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1 Slide Title Goes Here Renewable Energy: Assessing the experience of South Africa s Renewable Energy Independent Power Producer Procurement Programme (REIPPPP) Mark Pickering Globeleq South Africa Management Services

2 Credentials Globeleq Private generation company (IPP) Emerging market mandate (Africa & Central America) Largest private power producer in Africa Owned by Actis private equity fund. DfID s Commonwealth Development Corporation (CDC) is a major investor SA REIPPPP Round 1 Bid and won four projects Withdrew from one wind project due to supplier issues Closed 138 MW Jeffreys Bay Wind project Closed 50 MW De Aar solar PV project Closed 50 MW Droogfontein (Kimberley) solar PV project Active in Round 3 Portfolio India Pakistan Sri Lanka Bangladesh Philippines Tanzania Kenya Cote d Ivoire South Africa Mauritania Egypt Costa Rica Honduras Chile Argentina Bolivia Peru Panama El Salvador Dominican Republic Nicaragua Jamaica Guatemala Dominica St Lucia

3 Objectives Presentation objectives Overview of REIPPPP procurement mechanism Lessons from REIPPP Coming challenges with IPP procurement Way forward?

4 How to Promote Renewable Energy Investments? IFC experience with renewable procurement Feed in Tariffs (FITs) Used in 60+ countries Used in 30+ developing countries Renewable Portfolio Standards Extensive use in the US and Europe Just a few in the developing world India, Chile, The Philippines Competitive Procurement / Auction (MW or MWh) Most power pools in the US procure MW and ancillary services competitively New Jersey one of the first states to adopt competitive procurement for MWh LAC pioneered with dynamic auctions Mexico has been using competitive bidding for a decade MENA seems to be preferred choice (except CSP) India (PV), China (offshore wind), South Africa (Source: Luiz Maurer, IFC)

5 REIPPPP Ministerial Determination to Procure Technology Capacity (MW) Tariff Cap (R/MWH 2011) Tariff Cap (USc/kWh) Onshore wind 1,850 1, Solar photovoltaic 1,450 2, Concentrated solar power 200 2, Biomass , Biogas Landfill gas Small hydro ( 10 MW) Small scale (1-5 MW) 75 1, TBA Programme Design Up to 5 bidding rounds Notice of intention to bid Right to rebid Price caps may reduce from Rd. 3 Minister may reallocate MW between technologies High standard for compliant bids Most permits in place Debt and equity committed Considerable paperwork Competition in the event of: Competition for grid capacity Competition for capacity allocation Ambitious timetable Total 3,725

6 REIPPPP Outcomes Awards (MW) Available Round 1 Round 2 Balance Wind 1, Solar PV 1, CSP Other Total 3,625 1,416 1,044 1,165 Bidders Round 1 Round 2 Round 3 Bidders 53 79?? Preferred bidders 28 19?? Success rate 53% 25%?? Closure rate 100%???? Procurement model changed R1 to R2 (Capped allocation) Shift to real competition Tariffs Round 1 Round 2 Change ZAR/kWh USc/kWh ZAR/kWh USc/kWh % Wind 1, % Solar PV 2, , % Significant drop in average bid tariff

7 REIPPPP Geographic Distribution of Round 1 Preferred Bidders

8 What do we learn from REIPPP? Greenfield IPPs in Africa Algeria (2): Kahraba, Kahrama Morocco (3): Tetouan, Jorf Lasfar, Tahaddart Tunisia (2): El Biban, Rades II Egypt (3): Sidi Krir, Port Said, Suez Senegal (2): GTI Dakar, Kounoune I IPP* Burkina Faso (1): Hydro Afrique Ethiopia (1): Gojeb* Cote D Ivoire (2): Vridi Ciprel, Azito Ghana (1): Takoradi II Greenfield IPPs in Africa (2010) 40 IPPs in 15 countries 10,000 MW US$8 billion invested Almost no wind/solar Why renewables in South Africa? Nigeria (3): AES Nigeria Barge, Okpai, Afam* Angola (1):Chicapa* Congo (1): Sonda (X) Kenya (4): Westmont, Iberafrica, OrPower4, Tsavo Tanzania (4):Tanwat, IPTL, Songas, Mtwara Mauritius (4): Belle Vue, Deep River, FUEL, St Aubin Source: Eberhard, UCT GSB. Based on WB PPI database and author s compilation. (X) Denotes cancelled projects. (*) denotes projects under construction. Emergency power units not depicted.

