Private and confidential

Funding projects in REIPP - lessons learnt from BD1

PV Project Development Summit SA, 2012
September 2012
1
Contents
Section Page
1. Introduction to Standard Bank 2
2. South Africas renewable energy IPP Procurement Process 4
2.1. Overview of the process and the IRP2010 10
2.2. Qualification criteria 14
2.3. Evaluation criteria 19
3. Trends that appear to be becoming norms 22
4. Recommendations going forward 25
Private and confidential
Introduction to Standard Bank
Section 1:
3
On-the-ground presence in 18 African countries
Nearly 150 years of experience in Africa
Largest bank in Africa
Over 40,000 employees in Africa
Over 8,000 bank branches
Growth on the continent is a key strategic focus area
Market Capitalisation - USD 23.5 billion (7 May 2012)
Investment banking presence across the region and in
key markets strengthened by recent acquisitions:
IBTC Chartered Bank, Nigeria
CFC Bank, Kenya
Opening fully in Angola
Recently opened in South Sudan
Standard Bank
Angola (20.1 million)
Botswana (2.1 million)
DRC (73.6 million)
Ghana (25.2 million)
Kenya (43.0 million)
Mozambique (23.5 million)
Lesotho (1.9 million)
Malawi (16.3 million)
Mauritius (1.3 million)
Nigeria (170.1 million)
South Africa (48.8 million)
Swaziland (1.4 million)
Tanzania (43.6 million)
Uganda (35.9 million)
Zambia (14.3 million)
Zimbabwe (12.6 million)
Strong product
teams in
Johannesburg,
Lagos, Nairobi and
London
Unrivalled
knowledge of sub-
Saharan Africa
through on ground
presence
On-the-ground
presence in 18
African countries
Standard Bank - Natural partner in Africa
Key points
Most comprehensive network in Sub-Saharan Africa
Namibia (2.1 million)
South Sudan (10.6 million)
Source: CIA World Factbook
Private and confidential
Overview of the REIPP Procurement Process
Section 2:
5
Key points
The promulgated IRP2010 features the below energy mix
targets for 2030, in terms of new build:
Nuclear 23%
Coal 15%
Imported hydro 6%
OCGT for peaking 9%
Imported gas 6%, and
Renewables 42%or 17,800MW, of which:
PV: 8,400MW
Wind: 8,400MW
CSP: 1,000MW
IRP 2010 Summary
Consultation Process
The consultation process that ensued after the publishing
of the draft IRP2010 allowed for stakeholders to address
their concerns and make suggestions (479 submissions
received). The below two graphs depict the major
positive impact that the process had on renewables:
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In context
Changes to the IRP2010 include:
The increased allocation of Renewables to the overall
energy mix plan for the 20 year period
The defined technology split of the Renewables
allocation.
The further technology split and allocation of solar into
PV and CSP
Reduction in planned initial allocations of Peak-OCGT
and an increase in Natural Gas-Fired CCGT
IRP2010 has
hugely increased
SAs projected
renewables total to
17.8 GW over 20
years
IRP2010 is a
landmark public
policy document
that will change the
SA energy
landscape...
Overview
An update to the
IRP2010 is
imminent. It should
further define the
renewable energy
roll out for the next
decade
6
Overview Current IPP Procurement Programme Tariff Caps
SAs Renewable Energy scheme is a competitive bid scheme (IPP
Procurement Programme), with the tariff caps as per the diagram
alongside. The scheme includes the following technologies: onshore
wind, small hydro, Landfill Gas (LFG), biomass (solid), biogas,
photovoltaic systems and CSP.
IRP 2010 requires 300MW solar PV per year from 2012 to 2024, further
increased to 500/1000 MW per year until 2030, and 200MW solar CSP
by 2015, with 100MW p.a. through to 2025
The IPP Procurement Programme aims to kickstart the process of
reaching the IRP 2010 targets, with the allocations represented in the
diagram below.
Eskom will be the buyer of the power produced by signing the PPA,
acting through its Single Buyer Office (SBO).
