Volume II: Annex 4 POWER MARKET SYSTEM DESCRIPTION DEMAND FORECAST AND SUPPLY OPTIONS

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1 Namibia IPP and Investment Market Framework Technical Assistance USTDA Grant Number: GH Volume II: Annex 4 POWER MARKET SYSTEM DESCRIPTION DEMAND FORECAST AND SUPPLY OPTIONS Submitted to: Mr. Siseho Simasiku Chief Executive Officer Electricity Control Board 8, Bismarck Street P.O. Box 2923 Windhoek, Namibia U.S Trade and Development Agency 1000 Wilson Boulevard Arlington, Virginia Submitted by: CORE International, Inc Wisconsin Avenue, NW Washington, DC 20016, U.S.A. and EMCON Consulting Group Windhoek, Namibia December 2006 This report was funded by the U.S. Trade and Development Agency (USTDA), an agency of the U.S. Government. The opinions, findings, conclusions, or recommendations expressed in this document are those of the author(s) and do not necessarily represent the official position or policies of USTDA. USTDA makes no representation about, nor does it accept responsibility for, the accuracy or completeness of the information contained in this report. Mailing and Delivery Address: 1000 Wilson Boulevard, Suite 1600, Arlington, VA Phone: Fax: Web site: info@ustda.gov

2 Namibia IPP and Investment Market Framework Technical Assistance Under a Grant by the U.S. Trade and Development Agency ANNEX 4: ASSESSMENT OF THE LOCAL POWER MARKET PREPARED FOR ELECTRICITY CONTROL BOARD, NAMIBIA PREPARED BY Donald Hertzmark, Team Leader Vinod K. Shrivastava, Corporate Manager Uli von Seydlitz, Local Partner, EMCON Overview Market Setup Local Demand Regional Demand Summary CORE INTERNATIONAL, INC. WASHINGTON, D.C Web Site: June 13, Market Setup Market Setup Issues Foreign Generators NamPower Generation NamPower Trading NamPower Transmission Future IPPs NORED MME Policymaker ECB levy CENORED ECB Regulator Licenses Rules Regulations Central RED Erongo RED Regulated Entities SORED No independent Single Buyer (or other market operator) NamPower in potential conflict of interest Small market size limits options Low prices compared to international levels Perception that higher prices may damage economy Worries about competitiveness v. RSA Need to look at structure of economy to gauge impacts Foreign Trading Partners Foreign Customers Transmission Customers RED Customers 3 4 Payment flows Energy flows 1

3 Market Setup Issues LA taxation of electricity putting pressure on retail tariffs Removal could make space for more realistic generation prices without increasing retail rates Current LA funding method acts as a business and consumption tax, mostly on larger users Distribution & supply restructuring not complete Lack of stability & predictability End state not certain Market Setup Issues Eskom (and NamPower) in position to exercise market power They can refuse to pay the price required by a generator. They can control offtake volumes so as to benefit own generating plants Dual role as market operators is conflict of interest that is difficult to resolve Eskom (and NamPower) are used to exercising control and are averse to letting go of this control 5 6 Energy Market Estimated Electrical Energy Use - Namibia Local View Streetlight 1% Mining & Processing 24% Commercial / Industrial 45% Pumping 2% Domestic - PPM 12% Domestic - Conventional 16% 8 2

4 1 Demand Profile Load Curve Average Weekday Demand per Hour National Annual Load Duration Curve (2005) MW Winter Summer MW Hour of Day Hours 9 10 Supply Assumptions Van Eck & Paratus too expensive for normal supply Used for emergency situations Fuel costs above import price from Eskom Ruacana average available 120MW Used for peaking and mid merit, base load when full water flow Insufficient dammed water to meet continuous supply duty cycle Load Profile Domestic evening peak Usually served by Ruacana? Base load of 200MW Potential for IPP especially in low water season Daytime plateau Potential for IPP base load to mid merit IPP Opportunity Could argue that there is immediate IPP base load opportunity of around 200MW

5 System Demand (MW) Demand Forecast Namibian Demand Forecast including impact of Step Loads & Elasticity High Load forecast (incl all step loads) High Load forecast (incl high & med probability step loads) Medium Load forecast (incl high & med step loads) Low Load forecast (incl high step loads) 3.55% Scenario Vision 2030 scenario Year 13 Demand Forecast Low Scenario Little growth in 10 years 100MW Projects static economy & population Medium scenario Add 200MW in 10 years Includes ~70 MW from high probability mining & industry High Scenario Add 400MW in 10 years Includes additional ~200 MW from lower probability mining & industrial projects Possibility to supply Skorpion from 2011? 14 Step Loads High Probability Low Probability Project Asis Far West Tsumeb West Navachab Mine Whk Luderitz Elizabeth Bay Load 15 MW 10 MW MW 14 MVA +3.9 MW +7.6 MW Date up to Project Ongopolo Mining Karibib Cement (2) W/Bay EPZ Uranium Mine (West Coast) Scrap Smelter (W/Bay) Aussenkehr Farming Ramatex Textiles Load MW 18 MW 18MW 30 MW Date By over 4 years 5 years 15 MVA 2006/ MW end 2006 up to 20MVA Regional View 15 4

6 Regional Market RSA Market Forecast of Base Load Electricity Demand for South African High Scenario Medium Scenario Low Scenario Demand (MW) Year RSA Growth Areas RSA Expansion Plan 04 Market Growth Economic growth Mining & metals large projects Electrification Market Constraints DSM Move to service based industry electricity growth < GDP growth

7 RSA Base Load Options! Gas does not feature prominently But CCGT piped indicated close to coal in cost terms at high load factor Plan based largely on coal with flue gas cleaning More than 10GW of coal plant planned in next 17 years In Summary IV Strategy Refinement Barriers to IPPs in Namibia RED Limitations Local Government Reliance on Electricity Surcharges DX restructuring delays High Power Purchase Agreement with Eskom Control I Strategy Low Domestic Electricity Prices Absence of Single Buyer Domestic Pricing Impacts Low III Non Strategic Importance Professional Skills Shortage Low priority of Gas in S.A. Power Expansion Plan Forex Risk for Gas & Power NP/Eskom Control & Market Power High Gas Development Costs Low Power Prices in S.A. Low NP/Tullow Disunity High 24 II Contingency 6

8 Strong growth in regional market RSA demand to increase by 10,000 MW in next five years Regional demand growth accounts for most of current supply shortage Limited ability to provide massive increases in supply in short run Hydro in Zambia, Mozambique ~1,000 MW at most in next five years Congo River project very large, but longer term Current supply shortages result from exhaustion of 1970s-era excess capacity Most new demand must be met from thermal plants in next years Coal is largest potential fuel source The region s dominant player, Eskom, will wish to: build new generation facilities; and retain control Some Thoughts in Closing Demand Existing local demand can justify IPP MW? Growth in local residential demand unlikely to justify sizeable IPP (especially if DSM is used to reduce peaks) Local commercial and industrial load growth difficult to predict and dependent on a few large players high risk (e.g. Ramatex, other potential large power users) Exports to RSA & exchange with Zambia critical to economics of large projects Some Thoughts in Closing Supply This is not the 1970s Coal is not free Environmental standards cost investment funds as well as foregone output Gas is nice, but expensive Demand in RSA has outgrown transmission system NamPower views on market? ECB views on market?

9 Some Thoughts in Closing Structure NamPower views on market? How to implement single buyer What are the structural alternatives? How much volume does the Namibian market need to justify restructuring? ECB views on market Regional coordination - RSA, SAPP Trading efficiency for accountability? Thank You! Right now no one can order up new supply in convincing manner 29 8