Fieldstone Newsletter - First Half 2019

Dear Clients and Friends of Fieldstone,

This Fieldstone Newsletter - First Half 2019 (the official yet unwieldy title) finds us preparing to attend the African Energy Forum in Lisbon, a high point in the seemingly ever-expanding conference season. If there were truly some correlation between the number of successful projects and the total count of gatherings to discuss the topic, everyone in Africa would have unlimited access to power.

Nonetheless, gather we shall and at least this year we will find a full plate of actual things to discuss. There may not have been a sterling record of transactions that have reached closing since last year’s event but there does seem to be a host of current developments that bode well for the Continent in the coming months. Let me raise a couple of themes that I think bear noting:

Off Grid

Off Grid has been the pet topic of conferences for a quite some time. I remember back to the (in)famous London (Brexit) AEF, when there was a separate Off Grid village constructed outside the regular conference centre. With all this focus, it has been more touted as a need – a noble possibility – consuming capital at a greater rate than it has yielded sustainable business models.  The challenges have been legion and the path filled with temptations.  Often, technical prowess has gotten ahead of commercial reality (costs be damned) and the desire to create rate paying customers has led companies into adventurous economic initiatives with very mixed results.

Fieldstone has helped evaluate and finance a number of Off Grid companies over the last five years and we see the first evidence of sustainable models emerging. We are now working with Lumos Global which is focused on Nigeria that seems to have found such a formula.

The key distinguishing factors in the Lumos business model are sufficient patient backing to reach scale, rigorous cost control and a view of the relationship with each consumer as a fully-fledged customer, which makes the underlying business about something more than just electricity provision. At the root of all these attributes is that Lumos Global has adjusted its market and learnt from experience.  With over 100,000 customers and positive in country financial results, Lumos Global shows that Off Grid can be more than just an aid transfer mechanism with no prospect of sustainability.

Image by : Lumos Global
Image by : Lumos Global

Development Platforms

Fieldstone client Windlab closed a market setting fund raise/strategic partnership with Eurus of Japan for participation in renewable projects including a 100 MW wind project with excellent production fundamentals in Tanzania. The success of Windlab illustrates a number of points about successful development platforms in the current market:               

  • Development Costs: The shortage of good transactions and the amount of capital looking for projects means that investors understand that they need to secure projects prior to financial close and share the risk in order to have access and secure reasonable returns.
  • Team: the Windlab team is experienced with a record of success in South Africa. Projects without associated professionals are hard to value.
  • Continuity: Windlab has spoken continually with Eurus and the market about its portfolio. This proved critical to the success. Both private and public entities expressed interest in the position.
  • Portfolio: Windlab has a number of opportunities so the risk of a single project was hedged and the size of the portfolio made smaller assets interesting to even large investors like Eurus.
  • Following last year’s successful sale of the 650 MW Svevind development in Markbygden in Sweden, we are pleased to announce the sale of the second phase of the project which is 750 MW in size. Subject to a few remaining conditions, the sale should be finalized in the next month.
  • Fieldstone is active in areas where energy intersects with other sectors. Two cases in point, Fieldstone is advising on a sugar, power and ethanol production facility in Asia in advanced development and on a capital raise for a ground breaking ammonia production technology. Both of these projects are indicative of the way energy will be part and parcel of a range of industries in the future.

Fieldstone’s own development support vehicle FAIR (Fieldstone Africa Investment Resources) will respond to private company and DFI inquiries and offer a strategic stake in its portfolio and business in the second half of 2019. FAIR supports green and renewable projects that need assistance beyond advisory to achieve closing throughout Africa. These smaller projects (up to 50MW) benefit from the development experience of CEO Brian Van Oerle and his team as well as the resources of Fieldstone including some development funding. FAIR receives an equity position and co-investment rights and fees in projects for its efforts. In the 3 years of its existence, FAIR has evidenced a record of success with three closings during that time and currently has more than half a dozen projects under contract.

Renewables: Optimising Bids

Fieldstone honed its skills in achieving results in open bid competition in the South African REIPPP Program (REIPPPP) which came to an abrupt halt in 2017 (or perhaps, more precisely, took a hiatus). Fieldstone successfully advised on all of the REIPPPP auctions with unique success in South Africa. While South Africa paused, the skills of structuring and optimising bids has been a useful tool elsewhere in Africa and has even been a factor in our emerging Latin American practice where programmes are loosely modelled on the RSA model.

