Creative project finance: South Africa’s unique funding package

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    By Tom Nevin in Johannesburg
    South Africa will make its first foray into concentrated solar power (CSP) when Abengoa’s groundbreaking tower and parabolic trough installations come online in 2014.

    The deal struck between Spanish solar company Abengoa and the South African government’s Industrial Development Corporation (IDC) entails a 51%-49% shareholding in favour of the Spaniards; the IDC’s 49% includes 29% direct equity with a 20% stake to be held in preferences shares for local communities.

    Re-writing the project finance book

    It rewrites energy project deal-making on a number of fronts, particularly with the inclusion of a black economic empowerment component. The Power Purchase Agreement governing the deal will be backed by the National Treasury and signed by state-owned utility Eskom.

    The deadline for settling the nuts and bolts of the monetary aspects is end of June this year. Abengoa business development manager Pablo Infante, however, is confident that it will be wrapped up before then.

    The Abengoa CSP installations in South Africa will be more advanced than those constructed in Spain using technologically superior dry cooling, deploying steam superheating and reducing water consumption by 80%. The 50MW tower plant will be located on a 600-hectare site close to Upington, also in the Northern Cape Province while the 100MW parabolic trough plant, will have storage capability for 3 hours, and will be sited on 1,100 hectares near the town of Pofadder, also in the Northern Cape.

    An average of 600 construction jobs will be created during the construction period and around 35 full-time plant operations employees will be hired.

    The government-owned Industrial Development Corporation (IDC) took a shine to the project and consequently, a heavy financial interest. The deal-clincher was the promise of an economic boost to the remote semi-desert Northern Cape region, and the fact that the plants will hook up quite easily into the national grid.

    According to Rentia van Tonder, head of the IDC’s Green Industries division, the cost of CSP installation is “massive”. As such, the keystone of such a project is strong partners, “especially considering the technology involved”.

    Techno-wary

    A major challenge to sourcing finance in South Africa is the absence of potential partners that have funded CSP in other parts of the world. Van Tonder explains that, while trough technology is more developed than tower, the IDC found that South African commercial banks remain unconvinced that trough technology is “proven enough for them to come to the party”.

    This leads Van Tonder to believe that in CSP there is a significant role for DFIs, development finance institutions like the IDC, development banks and other such financial institutions because of their inclination for the development aspect of the project.

    In addition, many CSP projects can be based in the poorer rural area in need of infrastructure development, upgrades of the distribution lines and social investment. “And that’s more the appetite of DFIs than commercial banks,” she says.

    The Northern Cape Province is sparsely inhabited, rain deficient and economically unfriendly although some mining and stock farming pertains. That bleak picture hardly seems conducive to large-scale electricity generation.

    “That’s true enough,” concedes Van Tonder, “But what we want to see in South Africa is national energy development with big investment in those rural areas to alleviate high poverty and unemployment, and where generation would also feed into the national grid.

    “CSP is not the solution for remote small rural towns where 2MW would suffice. It is driven from the national grid perspective where we would like to have remotely-located base load type electricity feeding in nationally to support the whole country.”

    Van Tonder also likes CSP’s storage capability that adds to its propensity for hybridisation, noting that most solar-fossil hybridisation occurs with photo-voltaic. “What’s nice about CSP,” she says, “is that you can add the storage side which makes it base load energy. That makes CSP an opportunity although right now the add-on factor is biased towards PV.”

    Investment squeeze

    The IDC’s green energy chief says her organisation has calculated that over the next five years, according to the South African energy department’s integrated resource plan, IRP2010, about R500bn (US$65bn) would be needed to develop the required megawatts in wind and solar up to 2030.

    “If you look at Round One of the bidding for the renewables quotient,” she says, “you’ll detect very aggressive moves by the commercial banks trying to get into the debt space. Will that be the case in round two and round three? I’m not sure, because of the state of the foreign credit market.”

    She suggsts that in such a scenario, the government may raise climate change money via the National Treasury, which it will make available to the IDC, the development banks or other institutional sources.

    Climate change money is one source of funding to take CSP forward in South Africa in terms of more R&D and further installation. But it is nowhere near enough and much depends on whether or not development banks can sustain their financial interest.

    The CSP community, however, is energetic and noisy and is making up lost ground. Now they need to drive their case, and to coax commercial banks and other investors back into the fold.

    To respond to this article, please write to the Editor:

    Rikki Stancich: rstancich@gmail.com
    Follow @SAAEA

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