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Financing renewable energy – lessons from India and China

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Picture: John Yeld/Files – The 60-turbine Jeffreys Bay, South Africa, wind farm can generate around 460,000 megawatt-hours a year. China’s success in renewable energy expansion can be attributed to two main factors – a stable policy environment and the mass subsidisation of innovators and manufacturers, the writer says.

By Krish Chetty

President Ramaphosa, in his address to the nation on 25 July 2022, spoke about the country’s energy crisis and the interventions needed to take decisive action to promote our energy security and “end load shedding for good”.

The President’s plan centres on renewable energy generation and procurement, describing the role of the Renewable Energy Independent Power Producers Procurement Programme (REIPPPP) and the need to introduce pragmatic regulatory measures, hoping to unleash the sector.

The REIPPPP, however, is contingent on private financing, attracting foreign businesses interested in partnering with South African businesses to establish new wind farms, solar power plants or other renewable energy entities. To attract private investment, one must recognise the concerns of the investor.

After launching a private power plant (Independent Power Producer – IPP), it can take six to ten years to supply power to the grid. The foreign partner must travel across the country surveying possible sites and search for available substations in rural areas with high wind or solar energy supply. At this stage, foreign companies with expertise in wind and solar energy seek out local partners who have knowledge of local conditions and are suitably connected.

After identifying a suitable location, the prospective partnership needs to lease the land and install wind or solar measurement equipment to predict project profitability accurately. Data is crucial to measuring one’s investment risk. Once the site is secured and the profitability models seem promising, the prospective partners attempt to solidify the agreements and begin to negotiate the business’s structure, capital contributions, a potential selling price for their electricity, and identify a suitable source of financing. All projects involved in the REIPPPP need to source financing to ensure their venture is sustainable. The question is whether the funds will be sourced locally or internationally.

Globally, the National Treasury in 2021 calculated that there is US$ 12 trillion in circulation for climate finance. However, the majority of these funds are received by the developed world. There is a complicated web of money exchanges between the World Bank, governments, development finance institutions, philanthropic organisations and commercial banks.

Funds follow a project’s risk rating, which is dependent on two key issues – political stability and data. And there is a shortage or lack of data describing the consistent supply of solar and wind energy in developing and emerging countries. With poor data collection processes, the financial sector produces inaccurate risk ratings jeopardising a project’s chances of receiving this finance. Furthermore, if the bank offers a loan to a project with a poor risk rating, the bank’s risk rating is reduced, disincentivising the bank from investing in these projects.

In addition, regardless of the project’s risk rating, accessing international finance via dollar-denominated loans further increases a new vulnerable business’s risk. Exchange rate volatility makes it difficult for a business to predict project profitability. Some IPPs have had to forgo dollar-denominated loans from development finance institutions as they couldn’t assume the risk. These IPPs have had to source loans from local commercial banks, competing with other businesses. Often, these commercial banks’ financial risk models can be outdated or not tailored to the renewable energy industry, resulting in loans with high interest repayment rates, further reducing profitability.

South Africa’s REIPPPP is also competition based. The IPPs that appear sustainable with the lowest electricity price bid and contribute to their local community are named winners, who benefit from a twenty-year power purchase agreement. However, in this instance, competition pushes the price of electricity down, making it difficult for a new and vulnerable business to remain profitable. These prices result in low rates of return for investors, who tend to appreciate faster, short-term gains. Thus, the pool of available investors shrinks to those interested in the societal impact of renewable energy development.

Green Bonds pool together finance from local investors. Cape Town and Johannesburg set up such bonds previously and found they were quickly oversubscribed, indicating the high demand for such funds. The challenge in South Africa and other developing and emerging countries is understanding what constitutes green. In South Africa, it can be argued that a project with a social development component can indirectly positively impact the climate, therefore warranting their subscription to the bond.

To date, local green bonds have not been able to satisfy the demand for finance. China and India have both introduced attractive Green Bond alternatives, making available own-currency Green Bonds in foreign markets, thereby attracting international investors. The strength of this intervention allows subscribed projects subscribed to not contend with currency depreciation. India calls their bonds Green Masala Bonds and China refers to them as Green Panda Bonds. In future, the BRICS New Development Bank could expand its role in issuing China’s Panda Bonds and collecting funds from investors in Renmimbi.

China’s success in renewable energy expansion could also be attributed to two main factors – a stable policy environment and the mass subsidisation of innovators and manufacturers. Unlike South Africa, investors had confidence in China’s policy positions. The country is currently running its 14th Five-year plan, iteratively refining its policies and ensuring that every arm of its substantial state apparatus, business and academia operates in concert. This stability has allowed the country to leverage its local private finance to expand its renewable energy development.

China also provided subsidies to innovators and manufacturers within its high tech economic development zones. These zones are similar to South Africa’s special economic zones but with an added provision prioritising certain technologies such as renewable energy. Incubators were incentivised to develop the skills needed by the sector, while manufacturers received substantial discounts when securing loans.

These measures highlighted China’s ability to marshal its public and private interests when implementing policy. South Africa may have a larger problem with its low skills workforce. This problem requires its incubators and higher education sector to operate in concert to deliver skills development programmes to prepare a pipeline of construction, operations and maintenance workers needed in the country’s future wind farms and solar power plants.

Krish Chetty is Research Manager at the Human Science Research Council

This article is original to the The African. To republish, see terms and conditions