Government will provide guarantee over the PPA payment obligations
through the National Treasury
Current IPP Procurement Programme Structure
RE IPPPP
Single Buyer Office
(Eskom)
NERSA
Consumers
Generation Licence
Regulates
national tariffs,
enables cost
pass through
Electricity
Electricity
Money
Money
PPA
IPP Procurement Programme MW Allocations
200
1850
1450
12.5 12.5 25
75
0
200
400
600
800
1000
1200
1400
1600
1800
2000
Concentrated
Solar Power
Onshore Wind Solar
Photovoltaic
Biomass Biogass Landfill Gas Small Hydro
IPP Procurement Programme MW Allocations - Procurement
Targeted on/before June 2014 (CSP June 2015)
M
W
SA Renewables Overview
285
115
285
107
80
60
103
66
0 100 200 300
Concentrated Solar Power
Onshore Wind
Solar Photovoltaic
Biomass
Biogass
Landfill Gas
Small Hydro
Eskom
Concentrated Solar Power Eskom IPP Procurement Programme
7
Post BD2 Allocation
Technology
RFP1 MW
allocation
BD1 allocated BD2 allocated
Max BD 3
allocation
Onshore Wind 1,850 MW 634 MW 563 MW 653 MW
Solar PV 1,450 MW 632 MW 417 MW 401 MW
CSP 200 MW 150 MW 50 MW -
Biomass 12.5 MW - - 12.5 MW
Biogas 12.5 MW - - 12.5 MW
Landfill Gas 25 MW - - 25 MW
Small Hydro 75 MW - 14 MW 61 MW
Total 3,625 MW 1,416 MW 1,044 MW 1,165 MW
Overview
Currently, no MW
allocation has been
announced for BD3
Of the initial 3,625 MW, an allocation of 1,165MW will be available for future bidding rounds.
Tariff price caps remain unchanged. However, due to competition and falling prices of certain technology, the DOE does
expect bids tariffs well below the tariff caps.
The average price / kWh offered in BD2 dropped substantially from BD1for both Wind and Solar PV
From R1.14/kWh to R0.89/kWh for wind,
from R2.75/kWh to R1.65/kWh for PV
New FX rates have been published for use in the Financial models. The DOE has decided to place a cap on the level of FX
risk it would be prepared to accept for the period between bid submission and FC, equivalent to the lower of 60% of the
capex for the project ,or the actual FX exposure.
A cap has been introduced for the partially indexed tariff. Whereby indexation will be set at the lower of: (a) the proportion of
operating costs that are subject to annual price escalation & excluding fixed costs (i.e. debt service costs, fixed by interest
rate swaps and FX hedging), or (b) 50%.
Key points
Of the initial 3,625
MW, an allocation of
1,165MW will be
available for future
bidding rounds
The average price /
kWh offered in BD2
dropped
substantially from
BD1 for both Wind
and Solar PV
8
Tariffs Private Power is Competitive
Key points
SA electricity tariffs
are increasing at a
fast rate from a low
base
Note the central
IRP projections
exclude the
introduction of
Carbon Taxes (dealt
with as a scenario
although scheduled
to be imposed from
2012)
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)
Tariff Paths: IRP 2010 vs. Medupi/Kusile vs. Selected RE Technologies
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
Eskom National Blended Tariff (as per Policy-Adjusted Scenario) + Carbon Tax
Eskom National Blended Tariff (as per Policy-Adjusted Scenario)
Onshore Wind (BD2 average price)
Kusile + Enviromental Levy + Carbon Tax
Kusile + Enviromental Levy
Medupi + Enviromental Levy + Carbon Tax
Medupi + Enviromental Levy
Solar PV (BD2 average price)
Cogeneration - Woodchips
9
Key
Kusile
Medupi
Thyspunt
Bantamsklip
Koeberg
Ibhubesi
Onshore wind in the Eastern / Western Capes
Strong potential
Natural Gas deposits
found on the west
coast of South Africa
Piped onshore and
used as a feedstock
for Gas-fired power
plants
Shale Gas potential being
evaluated in the Karoo Basin
North-Eastern SA renowned for large coal deposits
3 potential new nuclear sites
ROMPCO gas pipeline
Utilised and sold by
Sasol
Mozambique SA has exceptional DNI
levels
High Solar PV, CPV and
CSP potential
Gas-fired Power
Wind Power Potential
Coal Power Potential
New Nuclear Sites
New/Discard Coal
New Gas
Solar Power Potential
CCGT/Shale Gas Potential
Existing Gas Pipeline
Secunda
Potential New Electricity Generation
Bagasse/ Paper Pulp
Cogen Potential
Bagasse/Paper Pulp Cogen Potential
Geographical Overview
10
R
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(
R
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R
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t
s
High SA shareholding (including BEE)
High local content (Manufacturing, O&M etc.)
