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Solar energy investors may pivot away from high-cost projects

Metier Private Equity seeks smaller efforts outside of South Africa.

When officials cut the ribbon on the R12 billion Kathu Solar Park near Sishen in the sun-baked Northern Cape on April 4, they will officially open the most expensive independent power producer (IPP) project so far in South Africa. The high cost may make it one of the last of its kind, with some investors now searching for smaller energy ventures that retain returns.  

The 100 megawatt (MW) Kathu Solar Park uses sunlight reflected from 384 000 mirrors on a 4.5km² site to boil water into steam that spins turbines. It is novel for incorporating four and a half hours of energy storage. The process retains the sun’s heat in tons of molten salt acting as a battery that is tapped by heat exchangers to keep the turbines spinning long after the sun has set or if it’s too overcast. 

Wind farms and photovoltaic (PV) solar energy – using panels to create electricity as opposed to a thermal plant like Kathu – don’t offer this capability to cope with the vagaries of demand.

Johannesburg-based Metier Private Equity, which manages about $500 million, invested R350 million in Kathu, the largest investment from the R1.5 billion in its Sustainable Fund division managed by Marc Immerman. He was attracted to the project because of its energy storage capability and the somewhat higher internal rates of returns offered by thermal solar plants as opposed to photovoltaic projects and wind farms.

“Photovoltaics is a completely commoditised project investment that’s now dominated by the various international utilities that can accept much lower returns but also extract value throughout the value chain including the operation, maintenance and some elements of the construction as well,” Immerman said by phone. “Because the wind and photovoltaic solar tariffs have gone so low, the equity returns have dipped below private equity returns generally.”

Costly

Wind farms and photovoltaic solar energy can produce a kilowatt hour for about R0.60 while new-build coal plants will cost at least R1.20 per kilowatt hour, says Immerman. A thermal solar plant like Kathu has a much higher cost per kilowatt hour, though the exact amount is confidential in terms of the sales agreement with Eskom, he says.

The high cost of solar thermal plants means they are largely on the way out as projects, says Immerman.

Meantime, the low prices for larger-scale wind and solar PV mean private equity houses such as Metier are looking elsewhere for returns because they are below targeted return levels, Immerman said. The internal rate of return for Kathu Solar Park is “more or less aligned with the rest of our projects,” he said. The Metier Sustainable Capital Fund targets a 25% internal rate of return (IRR), he said.

“This target can be realised through a sale after the construction risks have been mitigated. Given that the returns of the project largely replicate a yield instrument once construction is complete, there is an active buying market using discount rate pricing in the low double-digits. This IRR [internal rate of return] compression lifts the fund’s final IRR delivered to investors and the fund’s ability to invest during the development stage also offers return enhancement.”

The Kathu project, which actually started producing electricity for the national grid on January 30, was funded by a consortium led by Paris-based Engie with a 48.5% stake. Engie is the world’s largest independent power producer with 2017 revenue of €65 billion (more than R1 trillion). Other investors include South Africa’s Public Investment Corporation (PIC), the Sishen Iron Ore Company-Community Development Trust, Investec Bank, FMO (the Dutch development bank) and DEG (the German investment and development company).

REIPPP projects

Kathu is part of the government’s world-renowned Renewable Energy Independent Power Producer Procurement (REIPPP) Programme. Metier has helped develop seven REIPPP projects and has sold two of them. Those remaining include three wind farms producing 360MW and two thermal solar plants including Kathu totalling 150MW, says Immerman.

“The programme is a real achievement in that the government effectively learned lessons from other countries that have rolled out renewable energy procurement,” he adds.

“The costs of energy have dropped very significantly.”

For Metier’s renewable energy push, the future is in smaller projects in sub-Saharan Africa. “Thinking about the actual energy landscape in Africa, there’s a lot more opportunity for a required energy supply in countries other than South Africa,” says Immerman

Uganda Hydro

Metier already has an 88% stake in a $20 million 5.25MW hydroelectric project in Uganda nearly ready for commissioning. It could be a model of sorts for so-called captive production projects, as opposed to national grid hookups, says Immerman. The investor is considering projects in Ghana, Cameroon, Kenya, Mozambique, Malawi, Zambia, Uganda, Rwanda, Senegal and Ivory Coast.

To that end, Metier is raising $200 million for another sustainable unit fund due for a first close in August after investments from German, Dutch, French and Swedish development finance institutions. Other banks in Europe may also be interested, says Immerman.

Back in South Africa, the first new REIPPP bidding round in several years could start later this year, according to energy minister Jeff Radebe.

The ministry sidelined renewable sources during the presidency of Jacob Zuma with its push for nuclear reactors and coal. “There were interests at play in terms of protecting not just the nuclear ambition but also coal,” says Immerman. “People wanted to continue with coal, increase the level of coal generation, deliveries and so on.”

Truck drivers

Those deliveries were the subject of a court ruling last week as the union of coal truck drivers sought unsuccessfully to stop the government from pursuing renewable energy sources, out of fear of job losses. Proponents of renewable energy point out that these projects in fact create jobs, but like most so-called disruptive technologies, they are often different jobs than the old ones. 

Read: Truckers lose court challenge against solar arrays and wind farms

The REIPPP programme has drawn some R209 billion in private sector investment in eight years from investors such as Old Mutual, solar and wind farm developers Red Cap Energy, Phakwe Group and Pele Green as well as the PIC, according to the ministry. The initiative has connected 3 776MW from 62 independent power producers to the grid out of a total of 6 422MW procured from more than 100 IPPs through five bidding windows, ministry stats show.

