The changing African utility landscape - African Utility Week

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1 The changing African utility landscape - African Utility Week 14 May 2014 Ayanda Nakedi Senior General Manager Renewables Business

2 Presentation content South Africa s Energy Mix (Eskom & IRP) Drivers for renewables energy growth Renewable Energy Independent Power Producers Programme Africa and Global Solar Capacities Transmission and Intermittency Credit Ratings and Project Funding Integrated Demand Side Management 2

3 A growing share of renewables in the South African energy mix outlook by , 1.4% 2409, 5.8% 1400, 3.4% MW Eskom Total Net maximum Capacity Gx Mix (MW) 1830, 4.4% 35408, 85.0% Coal-fired Gas/liquid fuel turbine Hydroelectric Pumped Storage schemes Nuclear 1000, 2% 8400, 20% 0, 0% 8400, 20% MW 2609, 6% IRP 2010 Gx Mix (2010 to 2030) 6250, 15% 9600, 22% 3910, 9% 2370, 6% 0, 0% Coal OCGT CCGT Pumped Storage Nuclear Hydro Wind CSP PV The envisage outlook by 2030 for the Gx mix within South Africa indicates that renewables will play a significant role in the overall Gx mix Solar (CSP & PV) and contributed 11% of the Gx mix by In 2013, Solar capacity increased by 29% in the USA 9200, 10% 4759, 5% Total Gx Capacity Mix including the IRP 2010 Capacity Options , 10% 890, 1% 1200, 1% 41071, 46% Coal OCGT CCGT Pumped Storage Nuclear Hydro It should be noted that a revised IPR 2010 was conducted in November 2013 and is still to be approved Source: Eskom Integrated Report 2012; IRP2010, Power Engineering , 13% 2912, 3% MW 2370, 3% 7330, 8% Wind CSP PV

4 Strong fundamental drivers support continued growth of green investments globally Climate change concern Public funds of green energy Rising energy prices Ensuring security of supply and rural electrification Green investments Competitiveness with fossil Creation of Green Jobs Source: BCG

5 Investment in green energy steadily rising Historic investment in renewables 1 (B USD) Future investment needs (B USD) ,500 62% 17% 10% 11% 1% % Percent of total % 10,000 7,500 6,000 1, , , ,000 2, Renew -ables Coal Nuclear Natural gas Oil Total Challenge for business and governments is to ensure capital directed towards green investments Source: Bloomberg New Energy Finance 2012; IEA 2012 new policy scenario 1 Wind, solar, biofuel, biomass, small decentral, geothermal, and marine

6 MW The REIPPP opened the door for private investment in renewable energy Combined with global pressure to reduce GHG emissions and the need to rapidly scale up electricity supply, South Africa embarked on a renewable energy drive known as the Renewable Energy Independent Power Producer Programme (REIPPP) It is the Government s ambition to decrease GHG emissions by 34% in Allocation of capacity in bid Windows 1, 2 & Through the REIPPP, SA government is rolling out the planned renewable energy capacity of more than MW. Renewable energy projects with the capacity of MW (64 projects) were awarded during Window 1, 2 & 3 Source: Department of Energy Bid Window 6 1 Bid Window 2 Bid Window 3 Biogas Biomass Landfill gas Small hydro CSP Wind Solar PV

7 Several African countries are now considering solar PV and CSP (2013 installed capacities) Morocco PV CSP 0.1 MW 20 MW Algeria PV CSP 6 MW 25 MW Egypt PV CSP 0.6 MW 30 MW Nigeria PV CSP - 35 MW South Africa PV 114 MW CSP - Source: GlobalData 7

8 Globally the installed capacity for solar technology drastically increased over the last few years Source: GlobalData 8

9 An adapted transmission infrastructure needed to be properly manage renewable energy Energy from renewables will only be available when the energy source is available The best wind and solar sites in the country happen to be far from the grid, and grid integration cost could be higher. Sere wind farm is located 45 km from the closest connection point to the grid. Short to medium term challenges to grid access for renewables: o o Cutting supply from a baseload plant to compensate for an hour or two of very high wind generation is not practically possible RE fluctuations often happen quite rapidly, thereby requiring very rapid ramping of load-following plants (German wind farm example) Power supply variability Rapid voltage changes due to the impact of variability on the grid Ensuring the stability of the grid after a disturbance (Transient Stability) and synchronizing the plant turbines and shaft system with the grid (SSR-Sub-synchronous resonance-synchronisation) is a challenge for renewable energy grid connection Source: Eskom Transmission Grid Planning Meeting May 2013 However, from a holistic perspective, the location of the plant, a smart grid, and improved weather forecasting tools will mitigate these intermittency challenges 9

