Article

Renewable Energy in South Africa    

Valuation Insights

The Renewable Energy Independent Power Producer Procurement Programme (REIPPPP) was implemented by South Africa’s Department of Energy in 2011. The programme has largely been lauded as a resounding success stimulating both local and foreign investment into South Africa’s energy sector

In the current climate there is an observed level of increased secondary market activity on REIPPPP projects.  As these projects are niche in nature, a robust valuation of the asset is a critical factor in executing a successful transaction for an acquirer, and to mitigate key project finance risk for a potential lender.

Key Take-outs

  • Increased secondary market activity in REIPPPP projects due to uncertainty around future bid windows, lapse of three year shareholder lock-in period on the earlier bid window projects, consolidation in the sector and projects being fully operational with developers seeking an exit in order to recycle equity.
  • The typical valuation approaches for renewable energy assets may not fully capture the unique characteristics of a REIPPPP project such as ‘take or pay’ PPA agreement with Eskom, National Treasury guarantees and skewed equity IRRs from earlier bid rounds. These nuances may in some instances overestimate the financial and operational risk of the project.
  • Traditional valuation methods such as the Free Cash Flow to Equity model may lead to inaccurate results as it does not fully account for the changing capital structure of renewable energy projects over its term.
  • Deloitte’s preferred approach, the Adjusted Present Value (APV) method, together with an appropriate discount rate considering the nuances of REIPPPP projects, overcomes the key challenges in the valuation of a REIPPPP asset.
  • A robust valuation considering the unique characteristics of REIPPPP assets provides an important benchmark in negotiations and provides lenders with an added level of comfort on the ‘fair value’ of the asset based on its fundamentals.
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