Quantifying the capital requirement: 19% RE by 2030

Shutterstock WWF RE Vision 2030 Quantifying the capital requirement: 19% RE by 2030 Megan Sager, Consulting for Sustainable Solutions 29 August 2014 Presentation at IDC Offices

Overview Government plans for investment in renewable energy are not ambitious by international standards Renewable energy is the right choice for SA: it is affordable, promotes energy security and a sustainable future Achieving a meaningful renewable energy share will require creative problem solving: public/private capital and the grid 29 August 2014-2

Overview Government plans for investment in renewable energy are not ambitious by international standards Renewable energy is the right choice for SA: it is affordable, promotes energy security and a sustainable future Achieving a meaningful renewable energy share will require creative problem solving: public/private capital and the grid 29 August 2014-3

The IRP2010-2030 Update allows for a 9% share of renewable energy by 2030 WWF Renewable SA electricity mix, 2030 (IRP Update Base Case scenario) 5% 9% 4% By 2030, 9% of SA s energy requirement will be supplied by 17 GW renewable energy (RE) capacity. More than two thirds electricity will still come from coal, including 2.5 GW new capacity. 12% Coal Gas Hydro & other 69% Nuclear Renewables Coal emissions alone will exceed the DEA s PPD GHG emissions implicit electricity sector target, despite remaining within the DOE s IRP target. In the low economic growth scenario, RE falls to a share of just 6% SA s electricity. Source: Own calculations based on DOE (2013) 29 August 2014-4

This is not ambitious by international standards Renewable energy generation share and share growth in emerging markets, 2013 40% 35% 30% 25% 20% 15% 10% 5% 0% 11% 19% 9% 25% 37% 9% 5% 4% 4% 28% Brazil Chile India China Turkey Share of electricity generation by renewables, 2013 Annualised growth in share of renewable electricity generation, 2010-2013 (CAGR) Brazil and Chile have already met or exceeded +15% South Africa s targeted RE share for 2030. Information descriptor Can appear below the numbers China and Turkey will reach 9% within the next 3 years if current RE share growth rates continue. Source: BP (2014); own calculations. 29 August 2014-5

The WWF calls for a 19% share of renewable energy by 2030 SA electricity mix, 2030 (WWF high growth scenario) 19% 6% 4% 5% 66% Coal Nuclear Gas Renewables Hydro & other No further investment in coal or nuclear is supported. When possible, old coal-fired power stations should be decommissioned to lower emissions. Gas is acceptable as a bridge fuel: high ramp rates, lower emissions. Should low economic growth materialise, the proposed RE share falls to 9%. High RE penetration rate: 20%+. Global studies show a 20% wind share and 7.5-10% solar PV peak supply share are already feasible (Citi). 26% Germany s electricity comes from RE. Source: Own calculations 29 August 2014-6

This will cost SA 1-2% GDP p.a. but with likely multiplier effects WWF Renewable Capacity (MW) Generation (TWh) Fiscal cost : 2015-2030 (Rand) High economic growth (5.4% p.a.) scenario Add 2 200 MW p.a. Total: 35 000 MW Solar*: 19 000 MW Wind: 16 000 MW Annual: 78TWh+ Annual: R78 billion Total: R1.1 trillion Low economic growth (2.9% p.a.) scenario Add up to 2 200 MW p.a. (min 1 100 MW) Total: 17 500 MW Solar*: 9 000 MW Wind: 8 000 MW Annual: 39TWh+ Annual: R40-R78 billion p.a. Total: R480 billion Recent US infrastructure study shows 2x GDP multiplier effect for up to 10 years after investment * Solar mix (PV and CSP) determined dynamically according to developments in pricing, storage and the need for dispatchable power 29 August 2014-7

Overview Government plans for investment in renewable energy are not ambitious by international standards Renewable energy is the right choice for SA: it is affordable, promotes energy security and promotes a sustainable future Achieving a meaningful renewable energy share will require creative problem solving: public/private capital and the grid 29 August 2014-8

RE technologies compete favourably with conventional technologies on price WWF Renewable Price of electricity, 2013 (R/kWh) Wind Solar PV Nuclear Coal 0 0,5 1 1,5 2 International Reference Prices, 2013 Rand Local Reference Prices, 2013 Rand In the IRP Update, coal and nuclear are very cheap internationally +15% speaking. PV expensive. Information descriptor Can appear below the numbers Nuclear is likely to cost much more, while PV averaged R0.88/kWh in REIPPPP Round 3. Citi Research: 2013 Rand IRP Update: Adjusted, 2013 Rand Sources: DOE (2013); Citi Research (2013); Papapetrou (2014); Own analysis 29 August 2014-9

The recent rapid drop in PV prices is not an anomaly Best-in-class global utility-scale solar PV costs, 2010-2013 (USD/W) 3,5 3 2,5 2 1,5 1 0,5 0 0,18 0,41 0,5 0,3 1,85 0,15 0,31 0,26 0,11 0,72 2010 2013 Module Inverter Balance of Plant EPC services Other The dollar price of utilityscale solar PV has halved in the last 3 years. Drivers: Shift to China +15% Information descriptor Can appear below the numbers Low commodity prices Weak global economy In US PPAs are being signed for $60/MWh. Source: BNEF (2014) 29 August 2014-10