9 What do we learn from REIPPP? History of IPP Procurements in SA Programme Year Sponsor Nature Status Kelvin 2000 Johannesburg Old coal ~600 MW. Sale Municipal privatisation Kudu ~2000 Nampower Gas Namibia 800 MW. Inter-government negotiations DOE Peaker 2004 DOE 1,000 MW Diesel OCGT. International competitive bid. Failed? Failed? Mammabula Coal/IPP Coal 1,200 MW. Negotiations. Failed Cogen (PNCP) 2007 Eskom Cogen 6,000 MW. International competitive bid. Failed MTPPP 2007 Eskom 8 year PPA ~6 GW. International competitive bid. Largely failed 273 MW Multi-site Base Load 2008 Eskom Mixed ~15 GW. Qualification round. Failed Nuclear Eskom 3,200 3,600 MW. EPC bids. No award. Failed Kusile privatisation 2009 Eskom Coal 4,800 MW. Offered minority stake in partially built asset. Failed Moamba 2008 IPP Gas Moz ~200 MW. Negotiations. Failed? Benga, Moatize Coal/IPP Mozambique coal plants. Negotiations Failed? Sere / CSP 2009 Eskom 100 MW wind. 100 MW CSP RfI for co-investors. EPC procurement. Failed? REIPPPP 2011 DOE/Treasury 3,725 MW 1,416 MW award. Closed Baseload RFI 2012 DOE/Treasury Mixed, 60GW RFI Aggreko 2012 Eskom Gas Moz, 100 MW PPA signed. Multiple failures, extensive delays, limited success. REIPPPP learnt from failures

10 What do we learn from REIPPP? The importance of policy certainty Private investors place importance on the stability and enforceability of laws and contracts Private investors seek predictability and control of risks to avoid threats to their investment returns The roles of private participants in the power sector should match their capacity to take on investment risks under specific country conditions (World Bank, Reforming power markets in developing countries: What have we learned?) Investors seek certainty, and an appropriate allocation of risks. REIPPPP outcome indicates these conditions were finally met.

11 What do we learn from REIPPP? The importance of policy certainty 1998 White Paper on Energy Policy 2004 White Paper on Renewable Energy Dec 2008 NERSA consult n paper on REFIT Apr 2009 NERSA regulatory guideline on REFIT for wind, PV, landfill gas, CSP Jul 2009 NERSA consultation paper (+ six technologies, draft PPA) Aug 2009 Minister gazettes New Generation Regulations Oct 2009 NERSA publishes REFIT tariffs Inter Ministerial Committee Nov 2010 Minister gazettes amended New Gen Regulations Dec 2010 National Treasury PPP Unit appoints consultants Aug 2011 RFP issued Dec 2011 Round 1 Preferred Bidders Significant policy uncertainty en route. BUT sufficiently strong signals over three years to stimulate private investment in project development. By mid 2010 Eskom reported renewable project grid applications for ~20 GW.

12 What do we learn from REIPPP? The importance of policy certainty Wind Tariff Evolution Positive pricing signals were a major factor in attracting developers, investors, equipment suppliers and lenders to the market despite the unusually higher regulatory and social burdens.?? 2013 REFIT Round 3 average bid

13 REIPPPP The importance of competent transaction advisors Transaction Advisor Team Legal: Commercial Bowman Gilfillan ( BG ), Edward Nathan Sonnenbergs ( ENS ), Ledwaba Mazwai ( LM ) and Webber Wentzel ( WW ) Legal: Land Use BG, ENS, WW Legal: Environmental BG, ENS, WW Financial Ernst & Young (E&Y) and PricewaterhouseCoopers (PwC). Economic Development LM Technical Mott MacDonald Independent Review Team Legal evaluation teams Linklaters Technical teams Blueprint Consult Financial cross moderation by both PwC and E&Y of each other s work Independent governance review by Ernst & Young observed receipt and evaluation of Bid Responses Identified areas of non-compliance with the Evaluation Manual Costs DBSA loan, to be repaid from 1% transaction fee on successful projects

