Funding increases for small business energy solutions as investment cases improve

Different renewable energy, energy storage and/or generator solutions can partially address small businesses’ energy-related challenges, and funding to install such solutions in small businesses is increasing as the investment benefits for all parties become better understood.

Small businesses install energy solutions to mitigate risks to their businesses and ensure they can provide sustainable services to clients, noted financial services firm Standard Bank Group Natural Resources, Business and Commercial Banking executive head Berrie de Jager.

“In our discussions with our business clients, the issue of energy has featured more and, typically, electricity is one of the top three issues for them,” he highlighted.

Similarly, when financial services firm Absa started lending funds for the development of energy projects eight years ago, it took three years to disburse the same amount of funds for energy projects as the bank disbursed in the past month, noted Absa Relationship Banking Head of Manufacturing, Renewable Energy and Transport Logistics Justin Schmidt.

“What we have seen throughout the past eight years is that greater awareness of the business cases of energy solutions, and the better the end-users understand the costs of these systems when compared to the costs of disruption and electricity tariffs, the more traction is gained.”

Even if renewable energy and energy storage systems can only provide, for example, 30% of a company’s energy, that is still 30% of its energy costs that it can reduce, he added.

“There are many frustrations businesses face beyond not having electricity available, including the significant tariff increases each year and their inflationary impact on the business,” noted De Jager.

“Small businesses want to find a way to address these challenges in the long term to ensure they can deliver appropriate and competitive products efficiently, and energy solutions could turn businesses’ electricity costs to fixed costs, which helps to better understand and manage baseline costs.”

The returns on these systems are important, as business will rely on them to produce the savings they will use to pay back their lenders and to make them more competitive, concurred Schmidt.

Additionally, many of the components of renewable energy and energy storage systems have long-duration warranties and known performance metrics, and have become commoditised.

“For example, since the start of the year, about 85% of the deals we have funded have had battery storage integration, or were for standalone batteries,” he illustrated.

Battery energy storage enables businesses to discharge them when the renewable power is not sufficient, and means renewable-energy sources can become a larger part of the power their operations use.

“The more innovations there are on the technology front, the better the investment prospects for businesses,” he said.

The costs to run generators, at about R7.50/kWh, are significantly higher than electricity tariffs, at about R2.50/kWh, and running generators can significantly add operational expenses to a business.

However, this difference in costs between electricity from the grid and running generators improves the business case for companies to deploy renewable energy and energy storage systems and thereby reduce the energy cost of nongrid electricity.

“The volume of lending we have done over the past eight years has given us lots of learnings and we are more comfortable with how we lend and the values that we lend. Additionally, it is beneficial for us as a bank when our clients remain competitive and have better cash flows, which improve their ability to borrow sustainably,” Schmidt said.

Smart technology is a driver of the market and has an important role in transitioning smaller businesses, said De Jager.

“Every business in South Africa is struggling with the challenges around the availability of energy and its costs, as well as the journey towards a green economy. However, this also means there are significant commitments to increasing power resilience across different sectors,” he noted.

Incentives Impact

Meanwhile, climate finance, which is typically low-interest or concessional funding made available to drive climate actions, cannot readily be deployed to fund energy solutions in smaller businesses, as climate finance tends to target larger projects and has many elegibility criteria and controls, which come at a cost, De Jager noted.

“This (leveraging climate finance for smaller businesses) is receiving constant attention with a view to optimise its use,” he added.

“The funding lines that we use for small and medium-sized enterprises are internal. We rely on liquidity pools to lend.

“However, climate finance, government and industrial incentives that are available to businesses to reduce their carbon intensity all help to free up our internal funding lines and help us to have a larger pool of liquidity available to lend to small businesses’ energy solutions,” he noted.

The core benefit of incentives, concessions and other loan schemes, such as the Energy Bounce-Back (EBB) Loan Guarantee Scheme as a participating bank with National Treasury, is that they help to reduce the cost of capital, which benefits lenders can then pass on to clients to drive and accelerate the deployment of lower-carbon energy systems, De Jager highlighted.

Schmidt concurred, adding that rebates from development finance institutions (DFIs) for installing energy efficient or renewable energy systems helped to catalyse loans. For example, a 7% rebate reduced the lending required from the bank by 7%, and this served as a trigger for funding more solutions into industries.

“The EBB scheme is a positive development for the industry, and Absa has also provided energy grants to qualifying small business clients. For example, our Green Asset Finance grants, where we give qualifying SMEs up to R50 000 against their loans, helps to kickstart demand and reduce costs for smaller businesses.

“The reduction in costs for smaller businesses enabled by grants and incentives makes the installation of energy solutions cheaper and more competitive,” Schmidt said.

For banks, grants, incentives and other support measures influence the potential losses banks face in the case of defaults and enables them to increase lending into a market that is not mature, he added.

Clearer regulations have also made it easier to install renewable energy systems.

“All these initiatives, including incentives, loan guarantee schemes, tax depreciation allowances and regulatory clarity, are strategically important as they all help to improve the investment cases for businesses and help to open more of the market for lenders and pass on the benefits of lower pricing to the end user,” he said.

ESG Journeys

Meanwhile, because banks have their own environmental, social and governance (ESG) commitments, it is also important for them to support clean energy, energy resilience and transition projects and help companies to reduce their carbon footprints, said De Jager.

“This is why our pricing strategy looks at ways to optimise the costs for the end user. We do this hand in glove with well- established product sets and aim to optimise the use of these systems so that the client can install these systems almost on a cost- neutral basis whereby the reduction in consumption and costs of electricity can provide savings to repay the loan,” he said.

Further, funding these solutions also helps to solve the energy crisis in the country. Solutions that help small businesses, and businesses in general, help to mitigate risks.

“Energy challenges present significant risks to companies and, as a lender, it is also in our interest to mitigate our clients’ risks. Lower credit risks and better customer performance and growth already provide us with a significant economic motive to support these initiatives,” De Jager added.

Additionally, while above-inflation electricity tariff increases and a better understanding of the performance of renewable energy systems and their impacts on business costs have helped to improve investment cases, renewable energy systems remain large investments for businesses, said Schmidt.

“The cost of investment remains one of the biggest barriers to broader renewables roll-out, and companies must make a decision based on the long-term benefits.

“While investments in renewable energy systems are typically good investments, it remains a challenging business decision, as companies will own these assets for a long time.

“Therefore, one of the key roles lenders play is to provide support and information for companies to make the correct business decision for their operations,” he emphasised.

However, given that renewable energy systems are green assets, there is also an opportunity to increase the incentives and support provided to fund them, and accelerate their roll-out and the transition of smaller businesses in South Africa, added Schmidt.

“We have seen that ESG is becoming important for small enterprises as well, and not only large corporate companies. This is not based on compliance, but rather that ESG encapsulates good business practices, such as reducing consumption and waste and managing resources more efficiently.

“These practices benefit small businesses. When their clients and offtakers aim to improve their sustainability measures, having low-carbon small businesses as suppliers improves their sustainability score.

“Importantly, this also broadens the opportunity for small businesses to deploy renewable energy systems that will provide them with cost and sustainability benefits,” he added.