Green power investing brightens returns in ailing SA

Returns from REIPPPP are beating those in bonds and stocks.

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 $12.5 billion since 2011 and will attract another $35 billion 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.

 

SA bonds performance

 

“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 R700 million ($45 million) 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 industrialiSed 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 R11 billion, 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, which manages the Government Employees Pension Fund’s assets, 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 $27 billion, to start a fund focused on power and renewable energy in Africa, Sanlam Africa Investment chief executive officer St John Bungey said in April. Enel, Italy’s largest utility, Total and private equity firm Actis, are among other companies that are investing in plants that will supply national utility Eskom Holdings.

“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 R91 billion, or 47% of the programme’s investment so far, with foreign investors contributing R53 billion, according to government statistics. The state invested almost R32 billion 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 $177 million on a solar plant in the west of the country with Old Mutual Plc’s Futuregrowth Asset Management and the Industrial Development Corporation as part of the program’s 92 projects so far. They will increase power capacity by 6 327MW, with a target of 17 800MW in renewable sources by 2030. The country’s generation capacity was 44 829MW last year.

Margins Decline

Enel’s Green Power unit will spend about 1.5 billion euros ($1.7 billion) by 2019 into installing 1 200MW 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.”

© 2016 Bloomberg

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