Standard Bank Group
Sign in
Standard Bank Group
AGOA Insights
News 10 Nov 2023

Responding to the exponential growth of renewable energy means financial institutions must adopt a new ‘financial services industry’ approach

By Deerosh Maharaj – Head of Power & Sustainable Solutions, Natural Resources

Emphasis on energy security, affordability and sustainability remains a central theme in the transformation of the South African energy sector. Naturally renewable energy has become a specific growth market spurring the growth of a specialised ‘industry within an industry’ in the financial services sector.   More and more, we are finding banks gearing up to meet the needs of an ever-growing client base seeking financial solutions for these investments in their long-term resilience and sustainability.

The development is taking place against a national energy backdrop in which approximately 67% (21.4GWp) of peak demand is consumed by businesses. The residential sector takes up approximately 20% (6.4GWp), and 13% is deemed ‘technical losses’, which are made up of system losses, administrative shortcomings, and illegal connections.

Within these categories are businesses of assorted sizes and with power requirements that vary as they depend on the relevant business’s activities. At the forefront are major industrial and commercial enterprises with the liquidity and balance sheet strength to consider and fund appropriate solutions easily, from grid-augmented solutions to going off-grid.

A similar position exists in the residential sector, where demand for secure energy is limited by income. Traditionally, in a market where a solar solution can cost over R100 000, many are unable to consider renewable energy as a solution to loadshedding.

Sustainability is another key and overarching theme that businesses need to consider, and particularly businesses that are directly exposed to international trade channels due to the emergence of carbon borders. Essentially, what this means is that as time progresses, businesses that are the first to embrace sustainability and address their methods and processes for ensuring that their products and services decrease carbon footprint perspective will be the most agile and relevant.

Since energy is a key input into most products, this creates further impetus for renewable energy as it directly impacts the products underlying carbon credentials. Given that the local economy is so interlinked and as these pressures increase, we foresee that sustainability will impact all aspects of the market eventually. In the residential market we have also seen the emergence of a community of sustainability-conscious individuals who are making these investments primarily driven by the impact they have as opposed to the convenience they provide.

As the demand for renewable energy continued to  grow exponentially, financial institutions faced some practical challenges in  their ability to enter the market with financial solutions to support this demand. These included the need for a stable regulatory environment to enable the assessment of risks, which helps role players make long-term investment decisions.

Other considerations included the fact that financial institutions have limited experience with renewable energy financing and the amount of project risk involved in small-scale installations with extended repayment terms. Specialised knowledge was also required for the purpose of catering for the evaluation of complex projects and their viability in the embedded-generation environment.

All these factors explain the drive to create ‘an industry within an industry’ led by partnerships and the identification and implementation of workstreams to deliver the innovation demanded of an evolving, transforming renewable energy sector. 

In response, we have developed deep sector expertise enabling solutions to be delivered across the renewable value chain to meet the demands for delivering various client value propositions. Included are original equipment manufacturers of components such as panels, inverters, batteries and plant equipment, distributors and importers, and engineering, procurement, and construction companies.

The introduction of asset finance packages has been allied to this and focused on the client, from householders to industry. Screening and building a base of accredited solution providers has eased the way across technical barriers.

Finally, power purchase, subscription and rent-to-own schemes have been developed and could serve those with limited access to capital and those whose capital investment doesn’t align with their strategy. These solutions are offered through close partnerships and close the financial services circle.

The types of solar projects considered for funding are also tailored, with specialists assessing the requirements and applicability of funding solutions. Typically, these include capex funding solutions for existing businesses whose clients want to purchase a system and be the only beneficiary of the power generated.

An alternative, is a contract-backed funding solution for energy generators, including leasing, rent-to-own, subscription and power purchase agreements providers. Such a solution generally necessitates the creation of special-purpose financial vehicles that require funding.

Solutioning for financially resilient businesses and individuals has been well catered for.

Banks have struggled for some time with energy solutions for residential clients and for small-to-medium enterprises, which form the backbone of the economy and contribute significantly to employment and social stability in South Africa. This has therefore been a core focus area that we at the Standard Bank Group have been considering for some time. In fact, we recently launched our Solar Loan for the residential market as well as the Business Solar Loan targeted at small-to-medium enterprises. This is a joint initiative with support from government, ensuring that we can address a broader market more seamlessly and with greater speed of execution.

As banks with the expertise and skills available to focus solely on the energy sector move forward, the only constants will be that renewable energy options will intensify and that competition for market share by manufacturers, suppliers and installers will increase.

Inevitably, these pressures will be transmitted to financial institutions, which will have to rely on their accumulated knowledge, a network of in-bank and external specialists, and their ability to tailor bespoke financial solutions so they can remain relevant.

Being close to the renewable energy industry will provide the insights and data required for understanding new technologies and materials, coming trends, and the impact of commodities markets on the supply chain and critical for managing risks, refining product offerings, and building partnerships.

The good news for all concerned in the financial sector is that, although the exponential growth being experienced now may slow down as market penetration continues, the demand for renewable solutions will continue at high levels for at least the next five years.

The winners in the financial services sector will be those who have streamlined their operations and can offer well-defined solutions that cross traditional divisional barriers within their institutions.