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Investing in renewable energy brightens returns in SA

Jun 01 2016 09:00
Colin McClelland

Johannesburg - A programme that’s making South Africa the top destination for green-power investments across the continent and the Middle East is not only easing an electricity crisis: returns are beating those in bonds and stocks.

The Renewable Energy Independent Power Producer Procurement Programme secured about R196bn since 2011 and will attract another R550bn by 2020, according to data compiled by Bloomberg New Energy Finance.

With state-guaranteed contracts to buy the power over the next decade - and annual returns of as much as 20% - the project is a treasure trove for money managers and private equity companies seeking growth in an economy struggling to avoid a recession and the risk of a credit downgrade to junk. An index of rand-denominated debt has lost 23% over the past year in dollar terms, the biggest decline among 31 emerging markets tracked by Bloomberg.

“It’s very hard to see getting stable returns like that in other asset classes where there’s a lot of uncertainty and yields are relatively low,” said Jean-Pierre du Plessis, a portfolio manager at Prescient Investment Management in Cape Town, whose R700m renewable energy fund is up 14% since it started in September. “The majority is long-dated debt linked to inflation, so it suits the liabilities of pension funds and insurers.”

In rand terms, local bonds have returned 0.3% after a series of missteps by President Jacob Zuma, including the firing of his finance minister in December only to make another appointment days later, soured sentiment toward the continent’s most industrialized country. Stocks have returned about 7% over the past year.

Electricity gaps

The country is tapping into its solar and wind conditions to help plug electricity shortfalls after aging coal-fired power plants caused rolling blackouts.

Metier, a Johannesburg-based private equity firm, is targeting a return on investment of more than 20% in the Engie SA-backed R11bn, 100 megawatt solar project on land owned by Anglo American’s Sishen Iron Ore, Mike Goldblatt, a fund manager at Metier, said in an interview. Metier holds 12% of the project, Engie owns 49% and the Public Investment Corporation has an 18% stake, he said.

“There’s huge demand for energy by industry and for yield by investors when there aren’t many multibillion rand projects offering private equity stakes,’’ Goldblatt said. “Renewable energy is going to dwarf vanilla private equity options because of its capital intensive nature.’’

The potential to leapfrog traditional coal-fired plants is encouraging Sanlam’s money management unit, which oversees the equivalent of R424bn, to start a fund focused on power and renewable energy in Africa, Sanlam Africa Investment CEO St John Bungey said in April. Enel SpA, Italy’s largest utility, Total SA and private equity firm Actis LLP, are among other companies that are investing in plants that will supply national utility Eskom.

“South Africa is realising the benefit of a very well thought out competitive process, with really good efficiencies around project financing and supply chains as people have got more comfortable with the risk,” Lucy Heintz, a partner at Actis in London, said by phone. “That competitiveness has been delivered to the South African consumer in the form of lower tariffs.”

Increased capacity

Private financial institutions funded R91bn, or 47% of the programme’s investment so far, with foreign investors contributing R53bn, according to government statistics. The state invested almost R32bn through the Industrial Development Corporation, the Development Bank of Southern Africa and the Government Employees Pension Fund, the statistics showed.

Total, the French oil company, is spending R2.77bn on a solar plant in the west of the country with Old Mutual’s Futuregrowth Asset Management and the Industrial Development Corporation as part of the programme’s 92 projects so far. They will increase power capacity by 6 327 MW, with a target of 17 800 MW in renewable sources by 2030. The country’s generation capacity was 44 829 MW last year.

Margins decline

Enel’s Green Power unit will spend about R26.67bn by 2019 into installing 1 200 MW of wind and solar power generating capacity in South Africa, country manager, Lamberto Dai Pra, said by phone from Johannesburg. The company is earning between 10% and 20% on its investment, he said, declining to be more specific.

“Even though margins have declined, South Africa is still attractive for investment because it’s growing, though slowly, and needs energy and has very good sun and wind resources,” Dai Pra said.

“The regulation that set up the national tenders is an example for African and other countries.”

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