South Africa: ‘Load shedding is an opportunity’ for private equity

** This article was first published in the Southern African Venture Capital and Private Equity Association (SAVCA) annual journal.**

Jaco Maritz takes a closer look at private equity investment in South Africa’s power sector and highlights emerging prospects within the industry.

While many focus on the fact that the load shedding crisis is reducing growth in the economy, private equity fund managers are increasingly seizing opportunities to invest in the electricity sector. “Load shedding is an opportunity for our portfolio companies to provide energy solutions,” says Steven Faure, investment director for southern Africa at energy focused investment manager, Inspired Evolution.

Over the past decade, private equity firms have played a meaningful role in adding new generation capacity by investing in independent power producers (IPPs) that supply renewable energy to South Africa’s state utility, Eskom, as part of the Renewable Energy Independent Power Producer Procurement Programme (REIPPPP). Vuyo Ntoi, co-managing director of African Infrastructure Investment Managers (AIIM), estimates that the contribution of these IPPs has helped shield South Africans from two levels of load shedding.

Initiated in 2011, the REIPPPP fosters private sector participation in renewable energy generation via a competitive bidding process.

Successful bidders receive power purchase agreements with Eskom, and the programme benefits from government guarantees, ensuring stability and security for investors. To date, the REIPPPP has awarded over 6,000 MW of projects.

Notable private equity investments in the power sector over the past year include AIIM’s commitment to provide up to $90-million in initial equity funding for an initiative called NOA, which aims to develop, finance, and operate a portfolio of over 1GW of renewable energy assets. Additionally, the Revego Africa Energy Fund expanded its green energy investments to nine operating projects by acquiring a 34.5% equity interest in Aurora Wind Power and a 7.5% stake in Kathu Solar Park. In another transaction, Third Way Investment Partners joined forces with the Mahlako Energy Fund and Mergence Investment Managers to invest in Aventro, facilitating an increase in Aventro’s shares in the 100MW Redstone concentrated solar power project in the Northern Cape.

Faure says Inspired Evolution prefers to back vertically integrated renewable energy companies involved in the entire value chain, including site development, construction, operation, and ownership of wind or solar farms. He explains that these businesses are able to deliver markedly better returns compared to investments in already operational projects which only derive income from selling electricity at predetermined prices.

In addition to investing in companies owning power generation projects, private equity firms have also backed ancillary businesses. For instance, in 2022, RMB Corvest invested in Sedgeley Energy, a company specialising in designing, installing, maintaining and monitoring systems for Solar-Saver, a provider of solar solutions to commercial and industrial (C&I) clients. Furthermore, Secha Capital supported i-G3N, a lithium battery manufacturer catering to the storage market. According to Secha’s managing director, Brendan Mullen, the business has experienced a substantial uptick in demand for its products.

The rise of the wheeling market

The growing corporate off-take arena in South Africa, also known as the wheeling market, has caught the attention of fund managers. Wheeling allows an IPP to generate electricity and transport it via the national grid directly to a corporate customer, with electricity prices negotiated directly between IPPs and corporate off-takers. Faure says the wheeling market is significant, with mining companies particularly interested in these solutions. In one such transaction, AIIM invested in the 69MW Msenge Emoyeni Wind Farm in the Eastern Cape. Msenge has entered into a power purchase agreement with chemicals company Sasol to supply renewable energy to its Sasolburg site through a wheeling arrangement. The power Sasol is purchasing from Msenge will be used to secure renewable energy supply for green hydrogen production.

Although wheeling customers are not immune to load shedding, they can secure cost savings, as the price of renewable energy is typically lower than Eskom’s rates. Furthermore, procuring green power enables companies to make progress towards their environmental, social and governance (ESG) targets.

Leveraging government incentives

Some fund managers are also taking advantage of government incentives to spur private power generation. For instance, Grovest recently launched its Twelve B Green Energy Fund, which plans to own and operate solar installations to supply electricity to sectional title complexes and commercial clients on long-term power purchase agreements. The fund utilises Section 12B of the income tax act, which offers tax deductions for assets used in generating electricity from renewable sources. Recently, the Section 12B allowance has been increased from 100% to 125% until 28 February 2025, with no cap on solar installation output. Consequently, investors in Grovest’s fund can claim a 125% tax deduction on their invested amount. The fund targets both retail and institutional investors. The anticipated internal rate of return for the 10-year fund is 18% after deductions.

Opportunities ahead

While Inspired Evolution’s Steven Faure believes the REIPPP programme offers some of the best opportunities to invest in South Africa’s power sector, his firm will consider C&I and residential rooftop solar solutions as well as other ancillary businesses in the energy value chain, depending on the track record of the companies and their valuation.

Both Faure and Ntoi point to emerging opportunities in the battery storage segment. Eskom has commenced with the construction of its own large-scale energy storage facilities in proximity to renewable energy generation sites, which aim to alleviate strain on the grid during peak demand.

Industry stakeholders also anticipate that the private sector will soon have opportunities to invest in the expansion of the power grid, despite the current absence of a legislative framework to support such involvement. South Africa’s electricity network faces increasing constraints, particularly in provinces such as the Northern Cape, Eastern Cape and Western Cape. This issue became evident in December 2022 when a mere 860MW of projects were approved during Bid Window 6 of the REIPPPP, a fifth of the original plan, due to capacity constraints in the national grid.

Exit prospects

AIIM’s Ntoi believes there are ample exit avenues for South African renewable assets, especially for platform businesses with multiple projects. He highlights the interest from large energy companies and private equity funds, and while stock exchange listings have been sparse, they could serve as a potential exit strategy. For instance, in March 2023, Actis sold its Lekela renewable energy company, which operates five wind farms in South Africa and has a broader African presence, to Infinity Power. Danish fund manager Copenhagen Infrastructure Partners recently also acquired a majority stake in South African clean power player Mulilo Energy Holdings, which has developed 440MW of operating wind and solar projects.