Associated $[3-3.5]bn equity
requirements
Big three technologies need an estimated $[10-
11]bn of committed capital expenditures up to
2013
Capped tariffs seen as enabling equity
investments
PPAs are not able to be marked up, but remain as-is
Own Build grid connection is still being finalised and
appears to be a preferred option
Single Buyer Office is not independent , but remains part of
Eskom although the Parliamentary Committee has indicated
that it would like to conclude the process of moving it out of
Eskom before year end
NTC is not independent, but remains part of Eskom
The process for Small IPP Projects is still to be finalised
Clarity on reaching IRP 2010 targets with further IPPPPs
being created in future
Interest rate risk
Duration of bid risk, with the requirement that it be valid for
300 days from Submission Date
Understanding / Analysis of the REIPP Procurement Process
Areas of Uncertainty Key Requirements
Key points
Single Buyer Office
is not independent,
but remains part of
Eskom
Duration of bid risk,
with the requirement
that it be valid for
300 days from
Submission Date
11
Environmental consents namely a
positive Record of Decision from the
Department of Environmental Affairs.
One separate ROD per bid is
required.eg. A site with the capability
for 500 WM of wind, must apply for
and submit a separate ROD per bid of
140 MW
Qualification Criteria
Process & Structure
Key points
1
st
stage all bid
responses will be
assessed using the
Qualification Criteria
to determine
whether they are
Compliant Bids
Technical Criteria
and Evaluation
Proven technology, energy resource
availability, generation forecast,
project schedule, cost and timing of
grid connection, deliverability of
project, water consumption
Legal Criteria
and Evaluation
Project participants: equity
participants, lenders, contractors,
equipment suppliers, black
enterprises and local community
members
Title deeds, notarial leases, land use
consents including consents for
connection works. Mineral rights have
created a problem in certain instances
Financial Criteria
and Evaluation
Economic
Development
Criteria and
Evaluation
Submission of
Bid Guarantee
Structure of the
Project
Land Acquisition
and Land Use
Criteria and
Evaluation
Environmental
Consent Criteria
and Evaluation
Bid submission : R100,000 per MW,
Preferred Bidder status: R200,000 per
MW, Development fee: 1% of total
project cost
Fully developed shareholders
agreement, acceptance of project
agreements (i.e. PPA, Implementation
Agreement, Direct Agreement etc),
Statements by Members, Key
subcontracts
Price (full indexation and partial
indexation), financial standing of
project sponsors, robustness and
deliverability of funding proposal,
robustness of financial models
Only compliant bids
will make it to the
2
nd
stage going
forward. I
Almost 25% of the
bids submitted for
BD2 were non
compliant due to
simple omissions or
a lack of cross
referencing
40% SA entity participation: Job
creation, local content, black
ownership including local
communities, preferential
procurement, enterprise development,
socio-economic development
12
Evaluation Criteria
Process & Structure
Key points
BD2 ->
Compliant bids will
be evaluated based
on PRICE and
ECONOMIC
DEVELOPMENT
Total points 100
The score for economic development will place the following emphasis on the relevant criteria; job creation 25%,
local content 25%, ownership 15%, management control 5%, preferential procurement, 10%, enterprise
development 5%, socio-economic development 15% total 100% total points 30
The measurement of points awarded per category above will be [0] if the threshold level is met, to [10] for meeting
the target level, and linear interpolation used to determine the score per category for bidder responses that are
between the threshold and target level
Key ownership criteria for Onshore Wind and PV include:
Wind ownership targets: shareholding by black people in Project Company [12% - 30%], shareholding by local
community in Project Company [2.5% - 5%], shareholding by black people in contractor responsible for
construction [8% - 20%], shareholding by black people in operations contractor [8% - 30%],
PV ownership targets: shareholding by black people in Project Company [20% - 40%], shareholding by local
community in Project Company [2.5% - 5%], shareholding by black people in contractor responsible for
construction [8% - 20%], shareholding by black people in operations contractor [8% - 40%]
70/30 PRICE/,
ECONOMIC
DEVELOPMENT
weighting
ECONOMIC DEVELOPMENT 30%
PRICE 70%
Two prices to be provided (1) full CPI indexed and (2) partial CPI indexed per Bidders election
The base date for the CPI rate shall be April 2011 and adjusted annually (based on previous years CPI)
Two step process to calculating the Equivalent Annual Tariff (EAT)
Calculating the EAT for each price based on formula provided and discounted back to the base date
Each Bidders EAT will be calculated by reference to the lowest EAT for the same technology
Private and confidential
Trends that appear to be becoming norms
Section 3:
14
Overview
Grid Connections a move towards own build
If the Bidder intends to connect to the Transmission System, the Grid Provider will be NTC.
