REFIT comments AND Recommendations to Nersa Presented by Guy Spindler 5 th of May 2011 1 [Presentation title] [Client Name] 9 May 2011
REFIT comments and recommendations to Nersa CONTENTS OF PRESENATATION 1. Introduction to Sappi 2. Background 3. Financial assumptions 4. REFITs and qualifying principles 5. Other / Suggested Comments 6. Questions 2
INTROUCTION TO SAPPI Sales for the year ended September 2010 US$ 6,572 million 3 Fine Paper Mills 4 Sales Offices 9 Fine Paper Mills 16 Sales Offices 1 Sales Office 1 Sales Office 1 Fine Paper Mill (JV) 4 Sales Offices 1 Sales Office 3 Fine Paper Mills 4 Forests Product Mills 10 Sales Offices Manage 555,000ha Forests 1 Sales Office Sales By Source 1 (US$) Sales By Destination 1 (US$) 13% Europe 55% 24% 48% 18% North America Southern Africa 21% 22% Asia & other 3
REFIT comments and recommendations to Nersa Background Sappi welcomes this opportunity to contribute to the Nersa Consultation Paper Review of Renewable Energy Feed In Tariffs March 2011 and in preparation to contribute Sappi has concluded a feasibility study at our Lomati Saw Mill for generating more renewable power. This feasibility study has an estimated additional 8MW of power. This potential project could be implemented in a relatively short time should the required electricity energy rates be guaranteed. 4
Financial assumptions 5 [Presentation title] [Client Name] 9 May 2011
Financial assumptions. Sappi supports the principle of determining the levelised cost of electricity (LCOE) for renewable power projects to create an investment environment; however the economic parameters used in the analysis must reflect the realities of doing business and new projects must provide a rate of return that will meet business hurdle rates. LCOE is supported within reason that the lowest rates receive priority. That is REFIT projects with rates below R1.15 kwh (as estimated in the IRP 2010 as being the cost of electricity by 2020 in real terms), are awarded before the more expensive technologies. Sappi believes the exchange rate and WACC should be adjusted to the exchange rate and the WACC as at the time the PPA is agreed to, although REFIT will be reviewed on an annual basis for the first 3 years. 6
REFITs and qualifying principles 7 [Presentation title] [Client Name] 9 May 2011
REFITs and qualifying principles Sappi views the REFIT II Biomass Solid as flawed in the sense that it does not provide economic sense to generate electrical power from forest residues alone without supplementing this with biomass residue from forest product operations. The only viable option is the use of the whole tree of which the majority of the tree is required for the forest product industry. The use of whole trees for energy production is not supported as this is our primary raw material required for pulp and paper production. As the threat created by bio energy on food has been taken into consideration by only allowing food crop residues, the same reasoning should be applied to the forest products industry. Thus it is recommended that the words used in Table 3: Qualifying Technologies under Biomass Solid of 100% forest wood should be removed and the bullet forestry trees and residues should be changed to forest residues, as it is a threat to our core business. 8
REFITs and qualifying principles If only forest residue is used for Solid Biomass fuel from forestry operations for REFIT II then, from a number of feasibility studies that Sappi has recently concluded, the true cost of Solid Biomass fuel from forest residues is from R0.48 to R0.66 per kwh generated. This would require a collection radius of 21 to 45km to collect a viable quantity of total forest residue available (i.e. a 1MWe power plant). The fuel cost of R0.48 to R0.66 per kwh is based on a Heat Rate of 18,588kJ/kWh with a boiler efficiency of 80%. It is recommended under these conditions that the LCOE for REFIT II Biomass Solid is adjusted to the costs of forest residue fuel, as long as Saw Mill wood and Pulping wood is excluded from REFIT Biomass Solid. 9
Sappi s Forestry Operations Usutu Forests Manage 66,000 ha on leased land (58,000 ha planted) Sappi Forests Manage 489,000 ha Own 385,000 ha 257,000 ha planted 128,000 ha unplanted Grow schemes 96,000 ha Lease 8,000 ha 10
REFITs and qualifying principles Large collection areas (required for viable volumes), moisture content, labour and low bulk density of forest residue are the main inputs required to determine the cost of this renewable fuel. As a result forest residue is at least 2 to 3 times the current cost of D grade coal delivered ($1.67/GJ) dependant on region and logistics However it is renewable and is competitive to the other renewable technologies. 11
REFITs and qualifying principles Should Nersa accept Sappi s recommendation made under COFIT which are: the input values (the cost of fuel and heat rate) used to derive the LCOE for COFIT for Type III Wood chips are too low, and that two new categories should be created under Type III cogeneration, named Black liquor and Wood biomass, and that these two new categories have Feed In Tariffs rates based on the true cost of fuel and heat rates found in our industry then we would have no further comments for the Nersa Consultation Paper Review of Renewable Energy Feed In Tariffs March 2011, besides that the rate of R1.06/kWh is not increased, if Nersa does not limit forest biomass to forest residues only. In Summary, should Nersa accept that forest wood and forestry trees are removed as qualifying technologies then Sappi is recommending that the levelised fuel cost in Table A9, page 30 is raised to the real cost of viable quantities of forest residue (R0.48 to R0.66/kWh). 12
Other / Suggested Comments 13 [Presentation title] [Client Name] 9 May 2011
Other / Suggested Comments Sappi suggests that clause 3.3 should have the words and not retrospectively added to the end of this clause, for clarity purposes The biomass residue referred to in paragraph 3 on page 8 presumably refers to natural forests and should be defines as such. If this is not changed this section would be in conflict with the categories of feedstock recommended in Table 3 on page 21. Sappi s interpretation of Clause 3.4 is that once a PPA has been agreed to, including the applicable Feed In Tariff, then this rate will not be reduced at later stage. Clarity is requested with regards to our interpretation, and it is suggested that the qualifying principles are clear in this regard. Clause 4.6 is not clear with regards to the Distribution System and it is suggested that the words be replaced with any Distribution System connected to the Nation Transmission System. It is assumed where an IPP connects to a municipality who is connected to Eskom s Distribution or Transmission System will be able to pass the costs for the use of the municipality s distribution system onto the Buyer as per the original REFIT II draft PPA. 14
Closing Comments and Questions 15 [Presentation title] [Client Name] 9 May 2011
Questions? 16 [Presentation title] [Client Name] 9 May 2011
THANK YOU 17 [Presentation title] [Client Name] 9 May 2011