Kevin Shames: Geysers, batteries next big opportunity in exploding renewables sector

Former hedge fund manager Kevin Shames moved into the renewable energy field a few years ago, spotting the power of combining Government incentives with massive opportunity arising from the changing energy equation. The resulting creation, Bright Light Solar, is now a leading 12J company which is able to offer South African investors an effective 21% a year after-tex return. In this podcasted interview, Shames shares some interesting reactions to the recently released prospectus, and discusses the opportunity of solar-powered geysers. For more information from Shames and his team, click here. – Alec Hogg

This interview is brought to you by Bright Lights Solar and its chief executive Kevin Shames. In the past few weeks Kevin has spoken about the opportunity of the 12 J fund tax incentives and benefits, which offer a  20% plus after tax return. You brought out your prospectus after our last chat, what has the reaction has like.

The response has been fantastic with potential  investors asking incredible questions and even one potential investor going through all 170 pages with Kevin. The goal is to ensure that everyone understands what the offering entails and the legal agreement that backs it up.

So the return is generated by tax incentives the government is offering?

There are three components; the first is an upfront tax incentive which is the section 12 J incentive. The second is we pay semi-annual dividends from the very first year. So should someone invests in February 2020, they will receive their first dividend for the period ended August 2020, and thereafter and every six months. The final component is if an investor wishes to sell, liquidity will be made available to them from the beginning of year 6. These three components combined provide an investor an ROI of 21% after tax.

So the minimum time that you can reinvest for is six years. So it’s not a quick way to organise to pay lower taxes. What is the maximum term you can invest in?

One can invest in this for a maximum of twenty five years, which we recommend. One of the advantages is it’s a highly predictable future cash flow, which is especially beneficial for estates or investment planning purposes  because of the cash payment every six months. We can forecast that with a reasonable degree of accuracy because it is contractual. Furthermore we know roughly how much sunlight we get in a year. The only uncertainty is the tariff because our purchase agreements are linked to the NERSA escalations.

Who do you sign agreements with?

Agreements are typically signed with trustees of Sectional Title body corporates, commercial, industrial and agricultural customers and that is a contract that binds them to buy power from us over a long term period. The term is typically negotiated between the parties. If a customer wants to achieve the quickest form of ownership for the shortest period, the initial tariff will be higher with a higher escalation. If they want the lowest cost of electricity there is an option to push the term of the contract out to as long as 25 years without any capital outlay from their part.

Do you put in the  solar panels?

Yes. The capital that we raise from investors we use to install the solar equipment and that then is used to sell the electricity to the customer over the long term.

If you look at the power problems South Africa has, it’s surprising that there are not many 12 J companies offering fantastic returns like yourselves, doing exactly this?

There are some other section 12 J companies involved in renewable energy. It is interesting however to see that there isn’t anything listed on the JSE where you buy an investment that provides you access to these cash flows from long term power purchase agreements. These are wonderful investments for individuals and institutions due to the predictability of future cash flows.

And these returns are very high, people are quite happy often to go into a utility that gives them 5-6% as long as it’s guaranteed. But there is another string to your bow and that’s solar thermal or replacing geysers I guess with solar. Is that a completely different area?

In 2018 and 2019 our mandate restricted us to solar photovoltaic installation, which is plates that generate electricity from the sun. However, we can now use alternative forms of renewable energy to broaden our mandate. The first one is solar thermal which is using heat from the sun to generate hot water. This is a “use it or lose it situation” if you don’t have batteries. In other words if you generate electricity and that electricity isn’t used you lose it. However with solar thermal, it comes with a built in battery, which is water. So we can make the electricity consumption far more efficient by using the heat from the sun to provide a hot water solution to our customers. With no upfront capital cost we can supply and maintain hot water at a price substantially lower than it would have been paying to their local utilities to heat their water themselves.

You are doing this deal in the same way as you are doing the solar panels with the body corporates of an estate?

Exactly. Furthermore,  we intend bringing atmospheric water generation to these customers as well and what that is, is extracting potable filtered drinking water from the water vapour in the air through technology that allows us to capture this water and deliver filtered drinking water to our customers, which is a totally off the grid solution, that will be available later in the year. We estimate that will probably be available in six to eight months time.

Kevin Shames is the CEO of a Bright Light Solar and this special report was brought to you by bright lights solar. For more information from Shames and his team, click here.