Why we opened an office in Cape Town

What drove the decision for Green Giraffe to set up an office in Africa?

The idea for Green Giraffe to open an office in Africa was first mentioned in early 2015, during discussions on the long-term planning for the company. At the time the most active countries for renewables on the continent were Morocco, where we had been involved in all tenders, Egypt, to a certain extent with a few competitive tenders but underlying risks which made us unsure about the long-term viability of the framework, and South Africa. South Africa clearly stood out of that group in terms of volumes, supply chain, public procurement, and international involvement.

Between 2010 and 2015, South Africa had already awarded more than 6 GW of projects across 4 rounds of their renewable energy programme, with tariffs dropping steadily from round to round, reaching ca. 550 ZAR/MWh (around 33 EUR/MWh at today’s FX rate) (indexed) for onshore wind in round 4. The reduction in price between round 1 and round 4 was impressive and round 4 tariffs were amongst the most competitive worldwide at the time. Furthermore, the government was receiving bids under an expedited “half” round (although that was cancelled in favour of moving straight to a full 5th round). Interest was certainly elevated within Green Giraffe and as a result we made our first business trip to South Africa, attending the Windaba event (a large wind industry gathering) in Cape Town in November 2015.

Was it all plain sailing or were there challenges along the way?

Despite this positive context, we did face a few challenges before opening the office, which offered a few learning experiences… The biggest one was that before the round 4 projects could reach financial close and the process for round 5 could be launched, Eskom (the South African public utility and offtaker for the renewable energy programme) unilaterally froze the signing of all power purchase agreements (PPAs) for the programme. Ostensibly Eskom’s main argument was that renewable energy was too costly for the country – a difficult claim to reconcile with the fact that the prices achieved in the latter rounds compared favourably to the cost of some of the coal projects the utility was procuring at the same time. In reality Eskom sat in the middle of a major political fight which would only be resolved in 2017, after a new president took office.

In the meantime, we took the view that the renewable energy market was going to continue to grow across Africa and that, despite these issues, South Africa would be a strong base to operate from and cover the industry across the continent. Thus, although the South African renewable energy industry was de facto frozen for a couple of years, we decided to go ahead and open our office in Cape Town in October last year.

What is the outlook now?

The South African market is now building momentum once again as Eskom has resumed signing PPAs and the round 4 projects have reached financial close. The (same) government, under the leadership of the new president, also announced that round 5 would continue towards the end of this year. There is some uncertainty whether this may be delayed again given the upcoming integrated resources plan (IRP) update, but this time there is a clear plan and it is very positive to see how in the medium to long-term the government once again sees renewable energy as a core part of the energy mix.

Looking at the broader region, we are seeing more and more renewable energy activity, and with that opportunities to share our expertise in tender and debt advisory, project equity, and corporate M&A services, as well as scope to provide development advisory services.

• Several countries have signed up to and are moving forward with IFC’s Scaling Solar programme and others with KFW’s Get FiT. The aim here is to use high quality, standardised documentation, risk mitigation tools, and processes to attract the biggest players in the market to drive down their overall cost of electricity
• Other countries are running their own national tenders, especially in Northern Africa
• Several early stage development equity & debt funding initiatives targeting projects that do not fall in such tender frameworks also still exist (like, for example, in Mozambique and Kenya)
• Off-grid is expected to be a core growth sector both at retail and utility scale. Retail is largely driven by development objectives and lack of grid access. For utility scale projects, issues tend to centre around over-reliance on (i) public utilities with credit and liquidity issues; and (ii) government guarantees which are either becoming weaker or unavailable.

Morocco and South Africa remain the two largest African markets from a renewable energy perspective, with the most developed industries. The continent as a whole is very fragmented in terms of renewable energy development, but we are keeping a close eye on the likes of Ethiopia and Kenya which have a strong political agendas in support of renewables, Nigeria, as the largest economy and the most populous country, Egypt, which has gone for the jumbo deal approach, and several other countries such as Ghana, Ivory Coast and Zambia.

How does the opportunity for renewable energy differ to other regions?

The energy needs of Africa are huge and the opportunity for renewables is very high, as a decentralised, scalable, and now increasingly competitive technology. From a resource perspective, one can find both high radiation and high wind speeds across large swathes of the continent. As the immediate priority is cheap electricity, solar is likely to be dominant both on-grid and off-grid. It also has the benefit of being relatively less complicated to install and faster to develop, which is important in many African countries. However onshore wind makes sense in a lot of situations as well and provides a different load profile which can obviously be useful and complementary. A key difference to some other markets is that for many countries in Africa these renewable energy developments are necessary to meet rising demand and are additive in that respect as opposed to displacing already existing generation – although this comes with the challenge of electricity grid coverage typically being lower.

Off-grid solutions to supply residential households are also booming at the moment, with companies like Off Grid Electric BBoxx and Mobisol expanding across the continent. The “solar + storage + appliances” business model is a completely different sector compared to traditional energy generation, which uses pay-as-you-go, via mobile phones. The business model is dependent on scale, but the technology enables these companies to reach millions of otherwise hard-to-access consumers. Given the use of mobile networks, the real-time data they collect on customers can then be used to predict behaviour and demonstrate payment records and default rates, which should help open spin-off financing revenue streams. Ultimately these are hybrid tech/energy companies rather than pure energy companies, although they do encroach in on the utilities’ space and they have a potentially massive market ahead of them. It is certainly something to keep an eye on.

How do the financing markets look?

On the financing side of things, South African deals are not fundamentally different to what we have seen elsewhere (apart from some inflation-linked debt specificities and local content requirements, but this is just a technicality…!); the market is very developed and sophisticated. Debt pricing has gone down steadily and there is healthy competition on the equity side, with many active South African but also European, Asian, and North American parties. On the debt side, it remains a local market with Absa, Investec, Nedbank, RMB, and Standard Bank dominating the South African market, plus an increasing amount of liquidity from debt funds.

Across the rest of the continent, multilateral agencies such as development finance institutions (DFIs) (e.g. IFC, AFD, FMO, DBSA…) provide much of the liquidity. However, the regional and local commercial banks are seeking to make their presence felt and there is a recognition of the need to development local financing markets (like the South African one), to shift to lower dependence on USD financing. Export credit agencies (ECAs) also have a role to play and have been involved in some of the larger transactions to reach financial close.

What approach is Green Giraffe taking now the company has a regional presence?

As a company, we do not use local teams for local markets, and consider that we have a single global team, so the Cape Town office is not meant to be acting autonomously. Green Giraffe has the biggest team worldwide doing purely financial advisory for renewables and officers all across our European offices have been involved in African transactions. For now, we are making the most of having presence on the ground and getting to know the South African market, having already started processes to source our first transactions in the country and hire local staff. We are working on one high profile mandate in South Africa already and ongoing deals in Kenya, Mozambique, and Morocco also give us a good exposure to other African markets. It is an exciting time to be here, so we are looking forward to the opportunities in the pipeline and are keen to play a role in continuing to develop renewable energy in Africa.