Hailed as one of the top renewable energy (RE) programmes globally, South Africa’s Renewable Energy Independent Power Producer Procurement (REIPPP) programme has matured and evolved since its launch in 2011, helping drive the country’s energy transition to an economically sustainable low-carbon future.

“Serving as a cornerstone of South Africa’s Integrated Resource Plan (IRP), the REIPPP programme aimed to address the country’s electricity supply challenges, secure a reliable energy supply and diversify the country’s energy mix to promote sustainable economic growth,” explains Taona Kokera, Director and Infrastructure Finance Advisory lead at Forvis Mazars in South Africa.

The early phases: wind and solar

The early phases of the REIPPP primarily focused on wind and solar power projects, with a competitive bidding process used to select independent power producers (IPPs) to develop and operate renewable energy projects. These projects were then connected to the national grid, providing a stable and renewable source of electricity.

The REIPPP primarily relied on a feed-in tariff (FiT) model to incentivize renewable energy investment, guaranteeing IPPs a fixed price for the electricity they supplied to the grid for a specified period. This provided a stable revenue stream, mitigating the risks associated with renewable energy projects.

The world-class programme attracted significant investment from local and international funders, with the government-guaranteed, inflation-linked real returns making projects bankable and reducing the cost of funding.

“Structuring the finance deals needed to fund large-scale RE utility projects in the early REIPPP rounds were a key component in managing costs and arriving at a competitive cost per kilowatt hour bid,” adds Johan Marais, Partner: Corporate Finance at Forvis Mazars in South Africa.

“The private sector led a large portion of these investments, with a large appetite from institutional investors like commercial banks, private equity and sovereign funds to fund these projects.”

These funding lines included a mix of senior debt funding in the form of long-term limited or non-recourse funding and direct equity investments. As risks declined and projects started to deliver stable returns, banks and equity partners have also sold down exposure via the secondary market.

Evolution in renewable energy

Over time, the REIPPP expanded to include other renewable energy technologies such as concentrated solar power (CSP) and biomass.

“However, projects that did not meet the REIPPP guidelines were not feasible due to existing regulations, as it was impossible to wheel the power,” explains Kokera.

As the programme advanced, the government made regulatory adjustments to address challenges and optimise its effectiveness by revising bidding rules, grid connection procedures, and financial regulations.

Coupled with improvements in the RE generation and storage technology, tariffs fell sharply over successive tender bidding rounds, to the point where round four projects were among the lowest-priced grid-connected RE projects in the world.

A major turning point in the country’s energy transition then came as South Africa’s energy crisis deepened, with demand far outstripping supply in 2022 and 2023.

“In an effort to incentivise industry innovation, the government took the bold decision to liberalise the RE sector in South Africa, which has ushered in the next phase in the country’s energy transition,” explains Kokera.

The government’s landmark decision to increase the embedded generation threshold from 1 MW to 100 MW, and later remove it, effectively lowered the major hurdle preventing mass private sector investment in RE projects in the country.

“By removing the licensing constraints and implementing tax incentives, the RE sector has seen rapid and sustained growth in private commercial and industrial (C&I) projects,“ elaborates Kokera.

Companies across the spectrum used the opportunity to leverage the dispensation, which coincided with a dramatic decrease in the costs of components like solar panels.

“The logistic networks that bring these products into the country also become more efficient, with more in-country manufacturing taking place, which also helped to lower costs,” adds Kokera.

The need for innovative funding

These companies, especially intensive users in the mining, manufacturing and agricultural sectors, turned to various innovative funding models to get these projects off the ground and make them viable, especially larger-scale embedded projects that require large capital outlays.

“While banks were unwilling to fund projects outside the REIPPP programme initially, commercial or alternative lenders have entered the C&I space en mass, funding on-balance sheet projects via a combination of property and asset finance,” elaborates Marais.

“Larger projects generally require a combination of equity, mezzanine finance and debt funding, with lower cost, longer tenor debt often preferred because it offers better investor returns and lowers the tariff.”

Companies that lack the sites or financial resources to efficiently self-provision renewable energy enter into off-take agreements with IPPs through long-term Power Purchase Agreements (PPA).

Typically, IPPs rely on project finance as there is no balance sheet behind these companies to fund transactions. As such, IPPs will generally look to equity to fund the construction phase and debt in the operational phase.

“Forvis Mazars is also engaged in numerous refinancing deals to give IPPs access to cheaper funding lines to support long-term project sustainability,” says Marais.

Driven by the rapid pace and scale of C&I projects in the country, South Africa has become the largest and most mature C&I solar market on the continent, according to Wood Mackenzie data.

“The country’s C&I solar boom is set to continue, with a strong expected pipeline of 18 GW through 2027 buoyed in the medium-term by a new wheeling mechanism, which the City of Cape Town is currently trialling,” adds Kokera.

“The REIPPP programme has played an instrumental role in driving the growth of the IPP industry in South Africa and paved the way for a flourishing C&I sector,” continues Marais.

“With C&I set to dominate the RE landscape going forward, ongoing innovation to adapt funding models and procurement processes will support a dynamic IPP market that leads the country into a more energy-efficient era of cleaner, more reliable and cost-effective electricity production,” he concludes.

About Forvis Mazars

Forvis Mazars is a leading global professional services network. The network operates under a single brand worldwide, with just two members: Forvis Mazars LLP in the United States and Forvis Mazars Group SC, an internationally integrated partnership operating in over 100 countries and territories. Both member firms share a commitment to providing an unmatched client experience, delivering audit & assurance, tax and advisory services around the world. Together, our strategic vision strives to move our clients, people, industry and communities forward.

Forvis Mazars is the brand name for the Forvis Mazars Global network (Forvis Mazars Global Limited) and its two independent members: Forvis Mazars LLP in the United States and Forvis Mazars Group SC. Forvis Mazars Global Limited is a UK private company limited by guarantee and does not provide any services to clients.

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