. A level of uncertainty is never good for anybody, whether you are a sponsor, a lender, or a funder in any form because you always want to see continuity. I guess not every investor or funder is ready to sit through such long-dated gaps or low levels of activity in sustaining themselves, in taking a view on building a sustainable business portfolio in the country. The announcement that came through in December and the development was very welcome. Given the timeframe between the announcement in December 2017, and actually reaching financial close in April this was certainly very welcome for both of us, as the financier to the project and I’m sure for the sponsors as well.
Well, another dividend of Ramaphoria perhaps with the policy certainty, giving the international funders, as well as the SA funders the confidence to go ahead with ZAR4.4-bn Roggeveld Wind Farm. This special podcast was brought to you by RMB.
May 29, 2018