NO ONE-SIZE-FITS-ALL WHEN FUNDING RENEWABLE ENERGY POWER PROJECTS

As load shedding continues to bite, mines are seeking alternative, renewable energy partners. But how to obtain the funding necessary for such a project?

Driven by the challenges of climate change and ongoing load shedding, renewable energy solutions have moved from the fringe to the mainstream. Of course, implementing renewable energy projects at any scale requires funding – but not all such projects are equally likely to receive the investment they need from the financial sector.

Renewable Energy Projects Capacity

Amber Bolleurs, senior transactor in infrastructure sector solutions at Rand Merchant Bank (RMB), says the renewable projects the mining industry aims to implement vary widely. On one end of the scale are smaller, on-site, ground-mounted solar installations. On the other are large solar and wind projects that transmit power to the mine via the national grid – much like the Renewable Independent Power Producer Procurement Programme. Installations range between 80MW and 200MW per project – underscoring the extent of demand for renewable energy and for scalability of these projects.

Bolleurs says the challenges individual mines face in obtaining project funding depend on the power procurement process they wish to follow. In some cases, the mine prefers to own the renewable energy installation, although typically mines seek to buy power via an independent power producer (IPP) model.

MINE-OWNED AND -OPERATED RENEWABLE ENERGY INSTALLATIONS

“Mines wanting to own renewable energy installations themselves will procure on-balance-sheet funding, making them directly liable for any losses. Usually these installations are co-located on the mine’s property and financiers will consider the mine’s balance sheet in making their lending decisions,” she says.

In the case of a co-located installation, this procurement route depends on the availability of land on which to build a plant and whether the availability of renewable resources (e.g. sunshine, wind) at the location makes the project viable. In choosing this path, the mine must accept all risk relating to ownership, construction, operation and maintenance of the installation.

“On-balance-sheet finance for on-site installations is available – but it may be constrained in terms of tenor of funding and, potentially, pricing. On-site installations may to this, she suggests.

“For example, it enables mines to shi the ownership and operational risks of the renewable energy plant to the IPP, and simply agree to procure power from them at an attractive, predictable price path for a 15to 20-year period.

“It also doesn’t constrain or impact the debt capacity of the mine’s balance sheet and debt tenors can be stretched so that should the mine (buyer) default on its obligations to procure power, a third party can take over the contract – making the risk of loss for the bank lower and pricing more attractive.” not have a secured connection to the Eskom grid, which limits any lender’s ability to take a view regarding the installation’s security, and therefore its ability to sell power to a third-party buyer via a wheeling framework and stretch the tenor of the debt.”

On the other hand, there are challenges inherent in the IPP model. First, power procurement agreements need to be well structured and include adequate risk allocation between parties. Second, since these projects rely on a wheeling framework, buyers with an Eskom connection can benefit from its established wheeling framework.

But those with municipal connections will struggle to procure power if the municipality through which they connect to the national grid does not accommodate wheeling. Currently, very few municipalities have such a framework in place.

THE IPP MODEL

Most mines would rather procure renewable power from an IPP. There are several benefits

Lastly, constraints on national grid connection and capacity mean that some areas of the country, such as the Northern Cape, have land and renewable resources (solar) in abundance, yet remain “sterilised” due to the lack of transmission capacity to deliver power to the rest of the country.

“We need to see more investment from Eskom as it is the baseload provider and grid owner. It is imperative that the grid be expanded and strengthened in areas where capacity is required to further open up the market and ensure that major industrial projects have access to the power they need to operate,” Bolleurs says.