Dear Solar 12J Investors
(This blog has also been distributed via email and SMS).
Due to all the load-shedding news of late, we have decided to dedicate this newsletter to the impact of load shedding on our investments. However, before I get into all the load-shedding stuff, please find a quick update on our project pipeline below.
Project Pipeline
- Unfortunately we lost a major proposal (which we worked on for months) in respect of a well known privately owned gold mine. This project had the potential of an ultimate installation (modular proposal) almost five times the size of our current largest project. We were offered the contract should we match a competitive offer, which we declined since the commercial model compared to risk, simply did not tick our investment boxes. The lesson learnt is that this space is becoming very competitive and the larger players are definitely willing to undercut smaller funds like ours.
- We have been short-listed as one of the final pre-approved contractors to tender for the Lafarge South Africa closed-tender. Our team has been working flat-out on this massive opportunity and the tender proposal was submitted last week. A blue-chip project like this is too big for us to fund ourselves and the tender has therefore been done in partnership with other financial roleplayers. We will keep you posted over the next few months on this one.
- We are also busy with a number of other proposals and hope to close at least one more deal before the end of the year.
Projects won
Well done to Anton Boshoff and the Key Solar Exchange team for securing the second phase of our already profitable LimeRock business park project. Phase 2 will add another 300kWp generation to the existing LimeRoc 1 solar plant outside Pretoria. The site is estimated to be fully operational by 1 April 2023.
The load-shedding issue
In this email, we explain the impact of load-shedding on solar systems in general and how it impacts us as investors in the Futureneers solar fund. So, brace yourself, a bombardment of “load-shedding-negativity” is on its way! I know it will probably be a very long and exhaustive email to read, but please bear with us as we attempt to not only inform our investors what’s happening with their investments, but also provide some educational information with respect to the industry they are invested in.
As always, we will end with the key questions at hand, being:
- What are we doing about it?
- What does it all mean for our investors?.
Point No 1: Unfortunately load-shedding does impact solar systems and
decreases solar revenue significantly
Most commercial and industrial (“C&I”) solar systems in South Africa (including ours) are grid-tied. This simply means that when Eskom is load-shedding the client cannot use its solar generated energy and we can therefore not generate any revenue. Although clients are now starting to design and install “hybrid” systems (which may include adopting generators to enable the use of solar during load shedding), the bulk of solar systems out there have not yet been adapted for hybrid. Furthermore, adapting mini-grid solar systems like ours for “hybrid” is technically not always feasible.
The long and short… while even Eskom cannot switch off the sun, load-shedding does switch off our ability to sell the sun’s rays. This is contrary to Andre de Ruyter’s comment last week in News24 that Eskom cannot steal SA’s wind and sun. Mr de Ruyter, unfortunately you are already stealing our sun rays!
Load-shedding is bad for everyone, including the solar industry. Some may argue that it fast-tracks future renewable energy implementation, and although this statement certainly bears truth, the bigger load-shedding picture for all of us is negative – definitely in the short to medium term.
Point No 2: Load-shedding hits our top-line revenue
Solar systems generate solar energy during daytime when the sun is shining. South Africa has on average 4.0 to 6.3 hours of peak sunlight per day where we generate the bulk of our output (and ultimately solar sales). In Gauteng, for example, where all our solar plants currently operate, the peak sunlight hours are on average only between 5.3 and 5.5 hours a day.
Now imagine the impact on our Gauteng solar plants if Eskom hits us with load-shedding for one, two, or sometimes even up to 4 hours on certain days. The simple math tells the story of potentially losing up to 40% of our daily generation (and revenue) due to load-shedding. The impact is definitely more severe when it takes place during peak generation hours.
During the last few months the actual impact of load-shedding on our Gauteng operations was on average a 20% overall turnover loss compared to the 5% best practice predictions included in our original forecast models done less than 24 months ago.
Point number 3: Losing revenue does not reduce our fixed operational and maintenance costs
Now that we understand that load-shedding hits our top-line (sales or revenue), it is also important to understand that the bulk of solar expenses are fixed, such as insurance, cleaning, rentals, etc. Unfortunately this means that when our sales are, for example, reduced by 20%, our bottom line profit will probably be reduced by a higher percentage.
