Friday, March 22, 2013

South Africa : Reaching financial close in emerging markets

Considering that South Africa has certainly proven to be an attractive market, how are companies closing on financial deals in this market? And how can CPV companies learn a few tips and insights as what to expect as the technology gains momentum in this exciting developing PV market.

The renewable energy markets in Europe and the U. S. have been experiencing a challenging period due to the economic crisis in some of the traditional key markets such as Spain, Italy or France, and to some extent policy uncertainty in the U. S. also adversely impacted the progress. European governments have also cut back the feed in tariffs and support regimes in response to growing fiscal pressure.

In such scenario, it does not come as a surprise to see developers of large-scale solar power projects turning to emerging markets to strike deals. Over the past few months, the solar PV industry has witnessed some mega deals and South Africa has definitely featured in the list. Not surpisingly, developers, owners and operators of solar PV projects are constantly assessing markets where policy, demand, and risk are acceptable to investors and lenders.

For instance, Globeleq reached financial close for its three renewable energy projects including two solar PV projects late last year. The company is the majority owner and strategic equity investor in the 50MWp De Aar and 50 MWp Droogfontein PV projects in the Northern Cape. Another company, Johannesburg-based BioTherm Energy, too, closed on the financing of two solar PV renewable energy projects in November last year.

Reaching Financial Close Despite Initial Hurdles

As Globeleq states, its projects are among the very first renewable independent power producers (IPPs) to be implemented in South Africa. The company expectedly faced hurdles.

“Being first always has its challenges and it took considerable time and effort to complete the development, design, contracting and financing for the projects,” says Mikael Karlsson, CEO of Globeleq. He also added, “Globeleq’s experience with the REIPP (renewable energy independent power producer) programme and its key stakeholders was generally positive although the continuing delay of financial close created extra pressure on sponsors, lenders and suppliers.”

Globeleq leveraged on its partners, multi-functional deal team and combined the best international practice learnt in the European PV markets with Globeleq’s experience in power generation in emerging markets
The projects are now in construction and scheduled to commence operations in 2014, says Karlsson.

Marc Wright, senior associate, BioTherm Energy, mentioned that while closing the two solar renewable energy projects the company ensured that the EPC contract was balanced in respect to risk and also the flow through principle was applied to all agreements, ensuring that the sponsors’ risk was mitigated. “A similar approach was applied to the financiers of the projects,” he said.

Screening of a PV Project

Referring to screening of a PV project, Wright says a full financial model is required, to ensure that debt covenants and equity requirement are met. Once all requirements are met, a sensitivity analysis is completed to understand the project dynamics.
SolarReserve’s vice president of PV Development, Joel Link, says project economics drive the investment decision at the Sponsor level. The impact of financing parameters (including gearing) have a direct impact on the equity IRR and are a central part of the project screening process. “Lenders will set the gearing at a level that produces market acceptable debt service coverage ratios (DSCRs). Cash flow stability and predictability is a major driver for sizing DSCRs,” says Link.


Solar PV companies have managed to align their business model and operations in a way that attracts investors. One way to do that is to ensure that your investor can invest in projects that meet their return and risk profiles.
“A fully wrapped project with a single counterparty provides comfort to lenders in the event of non performance assuming the vertically integrated entity is credit worthy,” says Link.
“From an equity investor point of view and in the context of the South African market, we believe that there are a number of essential aspects which a PV project needs to demonstrate to attract financing from equity shareholders and lenders,” says Karlsson.

These include:
  • strong irradiation combined with the optimal technology choice,
  • high quality design and development which supports net capacity factor and ultimately strong project cash flows, iii) credible sponsors with a proven track record,
  • strong project contractual structure, and
  • strong regulatory framework which supports tariff sustainability.

“In our view most solar projects in South Africa are being developed by solar companies who are not vertically integrated and need to partner with larger investors with established track record in order to succeed in the complex and competitive REIPP programme,” says Karlsson.

Project Financing

Project financing has been extensively used around the world, especially in the power sector, for over two decades. The challenge is in applying project financing structures into new markets and countries where key stakeholders often lack the experience with project finance and renewable energies.
In South Africa, this created many challenges and an extensive education process of many of the participants, according to Karlsson. In addition, the lack of resources and expertise available in the market due to this being the first time, created several bottlenecks, particularly among lenders, lawyers and some technical advisors. The tight deadlines imposed by the REIPPP to the 28 projects further exacerbated this challenge, pointed out Karlsson.

For its part, from the outset Globeleq had assembled a team of qualified lenders and transaction advisors. The company also leveraged on its experience in developing and operating green-field power plants in emerging markets.
As in any transaction, costs must be carefully managed to ensure an efficient, timely and cost effective closing process. It is also good practice to ask each transaction advisor to appoint a lead person who takes responsibility for the delivery of the services. Under project financing the financial modeling process takes on a pivotal role since it forms the basis upon which lenders and equity investors provide financing. The model structure and logical integrity must be audited however it should always be borne in mind that the cash flows predicted by the model are only as good as the inputs and assumptions made.

“Solar PV is a relatively new technology, at least at the utility scale in Africa, and therefore there is greater uncertainty around some of the long term assumptions (e. g. solar resource correlation or degradation). Hence it is even more critical that these assumptions are supported at an early stage in the process by sound benchmarks and external third party recognised studies,” says Karlsson.
It is recommended that the best way to structure the team is to have an integrated, multi-disciplinary deal team. It is essential to have good communication between all the different members including lawyers, accountants, model auditors, technical advisors, insurance advisors, and lenders. Previous experience of the lead sponsor in project finance and renewable energy is essential.

In terms of the EPC and O&M contracts it is important to negotiate them as a whole rather than in isolation from one another. In the South African context, it is also important to have clear binding offers from contractors before the bid and keep a reserve bidder to maintain competitive tension.
Negotiating a fully wrapped EPC contract will cover majority of the risk during the construction phase. Risk mitigation includes allocating risk to appropriate parties, extensive insurance cover in place, etc. During the early operating years of the PV plant, the EPC contractor also acts as the O&M contractor to ensure that there is a follow through of the obligations and liabilities under the EPC and O&M contract.

CPV making progress towards grid connection

As previously reported by PV Insider, Pele Green Energy, one of the 28 preferred bidders in the first round of South Africa’s Renewable Energy Independent Power Producer Programme (REIPPP), started earlier this year the construction of a 36 MW solar CPV power plant in the Western Cape. CPV specialist Soitec won the contract to provide the modules for the plant.

Group Five is the engineering, procurement and construction (EPC) contractor for the project. Construction of the R1.8-billion plant, which will be one of the largest solar CPV plants in the world, will take 14 months to complete, said the report.
Pele Green Energy executive director Obakeng Moloabi, was quoted in a local news report saying that the construction deadline has been extended, but the company is still aiming to reach completion by June 24, 2014. He said that the South African government has incentivised all companies involved in the first round to start feeding power into the national grid as early as possible. “Once the plant is 50% complete, we can start feeding power into the grid,” he said.

Find more information on our activity on our website.