10 A stronger regional integration is a necessity There are 16 Southern African Power Pool (SAPP) members comprising 12 national power utilities from the 12 continental Southern African Development Community (SADC) countries. Nine of the national utilities are interconnected and are SAPP operating members. The remaining ENE of Angola, ESCOM of Malawi and TANESCO of Tanzania are not yet connected to the SAPP grid. Two countries, DRC and Tanzania, are also members of the Eastern Africa Power Pool (EAPP). The DRC is, in addition, a member of the Central African Power Pool (CAPP). Most of the power exchanges take place within the eastern and central area. The operation of the interconnected grid is split into three control areas composing of ESKOM, ZESA and ZESCO. Source: The International Renewable Energy Agency (IRENA) 2013

11 Major challenges ahead to ensure financial attractiveness of green investments Key challenges Examples Regulatory uncertainty Integration of green energy Trade barriers Impact of financial crisis Availability of financing Uncertainly around continuation of US production tax credit for green energy Ongoing debate about market price reform ~ 15 GW of Wind power not connected and 5 TWh curtailed due to grid constrains Delayed grid expansion threatens planned growth in wind on-/offshore Increasing protectionism, e.g. unfair subsidies, tariffs, domestic content requirements, etc. Spain stopped green energy subsidies and introduced tax on energy generation Italy phasing out subsidies solar Banks reducing expose to long-term financing due to tighter regulation Major utility balance-sheets increasingly constrained due to rise of small producers Source: BCG

12 Several challenges in financing energy projects in developing countries Challenges in financing energy projects Cost of renewables Tariffs are not cost reflective. Regulatory and macro economic risks Technology risks Inaccurate cost benefit analysis Currency risks High transaction costs Fossil fuel subsidies Country and political risks Low carbon policy risks Adverse credit rating Source: UNEP - Finance Initiative

13 Most utilities have pursued balance investment approach On average, ~15% of total invest directed into renewables Avg. annual investments '09 '11 (bn EUR) Note: RE = Renewable Energy. Only European utilities with 2011 investments > 1 bn EUR selected. 1: Wind share of RE measured as per installed capacity in MW at YE Source: Company annual reports ; company websites; BCG analysis Source: The Boston Consulting Group

14 Most utilities have recently received negative outlooks Recent changes: five additional negative outlooks and six downgrades Ratings by 1. Terminated rating relationship with Moody's in February 2013 rating shown at that date Note: Ratings for unregulated utilities and power companies status November 2013 Source: Moody's ratings; BCG analysis 14 Source: The Boston Consulting Group

15 Eskom and South Africa credit ratings as per March 2013 Entity Rating Status Moody s S&P Fitch Eskom Holdings SOC Ltd Foreign Currency Baa3 BBB - Local Currency Baa3 BBB BBB+ ZAR Long-term - AA AA+ ZAR Short-term - A-1 F1+ Outlook Negative (1) Negative (3) Stable (4) Stand-Alone Ba3 B None RSA Government Foreign Currency Baa1 BBB BBB Local Currency Baa1 A- BBB+ ZAR Long-term - AAA AA+ ZAR Short-term - A-1 F1+ Outlook Negative (2) Negative (3) Stable (4) Downgrading of credit ratings do have a direct impact on funding of projects by other institutions Source: Eskom Integrated Report: 31 March

16 Currency volatility and project finance risks Private sector lending in developing countries has often been in the form of loans denominated in foreign currency like dollars or euros. The general lack of long-term local currency financing meant that some entities, such as infrastructure projects and small businesses, were either unable to obtain financing, or they received foreign currency loans at their own risk. Institutions such as the International Finance Corporation (IFC) have been instrumental in providing facilities and instruments to mitigate against currency fluctuations in developing countries. Lake Turkana Wind Farm Estimated reported cost in 2014 was at Ksh 76 billion ( 623 million) Over the last 9 years, the Ksh depreciated by an average 2.7% against the Euro If the exchange rate continues to depreciate, the project by completion in 2015 could escalate to Ksh 80 billion due to exchange rate fluctuations. (excluding IDC, and others charges, etc.) The IFC has issued local currency loans using derivatives to finance energy projects in Kenyan shillings (Ksh), Nigerian naira and Zambian kwacha as an example. The corresponding graphs show the volatility of different currencies in relation to the dollar over a period of eighteen months. Source: International Finance Corporation and Local Currency Financing 16

17 More integrated demand side management (IDM) initiatives IDM s role is to ensure single ownership of DSM strategies, objectives and operations throughout Eskom It takes a market-driven approach to understanding and meeting consumer requirements and provides a platform from which Eskom can collaborate with: Government External stakeholders Consumers The 49M initiative aims to inspire South Africans to save electricity CFL lights Geyser Blankets Eskom IDM initiatives Geyser- and Pool timers LED down-lights Efficient shower heads Solar Water Heaters Source: Eskom Integrated Report: 31 March 2013, Eskom Website 17

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