JOHANNESBURG (miningweekly.com) – While Africa is blessed with great natural sun and wind resources, it has about 600-million people living without access to electricity, which is one of the biggest impediments to the continent’s economic growth.
Renewable energy is available to put an end to this impediment, as it is able to provide large-scale electricity access in a decentralised, low risk, modular and quick-to-deploy manner. It does not require economies of scale.
Renewables provide an “energy for all” opportunity, plus entry into the far-reaching fields of green hydrogen and green ammonia, which are poised to decarbonise heavy transport and major industries.
Solid risk-adjusted returns are already being achieved – with societal returns being significantly greater.
Nedbank Corporate & Investment Banking (CIB) group managing executive Anél Bosman made these and many other points during a Zoom interview with Engineering News & Mining Weekly, which has, over the years, observed the positive role that the bank has been playing in helping to fund South Africa’s energy transition.
In fact, Nedbank CIB has thus far funded 42 of the 92 large Renewable Energy Independent Power Producer Procurement Programme projects in mainly the Eastern, Western and Northern Cape.
The megawattage of these projects totals a considerable 3 446 MW, with Nedbank providing R33-billion worth of funding for them. A further R1-billion in funding also went into financially underpinning 75 embedded generation projects of under 1 MW each.
Currently, the bank is working with clients who are planning to close – in 2022 – many of the project deals that are positioned within what is described as "a strong pipeline of projects", all of them bigger than 1 MW. (Also watch attached Creamer Media video.)
“In addition to addressing climate change, and the imperative around that, renewables are democratising the energy sector, and giving us the opportunity to have energy for all, because we can do many, many small projects,” said Bosman, who elaborated that, in the South African context, renewables are driving a significant amount of long-term investment “with domestic and international capital – and that is so positive for us”.
Regarding the outlook for green hydrogen and green ammonia development, Bosman added: “We are tracking various projects with a view to supporting them in the future and we are very excited by this opportunity.”
Are there adequate sources of funding to support a rapid transition from coal to green energy in the South African context?
There are many investors who want to participate in renewable energy projects, and from a Nedbank perspective, we have significant appetite and credit limits to continue to be a key supporter of this energy transition. We have seen the corporate sector applying their balance sheets to the transition as well, primarily through entering into the long-term power purchase agreements for captive renewable projects. So, there is further support for this transition. What is more difficult is securing and sourcing long-term funding for the investment to enable the infrastructure such as transmission, and this is key to actually support the renewable energy programme.
What criteria are applied when decisions are taken to fund green energy projects?
It's obviously a long process and we work with our clients’ sponsors as well as the offtakers. We start with our energy and sustainability and other policies that we need to look at. But then there are also a few other important considerations to determine the bankability of these projects. The one is the experience and the financial standing of the sponsor that we partner with. Then obviously, it's the credit rating of the offtaker and in some of these programmes, the government actually guarantees the offtaking agreement. Then also the experience and the credit rating of the engineering, procurement and construction contractor, after the project has been built, the operator and maintenance contractor. We need to use proven technology. We look at the strength of the natural resource. Will the sun shine as much as we think it will, or the wind blow to the extent envisaged. Then there are other financial instruments that we use to hedge the cash flows and make sure that these projects can return the required payments. These financial instruments are, for instance, interest rate hedges and foreign exchange hedges, and also the financial structure, the ratios and covenants. It's a long and very diligent process that we go through to make sure that these projects are viable because the future projects are actually dependent on the success of the current ones, and that's a very serious responsibility that we have.
When will Nedbank CIB be issuing its next green bond?
We don't have one planned right now, but we will definitely issue them in future again, because they have brought new investors to the market, and this is very positive for us because the wider the group of investors, the more of these programmes we can do. These bonds bring diversity and lower the cost of the funding, and we can then pass this through to the project, and that's very important because the lower cost of interest, given how capital intensive these projects are, actually makes the tariffs lower over time.
Three years ago, Nedbank became the first bank to cease funding new thermal coal plants. Does that decision exclude replacement or stay-in-business capital investments in thermal coal projects?
Let’s distinguish very clearly between the funding of thermal coal power project plants and thermal coal production. While we no longer finance new thermal coal plants, we recognise that we currently require coal to support the South African generation capacity. Accordingly, we will continue to finance thermal coal producers on their stay-in-business capital requirements.
Is Nedbank helping to ensure that the R130-billion just-transition funding on offer from the UK, US, France and Germany is effectively leveraged?
We have no direct involvement or line of sight of the funding but it is our view that one of the key uses should be the expansion of the transmission that we spoke of earlier and the substations to support the further rollout of renewable projects in areas where they are most efficient as the Northern Cape, Eastern Cape, and where we are now out of current transmission capacity. That that will really unlock some of our renewable resource capacity.
How would you describe the return on investment potential for institutions that fund the new energy freedom, energy sovereignty – and contribute to climate change mitigation at the same time?
We can certainly measure returns in the short term from a financial basis and these are solid risk-adjusted returns that we can get on these stable new asset classes. But beyond the individual measurement of the investment returns, the societal returns are far greater, and it's been continued sustainable economic growth and the derisking of business through climate risk mitigation, and that is such a different return on the investment.
What is the main message that you would like Engineering News & Mining Weekly readers and viewers to take away from this interview?
We've invested in a leading energy finance team over many years that has played a significant role in financing and thought leadership in the drive for South Africa to move towards the energy transition. We further invested in developing innovative funding solutions for the embedded and corporate and industrial generation projects, and we're really excited with the rapid increase in the projects within our clients and we really partnering with them to unlock this new source of energy. We continue to work with our entire client base to support them on their sustainable journeys and it looks different for different clients, but it is all an incredible journey to walk together.