By Gemma-Louise Perrins
2021 is set to see the highest electricity price increase of the last decade. In fact, seven times more than the 2.20% tariff increase South Africa witnessed in 2018.
Shortly after South Africans were warned to expect another five years of load shedding, an increase of 15.63% in electricity tariffs was implemented to direct Eskom consumers in April 2021. The City of Johannesburg also hiked its electricity tariffs recently by 14.59% which took effect from the 1st of July 2021.
While South Africa’s energy crisis started to unfold with Eskom’s introduction of load shedding in 2007, 2020 was arguably the worst year for commercial property owners. Not only were the odds of the pandemic stacked against them with rising vacancies but, along with the rest of South Africa, they experienced 859 hours of load shedding during the year (9.8%) due to breakdowns at Eskom’s ageing power stations – a record worst.
Over the past few months, more and more municipalities across the country have spoken up about possibly going ‘private’, ultimately leaving the Eskom grid. Sheldon Friedericksen, Chief Financial Officer at Fedgroup, believes that commercial property owners do not really have a choice in this matter.
“I believe we would all rather be in control of our own destinies. Property owners are going to have to look at alternative sources of energy which means they may need to support their municipality or a private energy company such as our Solar Fund to fulfil their energy needs” he says.
Renewable energy emphasizes this stark reality. There are various methods that property owners can explore to be a part of South Africa’s energy mix and over time, implementing renewable energy equipment has become more affordable and accessible to property owners who now have the option of installing solar panels on their buildings.
By using the initial capital outlay to install a solar plant, and working on a payback period, property owners could acquire electricity at a cheaper price.
“From a financial perspective, this is the back premise to the increased interest and adoption of renewable energy” says Sheldon. “From a green and sustainability perspective in South Africa, which uses coal for power, renewable energy is the ‘cherry on top’”.
The risks versus the rewards of investing in solar as a property owner
While each property owner funds and operates their assets in different ways, Fedgroup’s renewable energy offerings appeal to all property owners who understand their electricity load profiles which in turn, enables different mixes of tenants to benefit from the ecosystems of their properties.
However, while one property owner may have upfront capital or spare capacity on their mortgage bond to fund and install a solar plant, another may not.
“Property owners who can fund a solar panel outright will commission an engineering company to perform the feasibility assessment, the design, the construction, and installation of the solar plant on their building. There will be an owner agreement in place where the landlord receives the benefits with a single capital outlay or finance coming from another source” says Sheldon.
However, not all property owners are willing, or able, to do so, particularly in the current market where they would prefer to reserve capital to purchase additional real estate.
This is where Fedgroup’s Rooftop Rental all-inclusive model comes in. Presenting the lowest risk from a landlord’s perspective, this offering is seen as a new rental income stream previously unearned on a property.
Fedgroup’s Solar Fund rents unused roof space from property owners by paying for and installing the solar plants, and the rent is determined via sub models which are based on the power produced per kilowatt hour.
“In essence, the landlord benefits the most with this option. Not only do they receive discounted electricity, which is cheaper per kilowatt hour, but they get paid regardless, with energy savings to reinvest. A service level agreement (SLA) is signed between both parties, and it is our responsibility to ensure the solar plant is operational, maintained, and managed. The landlord does not carry any of the risks – purely just the rewards” says Sheldon.
The ‘lease-to-own’ option presents a slightly different model.
“Once purchased through the provision of a construction finance facility, the solar plant is converted into a ‘lease-to-own’ payment model and the solar panel belongs to the property owner from day one. However, property owners are obliged to pay off the finance on the solar plant otherwise they face repossession, just like purchasing and financing a vehicle” says Sheldon.
On completion of the solar plant installation, the property owner receives cheaper or free electricity while reaping clean energy tax incentives such as 12B accelerated depreciation.
This model is forecasted on how much energy the solar plant will produce at the current municipal tariff. This means that, instead of paying the municipality or Eskom for electricity usage, the property owner saves, and this saving can be used towards settling the solar panel debt.
Unlike the case of a property owner placing a solar plant on their mortgage bond, which is backed by the property as collateral, if the property owner defaults on the solar finance, Fedgroup’s recourse is only ring-fenced to the solar plant. In such an instance they will decommission the site, remove the solar plant, and redeploy it elsewhere. The landlord keeps the property.
“With ownership in both these models, the responsibility of maintenance, management, and the insurance of the solar plant falls on the property owner who accepts the full associated risks and the forecast rewards” says Sheldon.
Investing in solar not only provides property owners with an advantage when moving towards ensuring their assets are sustainable but, in terms of the cost of a property, solar provides a property valuation uplift too.
“As your property costs decrease, you would expect your net letting income to increase and, on a standard valuation technique, this would result in a cap rate valuation increase” he says. “The cost of a solar panel installation does not equate to the extra value that is created or the discount for future cash flows from the energy that is produced. Our various finance models create the ability for property owners to execute on a solar plant installation in line with the risks and administration they are prepared to take”.
Fedgroup focuses predominantly on the commercial property sector which currently offers the best value proposition with sectors such as retail, which operates seven days a week, and the industrial sector which typically operates six days a week, procuring the most electricity during daylight hours.
During off-peak hours, ‘curtailment’ occurs which means that, regardless of the energy produced, without feed-in, it is wasted. Fedgroup’s models cater to this but there are certain buildings where feasibility works easier.
“Our clients consist of listed blue-chip companies to smaller property portfolios, as well as single properties who have all embraced renewable energy. There is a big drive within the listed property space to commit to green building initiatives”.
“We also have tenants that have adopted our Rooftop Rental model which works well because Fedgroup is taking the risk – the landlord must consent to their tenant, who wants to procure the power, installing the solar plant. The tenant only takes responsibility for making the electricity payments to our Solar Fund”.
However, there is still a learning curve when it comes to understanding how energy works within a building.
“Property owners need to understand their energy mix as well as their buildings. Older buildings can be a larger commitment in that you may have to refurbish and adapt the property’s roof and electricity reticulation to support solar and this is where the financing models come to the fore”.
Renewable energy is also relatively new in South Africa and a degree of uncertainty lingers in respect of the many solar companies who have received bad press over the past few years for ‘not delivering on their promises’.
“This makes commercial property owners skeptical when they are committing to anything from between R2 million to R50 million worth of solar in comparison to a R200 000 investment in a residential asset. It all boils down to finding a trusted partner and, in our ecosystem, this is Emergent Energy who is key to the sustainability of Engineering, Procurement and Construction companies (EPCs)”.
Eskom versus alternative energy
While we will always rely on electricity, there is more certainty on the unbundling of Eskom. Sheldon believes this will be aligned with international standards by separating transmission and generation.
“Transmission will become unbiased as to where it acquires electricity. Eskom will maintain the base generation capability with certain power plants, and these will predominantly require government’s support. However, the mix will change in terms of private energy being produced and fed through the different transmission lines and this is where feed-in becomes a reality”.
In respect of alternative energy, the usage of technology will determine its growth, with the improvement in storage and battery technology, especially at a municipal level, Sheldon believes this cost versus benefit cross-over point will happen within the next three to five years.
“In the end, real estate is not going to change significantly but how properties are used, why they are used, and the value proposition of real estate is very much where Fedgroup is positioned to add value to our clients. It is about unlocking value for asset owners, unlocking value for investors that have capital and bringing these two worlds together – bringing people with money to invest together with people who need money to be deployed in an asset and building an ecosystem where all parties share in that value” he concludes.