If the Bidder intends to connect to a Distribution System, the Grid Provider will either be the Distribution business unit
of Eskom, or a municipality, depending on the location of the point of connection
Shallow Connection Works:
Deep Connection Works:
The Department will provide clarification to the Bidders in relation to the cost of and process for undertaking "deep
connection" by way of a Briefing Note to be issued by the Department during the IPP Procurement Programme
If a number of Projects all intend to connect to a common substation, and the available capacity of the substation
is insufficient to accommodate all of the Projects, the DoE will comparatively rank these bids against each other
and the highest ranking bids will be awarded preferred bidder status
In many instances own build is becoming the preferred alternative as bidders are not prepared to risk delays in the grid
connection being ready when they reach the Scheduled COD, notwithstanding the deemed energy provisions in the
PPA
Key points
Grid Connection Options
for shallow connection works
Grid Provider
undertakes the connection works
Bidder Self Build
and transfer to Grid Provider
Bidder Self Build
and Bidder retains ownership
1
2
3
Transmission /
Distribution
Agreements to be
concluded prior to
or simultaneously
with the conclusion
of the PPA
Non-negotiability of
Connection
Agreement i.e.
Transmission
Agreement /
Distribution
Agreements...
The time frames
that Eskomhas
committed to, have
in a number of
instances extended
beyond the SCOD
which has created
problems for a
number of BD1
bidders
15
Technology BD 1 Submission BD 2 Submission BD 3 Submission
Thresholds Current Target Current Target Current Target
Onshore Wind 25% 45% 25% 60% 40% 65%
Solar PV 35% 50% 35% 60% 45% 65%
CSP without storage 35% 50% 35% 60% 45% 65%
CSP with storage 25% 45% 25% 60% 40% 65%
Biomass 25% 45% 25% 60% 40% 65%
Biogas 25% 45% 25% 60% 40% 65%
Landfill Gas 25% 45% 25% 60% 40% 65%
Small Hydro 25% 45% 25% 60% 40% 65%
Briefing Note 8 Summary
Local content requirements new manufacturers?
We note that the
local content
requirements get
more onerous as the
IPP Procurement
Process progresses
from BD1 to BD3
This should be seen
in conjunction with
the revised lending
terms being offered
by organisations
like the IDC and the
DBSA, both of which
are tying their
lending into the RFP
criteria, including
Local Content
Key points
Key points
Funding issues that have had to be considered
Local lending conditions
The local lending
market is well
established,
sophisticated and is
capable of funding
long -term
Local lending market is well established and understands Project Finance
Long tenors are possible
While the Renewables Sector is a new one, there is already an established PPP market with Standardised
Documentation and Market Precedent
Liquidity costs are relatively high and are likely to increase in the short to medium term, in many instances
fuelled by the considerable market activity being generate by the REIPP procurement process.
Ultimately the ability of local banks to continue to lend into this market will be driven by their ability to
distribute what debt they have lent into the projects that have closed in BD1 and BD2
The cost of swapping USD or EUR and layering onto that PRI is generally more expensive than borrowing
directly from local banks
1
Standard Bank Calculations
17
Various funding instruments are available
Funding issues continued...