However, this is just 5% of the total energy sold to South Africans, according to the ministry. The National Development Plan adopted in 2012 states that South Africa needs at least 20 000MW of renewable energy by 2030. By that time, 13 000MW of coal-fired capacity is scheduled for decommissioning as plants reach the end of their commercial and operational life, the ministry says.

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“A thermal solar plant like Kathu has a much higher cost per kilowatt hour, though the exact amount is confidential in terms of the sales agreement with Eskom, he say”

Confidentiality = Corruption. How can a taxpayer funded entity be allowed to sign confidential sales agreements?

Exactly correct. Th generated cost is so high they dare not publish it. The ANC government had again been succered into another corrupt deal, with the taxpayer to fund.

If its investors take 35% after tax from the project, I shudder to imagine what this PPA must cost the taxpayer, as solar thermal represents the highest cost renewable (both capex and opex). Most of the rest of the world looked at solar thermal and decided against it. Maar nee, ons is mos baie slim.

The midpoint of the most recent LCOE places solar thermal at about $0.11/kWh so R1.65 cost. Apply a 35% after tax IRR on top of that and taxpayers are paying over R2.50 per kWh for this. One could have bought four times as much solar PV and used after losses half of it all day long as pumped storage input. So call it 300% more from PV for the same cost.

Note: I am massively pro renewables, have an EV, my house is ⅔ independent, etc. But this kind of rubbish is what gives renewables a bad names. The advisors, bankers and investors are either fools or fraudsters, take your pick.

Yes, Johan….appreciate your analysis & number crunching. Am pro-renewables myself 🙂 Am still connected to the grid, but with a solar Heat Pump (connected to geyser 5 years ago, has now paid for itself.). I managed to get my monthly elect cost down to under R400pm (for a 2-person household). During load-shedding my UPS (backed up by battery bank) takes care of the rest. PV-solar panels would be my next ‘natural’ step.

When in the WC on holiday, I must come and visit you….you can take me for a drive around the block in your BMW i3 🙂 Must be a surreal experience for us petrol heads 😉

I would tend to agree with Johan’s costs. I you take the Kathu CSP and costs given above (i.e. R12 Billion for 100MW) and optimistically assume that it can generate full power for 7 hours per day plus the 4,5 hrs stored capacity (11,5 hrs per day) then over a 30 year lifespan it will produce roughly 11,5*365*30*0.1 = 12 592,5 GWh electricity at 95 cents per kWh (divide R12 Billion by 12 592,5E6 kWh) . It is more likely that it will produce the 100MW for 4,5 hrs per day, in which case the cost per kWh is R2,43. That of course assumes no running costs. Is it really cheaper than coal? Agree with some of the other comments, in that I would like to see some proper costing justifying the generating costs given in the article, especially the 60 cents per kWh for photovoltaic and wind.

Absolutely, NY. It’s a secret. One can be certain of one thing and one thing only and that the price Eskom is paying per kWh is more than they will get when they sell it to whomever they sell it to. Typically a municipality. This is called wealth destruction and it makes everyone poorer except of course Mr. Immerman who will get rich. This is why Eskom is in dire straits. They destroy about R10 billion a year selling electricity for less than they paid for it. It is crazy beyond belief – no wonder they need the SA taxpayer to cough up every year to keep them in business. It’s absolutely corrupt to the bone and a disgrace beyond belief.

I still find it difficult to get a grip on the real cost of green energy, especially for large scale generation such as a 5 000MW plant. Household size seems OK when you compare with the inflated new Eskom’s tariff structure. (The old Eskom delivered electricity at world rated pricing and I’m not convinced that green could compete with a “clean” Eskom price – i.e. before the municipalities added their rip off handling charge)
In the article he mentions a 5.25 MW project for $20 million. Scale up to 4 800 MW and you get $18 billion. Not cheap. Granted it is hydro, but where do you get hydro?
Or anyting on the scale of 4 800 MW that is not nuclear or coal in South Africa.
South Africa needs electricity in 10 000’s MW slugs, not 10 MW at a time.

There is nothing corrupt about the REIPPP process, the returns are less than half the 35% implied by this article, and the governance over the project selection has been world class. It is loose or mischievous for the author to imply such super returns. Just because Metier historically made 35% returns in its track record does not imply that anything like that is available in much lower risk infrastructure investing. There are the highest levels of competition in REIPPP which prevent exploitative returns, and in future rounds these returns will only decline further

And so the renewables smoke and mirrors continue. The real cost of renewables (solar and wind) is much higher than the R0.60 per kWh often peddled in the media as storage costs are not factored in.

They keep glossing over bid windows 1,2 and 3, stessing how costs have come down. Prohibitive costs, rising every year and ESKOM has that Albatross around its neck for the next 20 years.”Energiewende” nearly brought Germany on its knees, they now have very expensive electricity and have to ia rely on their neighbours, with 8 nuclear plants closed. So, while I also support alternative energy sources in the mix, I am tired of the sanctimonious “give us more contracts, more money,look at us, we are saving the world”. Nope. “We are in it for the money, like everybody else”.

armadillo:

IPP contracts in the US have been signed by Berkshire outfits at just under 4 US cents. That is post profit margin and given Buffett owns them, a proper cost of capital.

One rider : subsidies and incentives distort numbers

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