New opportunity for renewables entrepreneurs via RMB and German development grant

LONDON — Renewable energy is a double gift to the world. The obvious one is the impact of renewables replacing carbon spewing or unsafe alternatives. The other is the progressive benefits of technological advances which keep reducing the cost of solar, wind and other natural sources of energy. As lower production costs work through, it removes the catalytic imperative of State support. RMB has been among the first to recognise this trend with its FIRST project applying grant aid from Germany’s national development bank as leverage to support a fleet of smaller renewables companies. RMB’s Amber Bolleurs shared the story. – Alec Hogg

This special podcast is brought to you by RMB. I’m with Amber Bolleurs, Transactor at RMB IBD at the RMB headquarters which by the way is undergoing some renovations at the moment. I guess it just shows how the Group is growing and getting more people here. Amber, what area do you focus on?

I’m in the Infrastructure Finance team within the broader Investment Banking division of RMB.

We’re going to talk today about something called FIRST (Facility for Investment in Renewable Small Transactions). Renewables have been a particular area of focus for RMB over the past few years.

Absolutely. RMB got involved in the renewable energy programme when it was promulgated under the Integrated Resource Plan back in 2011. To date, there’s been four rounds under the larger renewable energy programme and RMB has participated in all four of those rounds.

It’s been widely acknowledged internationally as having been a huge success. Yet recently, it appears as though the government is stepping back a little.

Yes. We’ve had some very successful rounds to date. The most recent being round four. We’re waiting to see whether the PPA’s will be signed under that round. We believe that it’s made a significant contribution to our energy mix in SA and RMB will continue to support government’s original plans around renewable energy.

Amber Bolleurs

What’s PPA?

PPA is a Power Purchase Agreement.

How does that work?

Basically, it’s an agreement which is signed between the IPP (Independent Power Producer) and the government. In this case, Eskom, which is the state-owned enterprise that signs the PPA, which is then a government guaranteed purchase of electricity from the IPP.

That gives the investors some kind of guarantee, but the way that renewable energy is becoming cheaper and cheaper around the world, there is going to be a time no doubt, when that guarantee is no longer necessary?

Sure, it’s possible. It’s a hypothetical question around the ability (in the SA context) for Eskom to meet its obligations under the PPA. If the broader investment community gets to a point where it feels that that is the case, then it is possible that a traditional government guarantee wouldn’t be required.

I say that because in the UK it’s already happened where new renewable plants are going up without the guarantee. So, we’re moving in the right direction, but the interesting part about all of this is that the government, or Eskom (in particular), has stepped away. It was recently announced by now the ex-Minister of Energy that there would be no more new agreements until the Integrated Resource Plan has been finalised. Just explain and unpack what’s going on there.

That’s correct. There seems to be a bit of a disconnect between the original plans the Department of Energy had around renewable energy and Eskom’s plans forits sources of energy to the national grid. The disconnect lies between the Department of Energy (still seemingly to support renewable energy) and Eskom preferring to follow a ‘wait and see approach’ around signing more PPA’s until they have a better idea of what the Integrated Resource Plan will look like, and what their energy supply needs are going to be in order to meet demand.

So, you’ve got, within all of this, FIRST. Explain how that works.

FIRST is the brainchild of KFW Development Bank. It came about when the German Government issued grant funding (with certain stipulations attached to it) to the German Development Bank (being KFW). In this particular case, the stipulations were that it was to be used in SA’s renewable energy programme – with a specific focus on small independent power producers.

So as part of the broader renewable energy programme there was a 400-megawatt allocation for the small independent power producers, which are really classified as the SME corporates in SA. The intention for that allocation was to support inclusion of local manufacturers who may not be internationally accredited, but would like to partake in the broader renewable energy programme in SA.

Signage seen outside the headquarters of Kreditanstalt fuer Wiederaufbau (KfW) in Frankfurt, Germany. Photographer: Axel Seidemann/Bloomberg News.

Grant funding sounds like it’s a gift.

It is to a certain extent. It does come with stipulations though, but it is very attractive funding that’s allocated to KFW, which KFW then deploys in accordance with their government’s stipulations into the country.

How big is it?

The allocation for FIRST is €14-m, which is the initial allocation. Then there’s an additional €10-m on top of that, and a €5-m technical assistance facility, the details of which we can come to.

So, you’ve got this chunk of money, which has been gifted by the German Government with particular conditions attached, that makes it easier then to bring in new, smaller players into the whole renewable sector.

Hypothetically, yes. KFW really was at a crossroads where they could either take that funding and deploy it directly into the small independent programme or they could encourage larger corporate and investment banks in SA to take an interest in these smaller projects.

A typical small renewable project, with total project costs might range between ZAR80-m and ZAR120-m. So, €14-m or let’s say at today’s rate, ZAR230-m, would only really fund two or three projects maximum.

Flag map of Germany

These projects are traditionally quite hard to fund on a stand-alone basis. In doing so, we came up with a fund concept where KFW could provide a first loss piece, which is their €14-m. Then they attracted a senior lender to provide the broader senior debt portion, which is where together we came up  with the FIRST Fund, which really is a ZAR1.3-bn fund – funding being made available to fund small renewables.

So, you’ve taken their grant. You’ve put that into what you call a first loss, so if the money you lend out is not repaid that will be used to square the books as it were?