Point number 4: It’s getting serious and its not “transitory”
Let’s put it in perspective:
- So far, 2022 has been South Africa’s most intensive load-shedding year to date, as Eskom’s coal fleet continues to deteriorate.
- Data from the CSIR showed that Eskom had cut (load-shed) 2,276GWh of electricity in the first six months of 2022 – more than 90% of the 2,521GWh it shed for all of 2021.
When looking at the Eskom Energy Availability Factor (this is the ratio of what they are producing), it is clear that even in a declining electricity demand period, Eskom will not be able to meet future demand profiles without a serious intervention of renewable and other energy sources.
So what are we doing about it?
Simply acknowledging that load-shedding will negatively impact our profits is not good enough!
- We are already adopting our strategy and addressing these risks as follows:
We are actively investigating how to convert our current grid-tied installations to “hybrid” - This one is not as simple as it seems. The complexity lies in our mini-grid model where solar energy is distributed via an electric “web” to multiple clients. The engineering of such a mini-grid makes it almost impossible to introduce a hybrid solar/generator solution for the grid as a whole while the energy load is distributed and used by multiple clients.
- We are however now looking at models to “unlink” certain high-energy consumers from our mini-grid, which may provide them solar energy as a hybrid stand-alone solution during load-shedding, while the lower energy users will still be idle (on the mini-grid) during these periods. The model is still being evaluated and as you can imagine we will have to ensure its technical and financial viability before going this drastic route. We will keep you posted, but should we get it right we may be able to recover up to 60% of load-shedding losses on certain projects.
New projects are almost exclusively focused on Hybrid Solutions - Financial modeling has already been adjusted to forecast higher load-shedding over the next 5 years. This is important in decision-making and deciding which future projects to accept or reject.
- Emphasis will be to roll-out “hybrid” solar systems, which coupled with a generator may still provide clients with solar energy during load-shedding.
- Financial models are also already adopted to offer rental models to clients.
Battery solutions - We are actively looking at battery solutions (including combining such battery offerings with our current solar plants in Gauteng). However, at this stage the battery solutions are very expensive and simply do not make financial sense yet. The unpredictable nature of load-shedding makes financial modeling of battery solutions very complicated and risky.
- It is however an area of continuous focus and we will keep investigating.
Other Solutions and Opportunities - As entrepreneurial fund managers, we are always on the lookout for new opportunities within the renewable energy space, including adopting models in an innovative way, partnering with property developers, other 12J funds and prepaid electricity vendors to find investment opportunities.
- We are making significant progress in this regard and will soon update you on exciting developments and partnerships we have secured.
Our usual golden question - what does it all mean for us as Investors
- Load-shedding is not a train smash (and in the long-term will provide the investment fund significant opportunities). It will however have a short-term impact on returns.
- The good news is that all of our operational solar plants are still making money (even while losing 20% revenue due to load-shedding over the last few months).
- Our financial models have been battle tested and are standing up well.
- A compensating factor that offsets the lower returns from the solar plants as a result of load-shedding, is the fact that our fund still has a significant portion of capital invested in cash (capital not rolled out yet). With interest rates increasing, investors are also earning more interest on their cash.
We are therefore still on track for our next dividend payments in June 2023, but we want to advise investors (even at this early stage) that as a result of load-shedding described above, combined with increased costs, (resulting from global supply chain issues and increased global demand for alternative energy products and a deteriorating Rand to Dollar exchange rate), dividends for the June 2023 payment cycle are expected to be lower than originally estimated. We don't want to quantify the exact impact yet, but over the next few months we will keep monitoring the effect of load-shedding and keep you updated as we get more data and understand its impact better.
In summary:
Load shedding is certainly a challenge and we estimate that it will result in lowering our June 2023 dividend estimates. However, with large Eskom increases expected in April 2023 and regulatory support for solar increasing (believe it or not, irrespective of what you read in the news, it's still a complicated process dealing with Eskom and the Municipalities as a solar producer), we expect significant opportunities to evolve over the next 2-3 years. As fund managers we want to reiterate that our aim is still to meet our original targets over the 5 year time horizon, but please understand that these projects are definitely long-term focused and may hit some bumps in the road to eventual success.
As always, our money remains next to yours. We will keep you posted on our progress. Any questions will be welcomed.
Kind regards
Jaco Gerber
and the Futureneers Energy and Key Solar Exchange (KSE) Team