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Beating the blackouts

Renewable energy has moved up the agenda in South Africa as power shortages have taken their toll. Andy Thomson reports on a firm using private equity backing to address the problem

When power blackouts first hit South Africa around the beginning of this year, they were initially treated as a bit of a joke. Radio announcers would amuse their listeners by advising them to make their morning breakfast by vigorously rubbing two slices of toast together. But after a year in which regular power failure shave become commonplace, no-one is laughing any more. Nor should they: the power shortage issue is tipped by experts to last for another five years.

Media reports say the crisis stemmed from South Africa's heavy reliance on state utility Eskom – which provides around 96 percent of the country's electricity – and its inability to generate enough power to meet demand. Some cite decisions made by former President Thabo Mbeki's government as being at the root of the problem. It is alleged to have dallied too long before giving Eskom permission to build new coal-fired and nuclear power plants.

Whatever the reasons, public anger has led to calls for action – and also presented an opportunity for proponents of South Africa's under-developed renewable energy sector. Denham Capital Management (Denham), an energy- and commodities-focused private equity firm with offices in the US, London and São Paulo, is, in the words of partner Louis van Pletsen, “aiming to capture the opportunity in the waste-to-energy segment in order to assist the power crisis”. It is doing this through a €150 million equity investment in BioTherm Energy.

BioThermtargets energy-intensive industries where industrial processes release significant amounts of waste energy as heat and gas. It then uses this waste to produce electricity or steam, which it sells to the host site or third parties. Van Pletsen claims that the supply of waste energy is immense.“In South Africa you've had cheap power resulting in the very inefficient use of power. In other countries you've seen the very diligent capturing of waste heat, but not here.” He estimates that BioTherm can easily produce an additional 300 megawatts of capacity – enough to supply about 500,000 households with electricity.

BioTherm's green credentials are impressive. The company's first plant, which opened just over a year ago in Cape Town, was the first private sector renewable power generation project in South Africa funded under the Clean Development Mechanism (CDM) of the Kyoto Protocol. Projects like these earn carbon credits because of their contribution to the reduction of greenhouse gasses.

This is not new territory for Denham, which invests in natural resources, power/carbon and commodities-supporting infrastructure. It has two other waste-to-energy companies in its portfolio: Illinois-based Recycled Energy Development (RED) and Toronto, Canada-headquartered StormFisher.

According to van Pletsen, the nature of private equity investments in energy/commodities businesses have changed profoundly since the onset of the credit crunch. “A lot of the focus used to be around leveraged finance and the ability to benefit from incremental debt capacity. In the current environment it's less about leverage and more about intrinsic value and management-led operational alpha.” Denham will be hoping to use some of that operational alpha to help address South Africa's growing energy problem.