Hydro rockets towards a better energy future

South Africa's largest hydropower site is located in the Drakensberg and produces 1000MW of electricity. Such large scale projects take a considerably long time to develop and become operational. Hydro at a smaller scale provides many opportunities through which South Africa can bolster its power supply. For example, the US Department of Energy has identified between 6-8000 sites, reports Brand South Africa, where smaller hydro projects (below 100MW) could be established. 

February 2021 Red Rocket inaugurated its Kruisvallei Hydro facility, located on the Ash River in the Free State province of South Africa. It's a significant development for three reasons: the time to deliver the project, the site's design, and the business model that makes it feasible for its developer and operator.

The Kruisvallei region is located between Bethlehem and Clarence in the Free State, relatively close to Lesotho's northern border. Sprouting just above Bethlehem, the Ash River travels almost directly south towards Clarence, feeding the Sol Plaatje Dam. A discharge point for the Lesotho Highlands Water Project, the Ash River has a constant water flow and was earmarked about a decade ago for smaller hydro sites.

After several false starts, one of the projects attracted the attention of Red Rocket which started construction on 26 March 2019 and launched the site by 25 February 2021. Today, the site generates 4MW from two run-of-river hydropower plants - a unique design - that combine to supply 4MW and will generate around 24GWh per annum across a 20-year lifespan. Using the Ash river's flow of 15m3 to 40m3 of water, the site provides power to 1916 households, including the Kgubetswana settlement.

Red Rocket Energy

Red Rocket may be a new name to some but is fast becoming a recognised trailblazer as an independent power producer (IPP). It originated out of another IPP, Building Energy, when one of Building Energy's founders, Matteo Brambilla, had an opportunity for a management buyout.

"There was an opportunity last year to submit a proposal for a management buyout, and that was completed between March last year and September of the same year. We are an integrated IPP. We do development, we do all the arrangements in sponsoring roles and setting up deals, we do project management, and we do construction," says the CEO of Red Rocket.

Red Rocket is a wholly African company, incorporated in Mauritius. It inherits the sites and reputation of Building Energy, including both established and projects in development across Africa, such as the Kathu Solar Park in South Africa and Tororo Solar North site in Uganda.

Red Rocket doesn't niche itself to one type of energy production and delivers solar, biomass, hydro, and wind projects. This diversity is one of its selling points. The other is its new approach to integrated projects.

As Brambilla explains: "For smaller projects or for de-risking purposes, we decide to build projects we then operate and ultimately we own controlling stakes in projects. This approach makes it much easier to remain profitable, especially considering the long delays you can experience in the energy sector. The fact that we can control the project means that we can price risks better and only once. By controlling the project, we benefit from development fees, we take a bit of margin from construction, operation and maintenance, and asset management. All these go into a blended IRR that allows us to bid low tariffs with utility scale equity returns, but still, let us make our returns to our shareholders."

Headquartered in Cape Town, Red Rocket has staff across the continent and a network of development, implementation, and funding partners. For the Kruisvallei project, it collaborated with Facility for Investments in Renewable Small Transactions (FIRST), a specialised debt fund established between the German and South African governments. The investment is key to understanding the success of this hydro project and why Red Rocket's integrated approach is much more effective, says Greg Ansermino, Principal Fund Manager at FIRST.

"Red Rocket had a great project that they thought should go ahead” he said, “but they were struggling to get funding from the traditional funding markets. They had a strategy at the time to diversify building energy to create a track record, as an EPC contractor. And the banks were saying, 'We don't trust-building energy to a new EPC, we want you to put in place a partnership with a larger established EPC.' Looking back now, two years later, it's quite interesting. Three of those five EPC names have gone into liquidation, and Red Rocket has delivered a phenomenal project."

Red Rocket undertook the engineering, procurement and construction of the plant, while Red Rocket Asset Management is responsible for operations and management. H1 Holdings participates as a 46.5% shareholder via the project company, Zevobuzz Ltd. Kruisvallei Hydro is the third hydropower site to come online through the Renewable Energy Independent Power Producers Procurement Programme (REIPPPP).

Building the site

The Kruisvallei site was designated for hydro a decade ago, but the project stalled until Red Rocket—then Building Energy—reinvigorated the opportunity: bidding it in August 2014 and then being appointed preferred bidder in May 2015. It was a challenge. There were considerable licensing delays, the project had to be redesigned to make it feasible, and the original lenders backed out close to the construction initiation date. But through hard work and diligence, ground broke in mid-2018. Success resulted from a focus on collaboration and the new integration-focused business plan.

"Red Rocket's projects are the result of cooperation between lots of different people to make something work," says Ansermino. "When we started, there were severe reservations. Now two years later, I can stand here and say, not only have they made it work, they've made it work as well as anybody else could possibly have done, if not better."

The successful completion of Kruisvallei Hydro is even more impressive, considering its construction took place as the COVID-19 pandemic halted momentum in all corners of South African society. But thanks to stellar project management and close relationships with local communities, things worked out very well.

As mentioned earlier, the site provides power to almost 2000 homes, and it created 714 person-month jobs during construction. In addition, Red Rocket employed teams from South Africa for plant and logistics requirements, while an Italian team helped install and calibrate the site's turbines. 

Supporting the area

Kruisvallei Hydro's smaller scale facilitates a direct line with local communities and supports their development. It has committed a percentage of its annual revenues to initiatives in the surrounding area towards education, housing and sustainable enterprise development initiatives for the project's life-cycle.

Kruisvallei Hydro and Red Rocket support the local municipality's vision to integrate the environmental, tourism, agriculture and economic sectors in developments that will create jobs and better opportunities for all residents. Playing a pivotal role in these rural communities, the project helps promote community-based projects, training and scholarships, micro-enterprises, the building and equipping of educational and health facilities, and infrastructure development.

"Energy and local development go hand-in-hand in South Africa, which is why our integrated approach gives a great advantage," says Red Rocket CEO Matteo Brambilla. "By being involved at every stage and the agility of deploying sub-100MW sites, we can build very close ties to local communities and leaders. And by maintaining a continual business presence throughout the construction and operation lifespan, we don't build and run. We can stay as active participants in developing the surrounding region in the same collaborative spirit we use to deliver our projects."

Rocketing towards the future

Kruisvallei Hydro is the first demonstration of Red Rocket's integrated development business model and will soon be followed by more. Brambilla can reveal that there are at least three more projects in the immediate pipeline - two photovoltaic and one wind site of 5MW each - that will reach financial close by the end of 2021. 

Beyond that, Red Rocket has around 2.5 GW of projects under development for the fifth round of IPP bidding, followed by another 3 GW in projects for future rounds. These are spread across solar and wind - reinforcing Red Rocket's vision to provide sites across all types of renewable energy. As it builds its credibility as an EPC and IPP, Red Rocket has big ambitions, says Brambilla:

"We want to establish ourselves as one of the largest independent power producers on the continent. We are hoping to grow, develop and set up business everywhere on the continent, but for now, we're focusing on South Africa where we have a well-developed market. We have developments in progress, especially on wind and solar, and we hope that all our efforts, strategy and financial engineering will be successful in the next round of South Africa's renewable energy procurement programme. After that, we are already working on new developments for the following rounds in this country. Our objective is to reach two gigawatts of projects by 2025."