South Africa: Old Mutual sees stronger rand lifting green energy

Rays of Recovery

A stronger rand would boost South Africa's solar power industry. REUTERS/Thomas White

By David Whitehouse

Investment managers at Old Mutual Alternative Investments (OMAI) plan to make further investments in South African renewable energy as the outlook for a stronger rand improves the sector's prospects,

joint CEO Paul Boynton tells The Africa Report.

A stronger rand will increase the purchasing power of renewable-energy providers who source components from China. A healthier currency is “very useful,” especially for the solar power industry, Boynton says from Cape Town. “It’s a big plus.”

Boynton says the rand is likely to continue to be “very volatile”, but is likely to appreciate this year. OMAI predicts that South Africa will have a flat current-account balance in 2021, rather than the usual deficit. There has been a “material change” in the balance of trade as the country’s exports have held up well, while imports have suffered due to Covid-19, he says.

Cheap money from the US Federal Reserve is also likely to last, which will be supportive for the rand, he argues. The Fed may wait until 2024 before increasing interest rates, meaning investors will need more assets in other currencies to generate yield, Boynton says.

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While some of the firm’s assets in sectors such as travel and tourism are “very compromised” by the impact of Covid-19, “renewable energy is a stand-out,” Boynton says. OMAI has investments in 28 renewable power projects in South Africa, equally divided between solar power and onshore wind.

The firm’s investments in South Africa include stakes in the Orionis, Bokamoso and Waterloo solar power facilities, and the Perdekraal East wind farm. OMAI “certainly” wants to make further renewables investments both in South Africa and the rest of the continent, Boynton says. “The opportunity set has come to the fore in South Africa.”

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Auction programme resumes

South Africa aims to have a 41% share of renewable energy in the national mix by 2030. Key to the rapid growth has been the government’s tendering process for renewable energy, Boynton says. After a period of “lost momentum” under former president Jacob Zuma, tenders have now resumed.

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In February, President Cyril Ramaphosa confirmed the government will soon launch round five of its Renewable Energy Independent Power Producer Programme (REIPPP) for 2.6GW of solar and wind power capacity. This will help make up for the gaps left by retiring coal-fired plants.

• A further bid window will be presented in August.
• OMAI partners with project providers to make bids as the equity sponsor, using money that clients have invested in its funds.

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It is crucial that there is “reasonable predictability” in the government timeline for auctions, Boynton says. “It’s necessary for the industry to remain committed and engaged.”

• Other African countries can learn from South Africa’s success in creating a tendering framework with standardised documentation where results are price-driven, Boynton says.
• The result is that banks are now willing to lend to South African renewables projects at lower rates, and equity finance is coming in with lower expected rates of return, he adds.

Bottom line

Renewable energy is breaking though in South Africa, helped by a stronger currency and a clear government timetable for auctions.