The most recent example of success is close to home in our advisory work with Innovent, a newcomer to the African market based in France. Innovent was one of three selected bidders in the Get Fit Zambia auction process among 24 bidders. Particularly gratifying was that Innovent’s pricing was both competitive and still roughly twenty percent higher than the lowest bidder (highest among the three selected). Winning an auction at the cost of an underperforming asset is never the goal.

The Innovent experience is relevant to the Round Five REIPPPP auction in South Africa as well as auctions in Tunisia and Ethiopia, all of which are anticipated to take place around the end of this year. We will be working with new entrants and existing clients to secure part of the sizable generation quotient called for in the Investment Resource Plan of the Government. It is pleasant to have a full dance card in this most important round – for renewables and for the future generation in the company. In the meantime, we are involved in auctions in no less than five jurisdictions, so we are keeping our pencils sharp.

Industry Structural Shift

The delivery of power in Africa is having to respond to truly challenging circumstances, the likes of which only few private sector companies ever face. The key forces at work are the shift to renewables, technology that makes distributed power solutions viable and the need deliver uninterrupted power that can support the businesses that will provide jobs as a wave of young people seek employment.  Many are also facing these challenges from a position of financial weakness from non-cost reflective tariffs and high technical and non-technical losses and responsibilities related to electrification that further burden finances.

As ever solutions are particular and local,  but  we note that there is a general trend  for African utilities to be more nimble as they move away from single buyer positions – driven by competition from commercial and industrial generation and other forms of localized production as well as governments eager to distance themselves from direct guarantees -support which can only be avoided if a market develops for power. This is seen clearly in Nigeria where solutions are emerging that will allow large users to become direct customers of private generators and for private sub-networks with reliable power to emerge.

The good news in all of this from a utility perspective is that the complexity means that utilities will need to be freed to act more like decision making entities and less like government departments. This is essential for the utilities to be able to react and respond- clinging to the old single buyer model will work no better for African utilities than it has in other markets around the world. Freed from some of the time swallowing bureaucratic load and statist thinking, it may be surprising how quickly they can transform as they get leaner and more focused but decidedly better. The utility professionals in many African countries are capable to meet this challenge and programmes exist such as Power Africa to assist where capacity building is still needed (Fieldstone is proud to be part of the Power Africa advisory team led by RTI in East Africa).  There is no way to hang on to the past and I am enthused that even as I sit here in South Africa, I feel assured that this view holds sway.

Elsewhere

Africa and energy are a core competence but not the only aspect of Fieldstone’s business:

  • Following last year’s successful sale of the 650 MW Svevind development in Markbygden in Sweden, we are pleased to announce the sale of the second phase of the project which is 750 MW in size. Subject to a few remaining conditions, the sale should be finalized in the next month.
  • Fieldstone is active in areas where energy intersects with other sectors. Two cases in point, Fieldstone is advising on a sugar, power and ethanol production facility in Asia in advanced development and on a capital raise for a ground breaking ammonia production technology. Both of these projects are indicative of the way energy will be part and parcel of a range of industries in the future.
Image: Svevind development in Markbygden, Sweden
Image: Svevind development in Markbygden, Sweden

Transitions

 We would like to welcome Christine Gibson as a Senior Banker in our London office. She has been developing renewable projects for a family office after serving in a number of capacities for South African balance sheet banks. She joins Tshepang Marishane in London, another South African, who joined Fieldstone from Investec in Joburg but is now taking advantage of the Northern Hemisphere summer – not so warm but a lot of daylight hours.

Images : Christine Gibson and Tshepang Marishane
Images : Christine Gibson and Tshepang Marishane

Please do drop a line to me and copy in Indira Francis our Global Operations Liaison -IFrancis@fieldstone.group if anything mentioned in this note is of interest to you particularly or if you can benefit from discussions. For those of you attending AEF, we will have a dozen senior professionals eager to talk shop.

Best Regards

Jason Harlan
Chief Executive Officer