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What does SA's R130 billion renewable energy deal mean for investors?

by , 12 November 2021
What does SA's R130 billion renewable energy deal mean for investors?
I'm sure you've heard, with a great deal of fanfare from the COP26 conference, that the US, UK, Germany, France and the EU have secured a deal to provide South Africa with R130 billion in climate finance to build more renewable energy - and replace aging Eskom plants.

A recent Moneyweb article - interviewing RMB CEO James Formby - indicates this could branch out to become a R500 billion injection into the renewable energy industry in South Africa.
 
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So, what does this mean for investors?
 
Huge investment is coming for the renewable energy sector.
 
At this stage – it isn’t fully certain whether the R130 billion will be in the form of equity, debt finance, grants or even a combination of them. RMB’s CEO seems to believe it will be grants – with a debt component of up to R390 billion being added in later phases.
 
That would be huge.
 
So, what does this mean for private investors?
 
Well firstly – pension funds and other investment houses in South Africa hold around R11 trillion worth of investments. The majority is invested in equities. So, it could be that we will see roll out of more green bonds, and other debt instruments that would allow them to invest in the renewable industry. This would be a welcome alternative to investing in SA government bonds.
 
Secondly – I expect we will see the listed renewable energy companies on the JSE boom.
 
There are already a handful of them. And we will likely see new listings come online as well.
 
Simply put – as a country we cannot wait any longer for Eskom to fix our energy crisis. While there are certainly environmental benefits to renewable energy, the main benefit from my point of view is the fact that it can be rolled out faster – and with private sector being involved the level of corruption will hopefully be less than under full Eskom control.
  
But what about the energy storage issue?
 
So solar power doesn’t work at night, and the wind doesn’t always blow. Right.
 
But it is also a fact that car companies are rapidly switching over to hybrids and full electric vehicles. Many car companies will stop fuel operated cars as soon as 2032.
 
This means that cars charging from green energy is effectively part of the storage solution – and it saves SA a lot of foreign exchange if we no longer need to import millions of liters of oil.
 
I still think we’d need a strong baseload solution like nuclear. And we will hopefully soon see utilities scale storage solutions not based on lithium batteries coming online – I’ve written about the subject before. Things like Vanadium redox batteries, pumped storage schemes compressed air and liquid air are all becoming possible options.
 
So, are there stocks from which investors like you and I can benefit in the renewable sector right now?
   
Three renewable energy stocks on the JSE right now
 
Renewable energy stock #1 – Mahube Infrastructure
 
Mahube Infrastructure (JSE: MHB) has a R350 million market value and the company is invested in five different renewable energy projects: two wind farms and three solar PV farms.
 
Collectively the company generates enough energy to power more than 350,000 homes.
 
Its assets are: 
 
Dorper Wind Farm – 100MW wind farm in the Eastern Cape Mahube owns a 9.9% stake in the project
 
Noblesfontein Wind Farm – 73.8MW wind farm in the Northern Cape Mahube owns a 20% stake in the project
 
Jasper Solar PV Farm – 75MW solar power in the Northern Cape Mahube owns a 4% stake in the project
 
Lesedi Solar PV Farm – 75MW solar power in the Northern Cape Mahube owns a 5.3% stake in the project
 
Letsatsi Solar PV Farm – 75MW solar in the Northern Cape, Mahube owns a 5.3% stake in the project
 
Up until now Mahube has been a minority shareholder in all of these renewable projects. But the company earns good income from them and currently sits on a dividend yield of around 7.83%.
 
The company wants to transform into a more significant stakeholder in projects like these and is currently trading under cautionary – so there is a possible deal on the horizon. If a company like this could receive low interest loans or grant funding through the COP26 deal – it could spell massive upside potential.
 
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Renewable energy stock #2 – Hulisani Ltd 
 
Hulisani (JSE: HUL) has a market value of R194 million and paid a maiden dividend in June 2021.
 
The company is set to see much better growth as soon as more wind power projects come into construction. That’s because it doesn’t only own renewable energy producers, but also a company that MANUFACTURES the towers for wind power projects.
 
Its assets include:
 
Rustmo1 Solar Plant – a 7MW solar plant in the Marikana area. Hulisani owns 66% of the project.
 
Avon and Dedisa Peaking Power – These are 670MW and 335MW open cycle gas turbine plants in KZN and the Eastern Cape. These plants produce power specifically when Eskom experiences breakdowns or when demand is increased. Hulisani has an interest in the Avon and Dedisa Peaking Power Plants, held indirectly through a convertible loan into Legend Power Solutions (which holds 27% in each of the Avon and Dedisa Peaking Power Plants).
  
Kouga Wind Farm – An 80MW wind farm in the Eastern Cape. Hulisani owns 6.67% of the project.
 
Renewable energy stock #3 – Montauk Renewables
 
Montauk (JSE: MKR) with a market value of R23 billion is by far the largest of the three opportunities. The company specializes in using biogas from landfill sites to produce electricity. It has 30 years industry experience and is one of the largest US producers of Renewable Natural Gas (RNG).
 
The company operates 12 RNG sites in the US. It also operates a manure digester on a commercial dairy farm in California that produces gas from manure – for electricity.
 
The company’s maiden interim results in June 2021 came in with revenue of around R900 million and the company is not yet profitable.
 
It just received a patent for a near-zero emissions renewable energy system that processes agricultural waste into renewable fuels. It can produce ten times more energy per unit of emissions compared to conventional energy.
 
Renewable energy, and private energy producers like these are making a big dent in SA’s power shortages. Simply put – they’re the future. As technology improves and new projects come online profits will be even bigger. I for one am excited about the potential. My choice in the sector right now is definitely Mahube Infrastructure.
            
Here’s to unleashing real value 
 
Francois Joubert
Editor, Red Hot Penny Shares


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