Financing for energy solutions for small businesses is increasing as investment opportunities improve

Various renewable energy, energy storage and/or generator solutions can partially address the energy challenges of small businesses, and funding for the installation of such solutions in small businesses is increasing as the investment benefits for all parties are better understood.

Small businesses are installing energy solutions to mitigate risks to their businesses and ensure they can provide sustainable services to their customers, said the managing director of financial services firm Standard Bank Group Natural Resources, Business and Commercial Banking Berry the hunter.

“In our discussions with our business customers, the topic of energy has become more of a focus, and electricity is typically one of the three most important topics for them,” he emphasized.

When financial services company Absa began borrowing funds to develop energy projects eight years ago, it took three years for the bank to disburse the same amount of funds for energy projects as it did last month, noted Absa Relationship Banking Head of Manufacturing, Renewables Energies and transport logistics Justin Schmidt.

“What we have seen over the last eight years is that the more end-users understand the cost of these systems compared to the cost of disruption and electricity tariffs, the greater the awareness of the business case for energy solutions and the greater the traction gained.”

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

“There are many frustrations for businesses beyond the lack of availability of electricity, including the significant tariff increases every 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 efficiently deliver suitable and competitive products, and energy solutions could convert businesses’ electricity costs into fixed costs, helping to better understand and manage base costs. “”

The returns from these schemes are important because companies rely on them to generate the savings that they will use to repay their lenders and increase their competitiveness, Schmidt agreed.

In addition, many renewable energy components and energy storage systems have long-term warranties and well-known performance metrics and have now become commodified.

“For example, since the beginning of the year, about 85% of the deals we financed included battery storage integration or involved standalone batteries,” he explained.

Storing battery energy allows companies to discharge it when renewable electricity is insufficient and means renewable energy sources can make up a larger proportion of the electricity their operations use.

“The more innovation there is in technology, the better the investment prospects for companies,” he said.

The cost of running generators is significantly higher at around R7.50/kWh than electricity tariffs at around R2.50/kWh and running generators can significantly increase a business’s operating costs.

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

“The volume of lending we have done over the last eight years has given us a lot of insight and we are more comfortable with the way we lend and the value we lend.” Furthermore, “It is beneficial for us as a bank if our customers remain competitive and have better cash flows that improve their ability to borrow sustainably,” said Schmidt.

Smart technology is a driver of the market and plays an important role in the transition of smaller companies, said De Jager.

“Every business in South Africa is grappling with challenges related to the availability and cost of energy and moving towards a green economy. However, this also means that there are significant commitments to increase energy resilience in various sectors,” he noted.

Effect of incentives

Meanwhile, climate finance, which is typically low-interest or concessional funds to promote climate action, cannot easily be used to finance energy solutions in smaller companies, as climate finance tends to target larger projects and has many eligibility criteria has controls that make climate finance ineligible. “This comes at a price,” noted De Jager.

“This (the use of climate finance for smaller businesses) is receiving ongoing attention with a view to optimal utilization,” he added.

“The funding lines that we use for small and medium-sized companies are internal in nature. We rely on liquidity pools when granting loans.

“However, climate finance, government and industry incentives available to companies to reduce their carbon intensity all help to unlock our internal financing lines and help us have a larger pool of liquidity available to lend to small business energy solutions forgiven.” he remarked.

The main advantage of incentives, concessions and other lending programs such as the Energy Bounce-Back (EBB) Loan Guarantee Scheme as a participating bank of the National Treasury is that they help reduce the cost of capital, which then benefits lenders De Jager emphasized that We reach out to customers to advance and accelerate the deployment of lower-carbon energy systems.

Schmidt agreed, adding that rebates from development finance institutions (DFIs) for installing energy efficient or renewable energy systems helped catalyze loans. For example, a 7% discount reduced the lending required by the bank by 7%, which served as a catalyst for financing additional solutions in the industry.

“The EBB program is a positive development for the industry and Absa has also provided energy grants to qualified small business customers. For example, our Green Asset Finance grants, where we give qualified SMEs up to R50,000 towards their loans, are helping to stimulate demand and reduce costs for smaller businesses.

“The cost reductions made possible by grants and incentives for smaller businesses make installing energy solutions more cost-effective and competitive,” said Schmidt.

For banks, grants, incentives and other support measures impact the potential losses banks incur in the event of defaults and allow them to increase lending to a market that is not yet mature, he added.

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

“All of these initiatives, including incentives, credit guarantee schemes, tax depreciation relief and regulatory clarity, are strategically important as they all help to improve investment opportunities for companies and help open a larger part of the market to lenders and the “Passing on the benefits of lower credit pricing to the end user,” he said.

ESG travel

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

“That’s why our pricing strategy looks for ways to optimize costs for the end consumer. We do this hand in hand with proven product sets and strive to optimize the use of these systems so that the customer can install these systems at almost zero cost, where the reduction in electricity consumption and costs can lead to savings that pay off the loan.” , he said.

In addition, financing these solutions also contributes to solving the energy crisis in the country. Solutions that help small businesses and businesses in general help mitigate risk.

“Energy challenges pose significant risks to businesses and as lenders it is also in our interest to mitigate our customers’ risks. Lower credit risks as well as better customer performance and growth already provide us with an important economic incentive to support these initiatives,” added De Jager.

Additionally, while above-inflation electricity rate increases and a better understanding of the performance of renewable energy systems and their impact on the cost of doing business have helped improve investment opportunities, renewable energy systems remain large investments for businesses, Schmidt said.

“Capital costs remain one of the biggest barriers to wider adoption of renewable energy and companies need to make a decision based on the long-term benefits.

“While investing in renewable energy systems is typically a good investment, it remains a difficult business decision as companies will own these assets for a long time.

“Therefore, one of the key roles of lenders is to provide companies with support and information so that they can make the right business decision for their operations,” he emphasized.

However, given that renewable energy systems are green assets, there is also an opportunity to increase incentives and support for their financing and accelerate their adoption and transition by smaller businesses in South Africa, Schmidt added.

“We have seen that ESG is becoming increasingly important for small companies and not just for large corporations. This is not about compliance, but rather that ESG encompasses good business practices, such as reducing consumption and waste and managing resources more efficiently.

“These practices benefit small businesses. When their customers and buyers want to improve their sustainability measures, low-carbon small businesses as suppliers improve their sustainability ratings.

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

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