By Mashudu Mphafudi, Kuda Chimedza and Michael Bailey
Professor Anton Eberhard estimates that as of June 2023, households and businesses have installed 4412 MWs of rooftop solar.
Not only is this double the capacity of Eskom under its four previous Renewable Independent Power Producer Programme (REIPPP), but nearly a 350% increase of the installed capacity by households and businesses since March 2022.
However, there remains a funding gap that still requires government intervention.
On August 8, 2023, National Treasury launched the Energy Bounce Back Loan Guarantee Scheme (EBB). The EBB aims to alleviate the country’s existential power crisis that impacts small and medium enterprises (SMEs) and households with the generation of 1000 MW of additional generation capacity over the coming year.
The EBB provides for a government guarantee by the SA Reserve Bank (SARB) which will be liable for the initial losses up to 20%. This guarantee will be a contingent liability on the government’s account. The institutional lenders will incur the balance of the losses for SMEs and households’ rooftop solar of 80%. The EBB will terminate on August 24, 2024. The EBB will run in parallel to the beneficial tax breaks of up to 25% for the cost of rooftop solar for households and 125% for any renewable energy projects for businesses.
EBB mechanisms
The EBB will operate within three mechanisms:
- loan guarantee for rooftop solar to SMEs and South African households;
- loan guarantee for rooftop solar to Energy Service Companies; and
- working capital loans for South African businesses in the rooftop solar supply chain.
Mechanism 1: Loan guarantee for rooftop solar for SMEs and households’ investment
This mechanism will enable the disbursement of loans to both SMEs and South African households, intended for investments associated with rooftop solar such as solar panels, batteries, inverters, and other costs linked to installation.
Mechanism 2: Loan guarantee to energy service companies. This mechanism will enable the disbursement of loans to South African Energy Service Companies (ESCOs) who “provide leasing, instalment sales, and power purchase contracts to SMEs and households”.
For those SMEs and households’ who do not intend to purchase and own their own rooftop solar due to the high upfront capital requirements, ESCOs will be able to provide a reliable energy source to those SMEs and households. This mechanism will allow for such ESCOs to scale their services.
Mechanism 3: Working capital loans for businesses in the rooftop solar supply chain. As a result of the first two mechanisms, there will inevitably be an increase in the demand that such suppliers must meet. The purpose of this mechanism will be to ensure suppliers will be able to meet the demand with “minimum delays”.
In parallel to the EBB mechanisms, the Industrial Development Corporation of South Africa will offer mezzanine finance to facilitate new ESCOs; and scale existing ESCOs. The details of this mezzanine finance instrument are expected to be made available in due course.
Participation
Commercial banks will facilitate in the EBB on an opt-in basis and on a first come, first served basis until the earlier (part) of August 30, 2024, or until the EBB reaches 1000 MW. Treasury will, thereafter, assess the effectiveness of the EBB. The SARB will lend money to those commercial banks that are participating at the repo rate, and a 0.5% once-off charge of the amount disbursed.
Those commercial banks and other commercial lenders will lend the money as well as their own funds for the balance, being the unguaranteed portion of 80% of the loan amount, to the SMEs and households at an interest rate of no more than the repo rate plus 6%.
As of the date of this article Absa, First National Bank and Standard Bank have indicated that they will participate in the EBB.
SMEs will be required to comply with amongst others; the commercial banks’ requirements, registration with Companies and Intellectual Property Commission, and must be registered for VAT. Institutional lenders that ordinarily provide loans to SMEs, will also have access to the EBB through participating commercial banks subject to standard tax, legal and regulatory requirements.
SMEs participation is capped at those that have a maximum turnover of R300 million. Similarly, development financial institutions and non-bank lenders can also access the EBB through a commercial bank up to a maximum of R300m per entity.
The maximum amounts to be borrowed for, currently are anticipated to be as follows:
- an SME, will be R10m SMEs are also permitted to borrow a maximum of R30 000, for resilience measures, to provide access for micro, informal businesses that may require portable batteries or similar equipment to these assets;
- a South African household, will be limited to funding of R300 000 per household for the purchasing of rooftop solar; and
- for an ESCO, will be limited at R100m. This threshold is also applicable to installers of rooftop solar.
While Eskom wrestles with grid constraints which continue to limit the amount of capacity it can realistically add to the grid through REIPPP, the country has seen a large increase in the private sector’s self-generation with little to no government intervention.
The government has now provided incentives to SMEs, South African households, ESCOs and all participants throughout the rooftop solar supply chain to continue to assist to alleviate the grid capacity constraints, and ensure a reliable energy supply for all role players in the South African economy.
Cliffe Dekker Hofmeyer’s director Mashudu Mphafudi; Kuda Chimedza is a senior associate, and Michael Bailey, an associate.
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