Renewable loan costs falling

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Costs to fund renewable-energy projects in South Africa are falling as companies bid for wind, solar and hydropower plants in Africa’s biggest economy, where electricity supply struggles to match demand.

Potential investors are vying for R120 billion of the government’s renewable-energy projects, according to Nedbank Capital, which has loaned about R9 billion so far to fund construction. The Department of Energy will receive bids equivalent to about 9,000 megawatts for a 1,200- megawatt offer by today’s submission deadline, the Johannesburg- based lender said. It’s the third round of bidding for a total of 3,725 megawatts to be added to the national grid by 2016.

“As we moved through the bidding rounds, we’ve gotten more comfortable to reduce the debt returns on the projects, bringing them down,” Mike Peo, head of infrastructure, energy and telecoms at the Nedbank Group Ltd. unit, said. “It is good, sound bank lending. We do make good economic returns on the debt side.”

Soitec SA, a Bernin, France-based maker of semiconductors, issued R1 billion of notes paying a coupon of 11% on April 30, making it the only project-specific bond in South Africa. Investors demand a premium of 412 basis points to hold Soitec’s local-currency notes rather than South African government debt due December 2026. The difference asked to hold St. Peters, Missouri-based SunEdison Inc.’s $550 million of notes rather than similar-dated Treasuries narrowed to 676 basis points from 1,323 basis points on Nov. 16.

Yields climb

The yield on Soitec’s notes climbed 166 basis points since the sale to 12.5% on Aug. 15. The proceeds were used to fund a €140 million ($186 million), 44-megawatt solar-power plant near Touwsrivier in Western Cape province. The majority of projects Nedbank Capital will lend to would be priced at rates lower than Soitec, Peo said.

As state-owned utility Eskom struggles to meet demand with mainly coal-fired plants, South Africa’s investment in clean energy increased more in 2012 than any other country, rising 206-fold to $5.5 billion, according to data compiled by Bloomberg. That beats spending by Brazil, France and Spain.

In 2008, blackouts halted output at factories and mines in the world’s largest platinum producer for five days. On Aug. 12, demand for electricity outstripped supply by 0.5%. forcing Eskom to ask some of its biggest customers to reduce consumption. The power shortage is hampering the growth of the economy, which is forecast to expand 2% this year, according to the central bank, the slowest rate since a 2009 recession.

Worst performer

South Africa has a power-generation capacity of 41,900 megawatts, with 80% coming from coal-fed plants, according to Eskom. The utility paid R2.9 billion, or 83.6 cents per kilowatt-hour, to independent power producers and municipalities for electricity in the year ended March, contracting 1,135 megawatts of capacity from IPPs, it said on July 10.

Yields on government bonds due December 2026 rose 8 basis points, or 0.08 percentage point, to 8.48% as of 11:40 a.m. in Johannesburg, the highest in 16 months. The rand lost 17% this year against the U.S. currency, making it the worst performer among 16 major currencies tracked by Bloomberg. It had weakened 1.15% to 10.1736 per dollar by 15:34 on Monday.

“Every South African bank is heavily invested in this programme,” Peo said. “We’re lending for tenors of between 16 and 18 years in each project, which are very long tenors for banks. This is reflective of the confidence in the underlying projects and the risk structuring.”

Government programme

Nedbank Capital is supporting 32 bids with a project value of R35 billion in the round of bidding that ends today, as well as the R9 billion of debt provided in the first two rounds, Peo said. He declined to give details on the terms of the loans.

Interest in the projects is “driven by the government’s programme to buy clean energy from independent producers,” Joanita Roos, a Cape Town-based research analyst at Frost & Sullivan Inc., said on Aug. 16. “This creates an environment in which investors are secured in the price and the volume of megawatts allocated to each renewable energy technology.”

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