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Indeed market forces will support long term grid parity for wind and PV Projected tariff trajectory, 2014-2030 (2014 Rand) 1,60 1,40 1,20 1,00 0,80 0,60 0,40 0,20 - SOLAR PV Source: Own analysis; Donnelly (2014) Notes: CSP estimate refers to CSP with 3 hours storage SOLAR CSP - 3HR WIND AVE COST GRID ELECTRICITY, 2013 WWF Renewable The average price of grid electricity to Eskom was R0.82/kWh in 2013. Wind is already cheaper. +15% Information descriptor Can appear below the numbers PV will be the cheapest RE source by 2020. CSP is an alternative to nuclear. A weakening Rand may increase the wind price. 29 August 2014-11

Local factors may drive further price advantage WWF Renewable Price Tariff (Levelised cost of electricity) Variable Capital cost Learning rate Discount rate Capacity factor Lever 1: WACC 1% cut ~ 6% tariff reduction Change in capital structure OR better terms (e.g. CPI linked debt) Lever 2: Localisation Imported inflation drives project cost up and exposes sector to forex risk Local manufacturing is a partial buffer Strong policy and regulatory environment required to enable sector development 29 August 2014-12

Overview Government plans for investment in renewable energy are not ambitious by international standards Renewable energy is the right choice for SA: it is affordable, promotes energy security and a sustainable future Achieving a meaningful renewable energy share will require creative problem solving: public/private capital and the grid 29 August 2014-13

The first challenge to consider is grid integration SA grid map, 2011 Transmission and distribution infrastructure is inadequate. The Cape* region will be worst affected: grid stability limit = 15GW. Source: www.eskom.co.za Information descriptor Can appear below the numbers * This comprises the Western, Northern and Eastern Cape Extensive upgrades will be costly and these have longer time horizons than RE plant construction Uncertainty about plant location hinders investment. Solutions: Incentivise central procurement where capacity exists Perform robustly required transmission system upgrades (e.g. NC-GP line) Promote distributed generation near point of load demand. 29 August 2014-14

Grid balancing is required to ensure smooth power supply Ankerlig OCGT station, Atlantis RE has limited predictability and dispatchability: challenging for system operator which needs to balance the electricity system. Information descriptor Can appear below the numbers Solutions: Dispatchability issue solved with storage (energy and thermal): substantial for CSP and emerging for PV (1 MW battery already available) Intermittency countered with flexible power supply such as gas turbines and pumped storage. Midmerit combined cycle gas turbines running off natural gas are 1 option (e.g. Ankerlig conversion). Source: www.eskom.co.za 29 August 2014-15

The second challenge is Eskom as only offtaker 5 MW PV plant, India There is limited fiscal space to invest further in utility scale RE. SA is close to the public debt ceiling of 60% GDP. Current obligations reach 56.9% GDP, excluding REIPPPP guarantees. Information descriptor Can appear below the numbers Eskom already benefits from a R350bn guarantee (+- 10% GDP) for the new build programme. With a revenue shortfall of R225bn, sustainability is questioned. Solution: Liberalise electricity market to enable private and municipal utilities to connect to grid or go off-grid, directly contracting with customers on micro grids. Source: www.nrdc.org 29 August 2014-16

The third challenge is policy coordination and certainty Union Buildings There is a perceived lack of strategic and planning alignment between the various public sector entities: DOE, DEA, DTI, DPE, NERSA and Eskom. One example is multiplicity of emissions targets (DOE vs DTI). More immediate issue: DTI s desire for localisation vs DOE s lack of commitment to future RE procurement (e.g. State of Nation address) and NERSA s lack of electricity sector reform. Solution: One coordinated policy position which enables RE industry growth via commitment to RE procurement and sector reform. Source: Wikipedia 29 August 2014-17

Finally, wider private investor participation is required Commercial bank exposure to RE, 2013 20 18 16 14 12 10 8 6 4 2 0 Information descriptor Can appear below the numbers Nedbank Standard Bank RMB ABSA Funds committed to RE, Rbn Funds committed to RE as share of wholesale banking assets, % 8% 7% 6% 5% 4% 3% 2% 1% 0% Local bank balance sheets cannot carry all of the project debt associated with the WWF vision. Further, fully financed BEE partners are said to be scarce. Est. R400bn additional project debt will be required to scale up the RE sector from 2015-2030. At R57bn, committed funds are already 3-7% wholesale banking assets. Solution: Retirement funds (R3 trillion assets) can assist in primary or secondary debt markets for project and empowerment financing. Source: FirstRand (2013); Standard Bank (2014); Nedbank (2014); ABSA (2014); Creamer 2013(b). 29 August 2014-18

As financiers and stakeholders in the SA RE sector, you are a vital part of the solution Someone's sitting in the shade today because someone planted a tree a long time ago Warren Buffett, CEO Berkshire Hathaway ($15bn RE investor) 29 August 2014-19

Thank you Megan Sager Director, Consulting for Sustainable Solutions (Pty) Ltd megan@sustainablesolutions.co.za / 021 680 5390 www.panda.org 2010, WWF. All photographs used in this presentation are copyright protected and courtesy of the WWF-Canon Global Photo Network and the respective photographers.