FUTUREGROWTH: ALLOCATING CAPITAL TO RENEWABLE ENERGY INVESTMENTS
While the debate over the use of nuclear power continues, the renewable energy sector is quietly forging ahead
and independent power producers are adding much-needed capacity to the grid. Since the Department of
Energy (DoE) embarked on its alternative energy drive in 2012, capital investments in renewables have totalled
almost R200 billion.
South Africa has some of the best natural resources available for
solar and wind power. This, together with a reputationally strong
and well-run independent power procurement programme, has
created opportunities for institutional investors like Futuregrowth
− who is now a leading funder of the programme.
Investment into this renewable energy asset class is motivated
- The reality that South Africa needs more megawatts on
the grid to support and grow our economy.
- The need to reduce our carbon intensity – South Africa is
one of highest carbon-producing countries in the world.
- A need to transition South Africa to a sustainable energy
mix and a greener economy.
THE POWER OF STRONG PARTNERSHIPS
The growth of the renewable energy sector reflects the success
of the DoE’s Renewable Energy Independent Power Producers’
Procurement Programme (REIPPPP). In addition to the 6 327
megawatts (MW) which is under construction or already in
production, Government has confirmed that it plans to procure
a further 6 000 MW from independent producers over the next
couple of years, doubling the currently contracted renewable
This programme is a strong model for private-public
participation, and that has a lot to do with Government’s
commitment to transparency and the efficiency with which it is run. All the projects in the programme have a 20-year power
offtake agreement with Eskom, in which the parastatal will
purchase all power generated. This provides producers with
the revenue stream to repay the debt and shareholder funding
that has been used to build the power plants. Approximately
70% to 80% of the almost R200 billion invested in the 92
projects under the programme so far, has been funded by
debt, with most of this having been provided by the private
South Africa has historically been dependent upon electricity
generated by coal-fired stations. Given the economic growth
since 1994, the country’s power demand has increased
significantly and Government estimates that the installed
capacity will need to grow by 40 gigawatts (GW) (i.e.
double) over the next 20 years to meet forecast demand.
Government’s Integrated Resource Plan (IRP), updated in 2011,
leads the way for the energy sector in South Africa. It outlines
the proposed new power generation roll-out requirements and
the mix of generation technologies, including procurement
from independent power producers.
Approximately 17.8 GW (42%) of new generative capacity
over the period to 2030 is targeted from renewable energy,
split between solar photovoltaic (PV) generating 8 400 MW,
concentrated solar power (solar CSP) generating 1 000 MW
and wind generating 8 400 MW.
FUTUREGROWTH’S PARTICIPATION IN REIPPPP
Futuregrowth is one of the largest fixed income institutional
investors in the REIPPPP and was the first to invest in scale
from commencement of the procurement programme. So
far, Futuregrowth has funding commitments to 23 renewable
projects, including solar PV, wind and solar CSP technologies in Limpopo, Northern Cape and Eastern Cape. These projects
were awarded preferred bids by the DoE in rounds 1 to 3 of the
REIPPPP and, to date, 17 projects have achieved commercial
operation and are generating power to the grid.
ROBUST CREDIT ANALYSIS
To date, more than 50 projects across bid rounds 1 to 4 of the
REIPPPP have been considered by Futuregrowth for investment
and were subjected to our credit assessment and due diligence
process. Of these, more than 21 projects did not meet our
Included in our analysis is a combination of financial and nonfinancial
issues, such as environmental, social and governance
(ESG) factors that are relevant to our credit risk analysis process.
The key motivating factor for Futuregrowth is to understand the
risks associated with each project in order to price for and
appropriately mitigate these risks. We see ourselves as a longterm
funding partner and, as such, we take a view on which
issues could materially impact the sustainability of each project,
to better understand the overall risks.
CLEAN AND RENEWABLE GENERATION
Renewable energy projects do not use fossil fuels, nor do they
create toxic emissions or hazardous waste. With the cost of
fossil fuel-generated electricity rising all the time, it is vital that
we invest in cleaner, alternative energy sources.
- Each project requires an Environmental Impact Assessment
(EIA) as a key criterion of the bid. This looks at the
suitability of a proposed site and the impact of the project
on the surrounding area, the environmental resources and
- Projects have to meet the Equator Principles (a risk
management framework used by financial institutions
worldwide to assess a project’s environmental and social
EMPLOYMENT AND SKILLS TRANSFER
Important qualifying criteria for projects under the REIPPPP are
the creation of sustainable local jobs and the transfer of skills to
communities surrounding the project sites. This includes:
- Job creation
- Employing local labour to build and maintain the plants.
- Short- and long-term job creation.
- SMME development through employing contractors.
- A high level of mentorship and skills transfer from
- Local technology and subcontractors to be used in all
projects according to Government’s minimum requirements.
- International developers partnering with local firms that
have a strong knowledge of the South African market.
- There is a minimum requirement of 40% of
local procurement for every project and this threshold is
anticipated to increase in later bidding rounds.
INFRASTRUCTURAL INVESTMENT AND
- There is a strong emphasis on investment by the projects
into local socio-economic infrastructure and services, as
well as employing local labour to build and maintain the
- Many of the projects are in remote, arid areas and
civil engineering is needed for the construction and
operation of the project (including access roads). Every
project has aminimum BEE equity requirement that must
include participation by a trust representing the local
- Projects are required to report on their SED spend and
milestones each quarter with termination points given if
targets are not met.