DECEMBER 2011 TNE NEW ANGOLA S ENERGY STRATEGY

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1 TNE NEW ANGOLA S ENERGY STRATEGY Presidential Decree No. 256/11, of 29th September, approved the National Energy Safety Policy and Strategy. This aims for profound change of the Angolan energy sector by reinforcing its capacities and infrastructure, while establishing the main strategic guidelines for the sector (particularly in the electricity and oil and gas subsectors) and redefining the institutional model. The main goal is to quadruple the existing energy supply, by making the best possible use of the endogenous resources and allocating the most efficient technologies. (i) Electricity ity Subsector The diploma calls for the increase in output of this sector so that, by 2025, supply grows from current 3% to nearly 10%-15%. To achieve this goal, it will be necessary to overcome a number of factors that determine the subsizing of this Sector in relation to demand: a) The high inoperability of assets (estimated at between 40% to 50% of the existing infrastructure), which is due to the intensity of exploration, the ageing equipment and the reduced or inexistent maintenance; b) The soaring supply costs (by 220 USD / MWh distributed), due to high technical losses and the inefficiency of the production structure; c) The high subsidisation level (average tariff of 42 USD / MW), in which the State currently bears nearly 80% of the total cost of the system; d) The insufficiency of added-value and capacity; e) The structural financial deficits of state-owned companies that operate in this Subsector. The stabilization plan defined in this diploma will rely upon two phases: the stabilization phase, to be achieved throughout the year 2012 and which corresponds to the implementation of several initiatives with short and medium term impact; the consolidation phase, to be set in motion in 2013 and which shall launch the foundations for a great transformation of this Subsector, preparing it to effectively address its medium- and long-term needs.

2 All through the stabilization phase, the purpose is to create, in the year 2012, the short-term conditions to double the increase in available system capacity. This target will be achieved by implementing the PESE (Executive Programme for the Electrical System, dated 2009), where the main investments were defined, of which only 46% are going into full implementation and correspond to the following: (i) The capacity to resume at least 500 MW of producing capacity, to be carried out, for example, by modernizing and recovering some hydro power plants (i.e., Cabambe and Gove) and the transport and distribution network (in Luena, Ndalatando, Malanje, Menongue and Soyo); (ii) The construction of infrastructure in order to provide, at least 700 MW of additional capacity, to be carried out, among others, by reinforcing the thermal capacity of Luanda, concluding the Capanda-Luanda line and installing gas turbines in Cabinda, Namibe Dundo, Xagongo and Ondjive; (iii) The interconnection of the North-Centre-South system and the connection of Uíje to the North system; (iv) The electrification of urban centres and construction of small hydroelectric plants (for example, Chiumbe-Dala, in Moxico). The extension of rural electrification is also defined as an important short-term target, according to a set of specific projects, such as the development of the following Sub-programmes: (i) Small Hydroelectric Production; (ii) Thermal Generation Systems; (iii) Implementation of Photovoltaic Solar Systems. Over a long-term consolidation horizon, this diploma determines the adoption of measures to begin with structuring investment regarding energy generation, namely: a) the increase in the national generation capacity, by 2025, from current 1GW to 9GW (basically in water and natural gas resources); b) the maximization of renewable energies, with particular emphasis on water resources and, from time to time, on wind and solar energy; c) the other endogenous resources, which may play a supplementary role (for example, the combustion of urban solid waste).

3 The diploma recognizes the need to promote and maximize the potential of renewable energies as privileged technologies. It calls for the need to encourage investment through public policies tailored to the competitiveness of each source. The promotion of renewable energies will involve taking full advantage of the potential of water resources that are already identified, and the potential of solar energy and wind energy, stress being laid to the impressive track record in implementing these energies and a lesser maintenance need as compared to other types of generation. Regarding the interconnected systems, the diploma points to give priority to the construction of large hydro power plants and natural-gas combined-cycle power stations (NGCC). Within this context, it is expected that the first NGCC will be launched (with a capacity between 400 and 800 MW), a new hydro power plants in river Kwanza be built and the works of Cambambe (960 MW) and Laúca (2 GW) be concluded. The geographically balanced expansion of electrification is another objective in the long run. To this purpose, there will be an intervention in terms of tariffs (which currently cover 20% of the system costs only) and the reinforcement of the operators added-value. The following institutional model will be established: - MINEA (Ministry of Energy and Water), which will be responsible for defining policies and strategies; - IRSE (Institute for Electricity Sector Regulation) and AREA (Atomic Energy Regulatory Agency), which will have regulatory authority; - 3 distinct state-owned companies: each will hold responsibilities at the level of each area of (i) product asset management, (ii) energy transport and (iii) energy distribution. The most relevant principles of the Energy Sub-sector will rely upon encouraging the injection of private capital and know-how, as well as the creation of attractive remuneration schemes for private investors. The celebration of Public-private Partnerships may be considered in specific cases, considering the risks and any hindrances arising from that (in particular, in terms of generation and transport). The diploma makes the assumption that the current Angolan operators may not have the scale and the resources allowing them, in an isolated manner, to address these challenges of transformation of the Angolan energy sector.

4 In this context, this diploma establishes that the new investments in the area of production may be open to private capital, in addition to any public investments. It is considered that this is the area with the greatest lack of financial and human capital and the most attractive one to private operators. The public operator will be responsible for bringing together the whole existing production infrastructure (including Capanda) and play a crucial role in new public investments, in accordance with procedures still to be defined. With regard to production investments from natural gas, it is argued that there should be a partnership model between SONANGOL E.P. and ENE, because of the privileged access of the former to natural gas resources and its knowledge of this sector. In terms of financial resources for the implementation of the energy plan, a specific Fund will be created and financed by different sources, such as taxes, concession fees and fines. In addition, the diploma admits that the financing may arise from Public-private Partnerships as a way to address the intensive capital and investment needs, and infrastructure reinforcement. These Partnerships are defined as the privileged mechanism for investment and for the operation of new large production units (greater than 10 MW). This model will allow some degree of competitiveness, while maximizing the levels of efficiency and regulation and making the market more attractive. As for the large production units and in terms of co-generation units (which will be subject to a priori licensing), feed-in tariffs will be the remuneration mechanism attached to production. The purpose is to provide the private operators with an attractive remuneration without jeopardizing the efficiency of public costs and end consumers. The subsector transformation programme of the Angolan electricity subsector will involve a global development of nearly USD 13 thousand million, to be made until (ii) Oil and Natural Gas Subsector The diploma fixes, for this subsector, the need to increase supply, by 2025, from current 33% to nearly 45% to 55%.

5 The strategy can be summarized as a way to maximize the attraction of richness by angolanizing the upstream activity and rationalizing the existing resources. To that end, the role of SONANGOL will be reinforced as an operator, a new regulatory entity will be created and the subsidisation of the end consumer will tend to be eliminated. Besides, the purpose will also be a swift implementation of a liberal model in this Subsector, provided with a new legislative and regulatory framework, to be elaborated on the basis of the guidelines of the Ministry of Petroleum. At institutional level, the IRSE (Institute for Electricity Sector Regulation) will be involved in the definition of a new tariff model and CSP (Productive Sector Committee) will act in the implementation of measures defined for this Subsector and in the coordination and monitoring of all activities. The carrying-out of the oil and gas subsector programme will involve a global investment between USD 13 to 15 thousand million, to be made by 2025.