With Africa’s energy transition gaining momentum, it is critical for independent power producers (IPPs) in the renewable-energy space to adopt innovative financing models that help them to successfully scale their operations.

As IPPs transition from project-based development to building long-term, investable enterprises, access to flexible and strategic capital is crucial, advises energy sector pioneer and advocate of socioeconomic advancement Pele Energy Group CFO Matt Wainwright.

Founded in 2009, Pele was among the first 28 IPPs to be awarded power generation licences in South Africa in 2011. Today, the global renewable-energy market is merely 25 years old, with the local market even younger at 15.

“The primary goal of the first pioneers in the sector was to help banks to comprehend investing money into young technologies, such as solar panels and wind turbines, when there was a lot of uncertainty,” explains Wainwright.

This started with making the regulatory frameworks and contracts more bankable and led to the introduction of bank financing at project level, which was mainly complemented by corporate financing from large parastatals.

“Since then, we’ve seen a huge degree of innovation from development finance institutions, as well as the South African commercial banks, which have done significant work to adapt their product suite to what the market needs. And they’ve done that in a relatively short time, if you consider the age of the local sector,” explains Wainwright.

Challenges Remain

Uncertainty is still a factor when IPPs attempt to scale up from project-level financing to become sustainable enterprises.

While there are long sales cycles that require lengthy periods to generate capital returns from a development fee, IPPs must also ensure that they have enough funds to survive until a project reaches financial close and they can be remunerated.

However, because of the fast-paced evolution of the market, once a project is bankable, the equity funding is generally available, says Wainwright.

“By mid-2015, there were many equity- level products being offered by banks and development finance institutions (DFIs) to support developers by selling equity stakes in these projects. The challenge was trying to map that out into a sustainable set of cash flows with a degree of predictability that an investor or funder could understand.”

He adds that blended finance models (the combination of commercial and DFI capital) help to de-risk renewable-energy investments and attract more capital into the sector.

Blended finance can align mandates from different providers of capital. An IPP generally has three main clusters of activity that require financing – the project development stage, where funding is needed for environmental- impact assessments and grid studies; the project equity funding where the IPP is investing capital into projects; and operational costs such as salaries and overheads that require working capital.

“DFI capital is much more geared toward the developmental stage, whereas a commercial bank has a far more risk-based view and mainly takes on project equity. The hardest funding gap to bridge is the payment of overheads until a business becomes sustainable. That’s one of the missing sources of capital in the African market. It’s not an unsolvable challenge, but there isn’t a straightforward path to attracting capital, particularly if you’re building an IPP,” emphasises Wainwright.

While institutional investors in general are increasingly looking to invest in proven operators, the biggest barriers in Africa’s renewable-energy market are that the energy sector is highly regulated and IPPs are capital intensive.

“The ownership regimes are very rigid and structured, which is counter to investor interests. Investors are seeking flexibility and access to capital markets, either to attract more capital for their existing investments or to potentially sell down their interests to recycle capital into new growth opportunities,” elaborates Wainwright.

Pele is considering the recycling of capital from assets (power plants) that are operational and, thereby, de-risked. Many market participants can come in at that point without needing to take a considerable risk, as there is existing cash flow to assess; but with the rigidity of how equity is held, and because of how many projects are financed, the ability of IPPs to recycle capital is highly constrained.

Sage Advice

He highlights that embedding true sustainability and economic transformation into an IPP’s business model and business practices will attract more capital.

For example, Pele comprises Pele Green Energy, which is the group’s renewable-energy business, and its sister company Knowledge Pele, which is a research-led impact business. This allows real line of sight into the developmental impact of a renewable business in the communities that host its assets.

When building businesses around sustainability targets, Wainwright says it is crucial to take a holistic approach. The impact of advancing the green energy story is left wanting if issues such as access to clean water and a living wage are not also addressed.

He emphasises the need for emerging IPPs to dedicate their full attention to growing their business when trying to enter the market.

“It’s quite a tough business and long game. There are lengthy sale and development cycles and in the early years; you’re really putting in the hard yards to understand how everything works and how to manage development and investment risks.

“In South Africa, there are broadly two ways to grow into an IPP – focusing on investments if your skills and talents lie in financiering, and by being a developer, which involves identifying sites and securing permits and offtake agreements.”

While the second approach requires less capital, it is riskier, although it has higher payoffs.

“It’s the smart developer that converts that development equity into investments in projects and reinvests in their own business,” Wainwright concludes.