Investigating alternative funding sources for community equity ownership in renewable energy projects in South Africa

Master Thesis


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University of Cape Town

The combined effect of a number of factors has forced the Government of South Africa to launch and seek to expand the renewable energy sector through the Renewable Energy Independent Power Producer Procurement Programme (REI4P). Such elements include environmental issues, especially climate change; the need to diversify energy sources in order for the country to be energy secure; and the developmental potential that investment in a new industry, in this instance the renewable energy industry, can bring in terms of job creation, economic growth and the exploitation of abundant natural resources. In addition to the REI4P, the Government has also been compelled to seek to expand energy supply in the country, in general, due to the energy crisis, which in turn, is closely associated with a population that is growing at a pace that is much faster than the rate at which energy can be readily supplied. Community Equity Ownership (CEO) or local community ownership is a unique feature of the REI4P that has recently come under close scrutiny due to its requirement for project companies to offer a minimum of 2.5% to 5% shares of their companies to local communities residing within a 50km radius of their renewable energy plants, in an effort to contribute toward their socio-economic development; the challenges presented by community trusts; and the subsequent resistance towards the notion of local community ownership by REI4P project companies. It is the subject of this research because it is still a critical and integral component of the REI4P and challenges associated with its financing have, in the past, jeopardised the accomplishment of the very goals for which it was constituted. The value of Social License to Operate (SLO) is that it can lay the foundation for positive relations to prevail between communities and Independent Power Producers (IPPs) in the pursuit of a viable renewable energy industry and increased energy supply in South Africa. To this end, the study demonstrates that whilst CEO is obligated in the REI4P, it also constitutes SLO because if communities own shares in REI4P projects, they are more likely to cooperate with them. Thus, the CEO, Socio-Economic Development (SED) and Enterprise Development (ED) requirements of the REI4P essentially constitute the SLO ‘building blocks’ for the Programme. Development Finance Institutions (DFIs) have been at the forefront of funding local community ownership, although other financial institutions, including commercial banks xiv have started financing it as well, while requiring guarantees and security from communities, which can offer neither. The continued implementation of the REI4P, as well as the launch of the Baseload IPP Programme and the Medium Term Risk Mitigation Project, will ultimately increase the total number of IPP Programmes in the country and will likely intensify the demand for finances to fund CEO. In view of this, where will the funding for this key aspect of the current and proposed IPP Programmes come from? This study sought to identify alternative funding options for CEO in order to ensure its continuity in both the REI4P and the proposed IPP Programmes. An exploratory research design was pursued for the study in view of data limitations arising from the infancy of the renewable energy sector in South Africa. Moreover, a questionnaire survey was undertaken and a purposive sampling technique was used to interrogate a select group of financial institutions and REI4P Independent Power Producers (IPPs), with a view to determine what their experiences have been in relation to funding CEO, as well as to identify alternative funding options for it, going forward. In this regard, a sample size of 15 was taken out of a combined total of 72 financial institutions and IPPs. Thematic content analysis was subsequently performed to process the data. The main risk associated with financing CEO that was identified by stakeholders has to do with a lack of security in lending to disadvantaged communities because they often have no collateral and can offer no guarantees that demonstrate their capacity to repay debts. Furthermore, the establishment of a Grant Scheme for funding CEO, on the one hand, and a Guarantee and Incentive Programme, on the other, wherein Government stands in as guarantor for communities as they borrow funds to facilitate CEO; were found to be potentially instrumental in widening the pool of funding for CEO. Increased vendor support and more ‘preferential’ loan terms and ‘softer’ loans from DFIs were also identified as critical in the endeavour to increase the funding sources for CEO. Although the use of the Government Pension Fund to warehouse shares on behalf of communities and utilising communal land as equity both hold some promise; they require further research. It is, therefore, concluded that there is potential for alternative funding options for community equity ownership in the REI4P. The study also found that, based on the experiences of survey respondents, there are inadequate sources of finance for CEO, in light of the increasing pressure on available financial opportunities. To this end, the delineation between the xv potential for funding local community shareholding in REI4P projects and actual access to funding is fundamental.

Includes bibliographical references.