An extract from The Renewable Energy Law Review, 3rd Edition, by Covington & Burling LLP
Renewable energy project development
i. Project finance transaction structures
A large percentage of the project financing activity for renewable energy projects has occurred within the framework of REIPPPP and the Small Projects Independent Power Producers Procurement Programme. While the project finance structure that has been adopted to date follows international norms, there are a number of unique features imposed on sponsors under REIPPPP, including localisation requirements that cover the development of specific categories of people, enterprises and communities or economic sectors. The following broad categories are covered:
job creation;
local content;
ownership;
management control;
preferential procurement; and
enterprise development and socio-economic development.
In terms of documentation, these follow international norms, with financing documentation largely following Loan Market Association precedents. Security packages typically include the following:
borrower guarantee and share pledge;
borrower cessions of its rights, title and interests in respect of aspects such as the project documentation, insurance proceeds, claims, licences, permits and authorisations under the transaction;
general notarial bond, which is a registered security over all the movable assets of the borrower;
special notarial bond, which is a registered security over specified movable assets of the borrower; and
mortgage bond, which is a registered security over the borrower's land rights.
Construction, operation and maintenance agreements also largely follow international norms with engineering, procurement and construction contracts and operation and maintenance contracts closely following what one would expect to see in established markets. Internationally accepted standard construction contracts such as a FIDIC Silver Book are common (amended though to tailor for market norms and certain testing and performance complexities relative to each renewable energy technology).
To date, the vast majority of debt has been provided by the large five domestic commercial lenders (Rand Merchant Bank, ABSA, Nedbank, Standard Bank and Investec) with some participation from development finance institutions and pension funds (DBSA, PIC, IDC, etc.). International institutions such as the International Finance Corporation and the Organization of the Petroleum Exporting Countries have also been involved with financing a number of large renewable projects.
Aside from a large number of Enel projects (the Italian national utility) in Round 3 of REIPPPP, almost all projects have been financed on a limited or non-recourse basis.
While debt tenors vary, they are typically around 15 to 17 years (from commercial operation date) and spreads on the Johannesburg Interbank Agreed Rate are between 310 and 400 points (risk premium 250, liquidity 120 and statutory costs 30 points).
ii. Distributed and residential renewable energy
Eskom, in its position as the national utility, is also the primary licensed distributor of electricity in South Africa. As was mentioned above, the current regime does not allow excess electricity to be sold back to the grid from renewable sources as it would be in jurisdictions such as the United States or the European Union, and a change in the regulatory regime would stimulate the rooftop solar market and allow it to grow far more quickly. There is also no regulated framework for use-of-system charges for embedded generators (connected to the distribution network). NERSA is, however, in the process of developing a framework for generators.
Generators that wish to wheel energy to third parties face a number of challenges related to the use-of-system charges.
iii. Non-project finance development
The appetite in the market for on-balance sheet, corporate, full equity finance is extremely small. Almost all developers and sponsors of renewable projects in South Africa adopt a project finance structure.
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