14 What do we learn from REIPPP? The importance of political support Supportive Presidency Eskom Inter-Governmental Framework Agreement (Government Guarantee) Department of Energy National Treasury NERSA Generation License DTI Dept of Econ. Development 20 year PPA Equity 3 year lock-in No change in control without DOE consent IPP Unit Implementation Agreement REIPPP Project PPP Unit Dept. of Environment Dept. of Water Affairs ROD Water use license Credit Rating Agencies Lenders Dept. of Min. Affairs Mining rights EPC O&M Land Lease Local Permits OEM Contractors Logistics Typically 5-10 years 20 years +5 years Land use Building Government has succeeded in aligning its elements.

15 What do we learn from REIPPP? The importance of political support Basis of political consensus? Driver 1: Reduction in carbon intensity IRP 2010 predicated on reducing CO2 emissions from 912 g/kwh to 600 g/kwh by 2030 Driver 2: Additional generation capacity Quickest to build Builds on learning from failed IPP initiatives Simpler than other IPP transactions Driver 3: Economic development opportunities Extensive obligations Will the policy consensus be sustained? Will REIPPPP deliver on its promises? Will other IPP programmes achieve consensus?

16 Reflections on REIPPPP MK1 Key success factors Political support across multiple ministries COP17 push factor Built on previous IPP procurement failures continuity of leadership Achieved policy certainty Highly dependant on international advisors Lucky timing (counter-cycle to global downturn) What do we learn from REIPPPP? World class renewables procurement BUT, is it replicable for other technologies?

17 New Generation Capacity Timing realities Medupi Ingula Kusile (Source: Eskom, March Presentation to Parliament) Station Original Eskom plan (~9 mths/unit) Nov 2010 MTRMP Scenario 1 Delay (mths) Medupi Unit 1 COD Apr-11 May Medupi Unit 6 COD Jan-15 Sep-15 8 Kusile Unit 1 COD Mar-12 Jul Kusile Unit 6 COD Dec-15 Oct All three projects will take a decade or more from start of construction to COD. Even more time is required beforehand for planning, permitting and financing. (Source: (new build programme) DOE, Nov Medium Term Risk Mitigation Programme)

18 The IPP Procurement Challenge Scale of the challenge in MW Ministerial determinations herald a major shift from public to private investment. Functional IPP procurement system is now a precondition for supply security.

19 The IPP Procurement Challenge Massive policy shift from public to private supply. Based on what?

20 The IPP Procurement Challenge Scale of the challenge in transactions Public: One decision remains. IPP procurement: Multiple programmes required.

21 The Way Forward Lessons from REIPP Political support How to sustain political support? Gas and hydro Auction model will not translate easily Limited primary energy supply options. Key infrastructure bottlenecks Need to pay especial attention to process integrity Coal Similar constraints for coal (supply, location, water) Co-gen Auction may work for co-gen, but price cap concept would need to be reviewed. Future IPP procurement will be more difficult than REIPPP, with a much higher risk of delays and failures.

22 The Way Forward Lessons from REIPPPP Risk of overbuild? Baseload IPP determinations may represent too much capacity, given economic downturn. Programme timing needs to be more clearly defined. Financial For how long can Treasury back PPAs with government guarantees? Depth of local debt market? Partial $ PPAs? Institutional Boom and bust for Eskom s capital projects department? Can DOE manage multiple procurement programmes?

23 The Way Forward Lessons from REIPPPP Where will institutional reform come from? Single buyer model creates a bottleneck in the system Besides REIPPPP the single buyer model has had a very unsuccessful history in the South African institutional context Could a wholesale market increase supply security? What sector reforms would be required to achieve this? Where is the vision for power sector evolution going to come from?

24 Thank You