Absolutely. By putting it into a fund and creating a first loss piece you are giving a senior lender a diversification benefit of having funded say, 15 projects. In addition to that, if there are any non-payment or other defaults from the projects that FIRST has funded, as a senior lender you are senior in the cashflow waterfall and have a buffer that’s created in cash flows with the first loss. That will absorb any of the initial losses, related to those projects.

So, it’s making the German Government’s money go further?

Absolutely.

Now, you’ve got ZAR1.3-bn that you can use and lend out to players in this field. How do you start selecting them?

Part of the reason for having a fund and, also part of the reason why corporate and investment banks haven’t been interested in these small projects, is that it requires the same amount of effort to originate structure and negotiate a ZAR100-m project as it does a ZAR1-bn project. The level of detail that is required is exactly the same, so corporate banks tend to stay away from getting involved.

KFW went out to tender and found a fit for purpose fund manager, who in this case are nominated as EWF Partners. This fund manager consists of two previous project finance experts in the field in SA that have come together with the BEE Consortium to form this fund manager. What they will do is look after the interests of FIRST. They would typically assume a traditional transactor role for the debt fund itself and go out and originate these deals. They will structure them and submit the credit application to the FIRST credit committee. They will then negotiate legal agreements and ultimately monitor those projects post-close.

Okay, it sounds very complicated. Lots of big words thrown in there. Just unpack that real basic. You’ve got someone in between those who want to go and borrow the money so that the big banks don’t have to invest all of their time and energy in smaller projects, which is not really their expertise?

That’s exactly it. The interface that we have put in place, being EWF in this case, has the skillset of the larger banks to perform that role. So they are performing it to the same level and standard which a corporate and investment bank would expect. It allows corporate investment banks to focus more on the larger transactions, while still having exposure and still incorporating and participating in a small renewables programme.

How far along the road is FIRST right now?

We’re just about to reach financial close. There’s the last few CPs outstanding, but we are literally weeks away from being able to begin structuring our first transaction.

So, that would mean them calling for those who would like to borrow from the Fund?

Yes, that’s correct. We’ve already started investigating potential projects that we think could benefit from a FIRST senior loan and started working around different aspects such as pricing and structuring around those projects. I would say we are a few weeks off from engaging the market.

Typically, what would those projects look like? Solar, wind, or anything particularly in that field?

Under the small independent IPP programme they allow for onshore wind, solar PV, biogas, biomass, but I think from a FIRST perspective we would focus particularly on solar PV and wind.

Why is that?

The technologies are proven technologies in the SA context so, it makes it easier from a funding perspective. It’s also a known technology for the investment banks who already have quite a lot of exposure in the SA context.

Of course, the next important part is that if Eskom is not going to be buying the power then who is?

With the announcement of the former Energy Minister, we were probably about halfway through the structuring of the FIRST Fund and we realised that we can no longer rely simply on supporting the small independent power producer programme led by the DOE.

We have since broadened the scope of the FIRST Fund to consider projects that are led, still on a small basis, but with the municipalities, metropolitans or industrial and corporate clients who are looking to possibly have an Independent Power Producer manufacture power for them from a “captive power” perspective.

So, they would then give their own guarantees, these smaller purchasers, in the same way as the government would have in the past?

They would sign a PPA with an Independent Power Producer or the project, in this case the smalls project, which is a similar format to what Eskom would sign with an IPP in the larger renewable programme. So, it’s really an agreement to purchase power that IPP manufactures.

Is there a lot of demand?

We think that there is. We’ve identified quite a few in the municipal-led space with their smalls programmes. As we understand it, there are 10 bidders in those programmes that we think would be good targets for the FIRST Fund. The trend to move towards green energy initiatives these days could generate a lot of impetus for corporates to think about green energy and also diversify their source of energy in SA going forward – ever mindful of the Eskom tariff increases that are likely to take effect sometime in the near future.

Read also: German Energy Minister Baake tells SA: Build your renewables – dump nuclear

So, Amber, let me just understand this. If you are a corporate looking ahead and nervous about the way that Eskom tariffs are going, you can hedge yourself against it by buying say, 10 megawatts supply from an independent producer as part of the whole FIRST Fund?

Theoretically, yes that’s correct. The FIRST Fund would basically advance a debt tranche to a project which could provide you with that energy level.

Who’s going to be the provider of the energy? Who’s going to actually be building it?

It will be the sponsor of the project, who, in this case would be small to medium business enterprises in SA, and there’s a number of them. They’re quite diversified. For confidentiality reasons I won’t mention them at the moment, but there are a few sponsors that have come forward to say that they’re interested. They have been looking at providing IPPs on a private basis to private offtakes as opposed to Eskom and, ultimately, the government.

Read also: What Zuma, Eskom can learn from Germany’s nuclear-free “Energiewende”

So, these would be like little Eskoms?

Yes. If we are talking, Captive Power, these are basically a mini-generation for a single offtake that is ring-fenced to that offtake, so they don’t plug into the national grid.

And the funding that they would require, presumably, is for the capital to invest or to buy the solar panels, etc?

That’s correct. The project company would estimate via a financial model what their total project cost would be and then through that we would agree an appropriate capital structure. The FIRST Fund would then provide either the senior or mezzanine tranche in that particular project.

Are these companies around, at the moment? Are they doing business?

Yes. There’s also a few of them who might partake on a small scale perhaps in the larger, renewable energy programme alongside other larger sponsors, who would be able to participate on a standalone basis, under a smalls programme.

So, what this would be doing then is give them the opportunity to perhaps expand the market?

Absolutely. A smalls programme is really all about inclusion and diversification, and FIRST is really there to help facilitate that.

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