Key points
The requirement for
a ZAR tariff has in
many respects
dictated that the
primary source of
funding is from the
local South African
banks
This is generally available from the IDC and DBSA, but Standard Bank is providing BEE finance on a few of its
deals
Considerations to qualify for DBSA debt
Broad Based
Previously enriched BEE partners will qualify for less
Active shareholders will be given preference (e.g. engineers or O&M contractors who are also
shareholders)
Considerations to qualify for IDC debt
Tower manufacture (wind) and panel assembly (PV)
Broad Based
BEE FUNDING
SENIOR DEBT AND MEZZANINE FUNDING
Vanilla commercial bank Senior debt funding from the Big 5 commercial banks. Typical terms include
Construction plus 15 years (leaving a 5 yr tail on the PPA), with a couple of sweeps on longer tenors
Margin Libor plus bank costs, plus liquids, plus credit margin
Standard PF covenants
Mezz has been provided on various deals and generally constitutes 5-10% of the total funding package
18
Various funding instruments are available
Funding issues continued
Key points
The requirement for
a ZAR tariff has in
many respects
dictated that the
primary source of
funding is from the
local South African
banks
SECONDARY MARKET CONSIDERATIONS
A number of challenges have presented themselves from a distribution perspective, including but not limited to
Traditional channels of distribution include NBFIs who have not been in a position to nor had appetite to
take construction risk
Including them in the financing packages before financial close has been challenging as they have
rigid/fixed debt drawdown requirements
The nature of their business has dictated that these organisations do not like to get refinanced and would
rather see loans run to term
State owned pension funds have expressed interest in taking assets in the secondary market
DFIs from Europe have expressed considerable interest in the market, but have battled to get comfortable
with the FX risk associated with lending in EUR/USD and getting repaid in ZAR
The impact of Basel III is proving to be punitive and in many instances the tenor of hedges is too long for local
banks to handle without it becoming unreasonably expensive.
This in turn is limiting the foreign DFIs from coming into this market
Key points
Funding issues continued
Local lending conditions
The local lending
market is well
established,
sophisticated and is
capable of funding
long -term
Challenges experienced on BD1 closing
Changes in agreed EPC terms and conditions post selection as a preferred bidder
Movements in market conditions (liquidity)
Documentation issues
The contractual termination regime
Delays in getting RODs in place
The Corrupt Acts indemnity in the PPA/IA
Credit standing of equipment suppliers
Generation license drafting
Section 53 Mining Rights
Resource measurement has been an issue (primarily on wind), but it is relevant for CSP projects
where site specific information is needed
1
Standard Bank Calculations
Private and confidential
Recommendations on the way forward
Section 3:
Key points
Recommendations on the way forward
Practical suggestions for future bidding windows
Planning is critical
for a successful bid
submission
Finalise the major
EPC and equipment
supply issues
before bid
submission
Confirm your BEE
funding early and
get firm terms, not
indicative terms that
are subject to final
approval
Equity Returns
- Target realistic equity returns and preferably back-end development fees .
- BD2 proved that high up-front development fees are not going to win bids
Plan ahead
- the printing of a bid submission takes at least 1 week.
- Preparation for a credit committee meeting takes at least 10 days
- Financial model audits (approximately 3 weeks) can only commence once the EPC price, equity
structure (and by definition equity return) are final
- You should therefore have concluded all commercial negotiations for your bid at least 7 weeks prior to
bid submission to enable the above milestones to be achieved
Properly prepared bids
- In order to prepare a compliant bid, your documents should be properly indexed and cross referenced.
- Remember, you are submitting them to audit firms who, amongst other things, prepare indexed files
for a living
- Ensure your soft copy model ties into the hard copy documentation
Key points
Recommendations on the way forward
Practical suggestions for future bidding windows
Finalise the major
EPC and equipment
supply issues
before bid
submission
Confirm your BEE
funding early and
get firm terms, not
indicative terms that
are subject to final
approval
Environmental and
land use rights take
a long time to
finalise and morare
Equipment supply and EPC contracts
- Should be negotiated in detail PRIOR to bid submission
- Deal with the difficult issues in the term sheet, eg: payment timing, security, performance and delay
LDs
- Insurance is a critical part of the EPC. The insurance advisers therefore need to be involved early in
the process
Engage with your BEE funder early to understand its lending conditions by doing so, you will ensure that
your letters of support are as unconditional as possible and unlikely to change in the run up to financial close
Consents
- Secure environmental and other consents early.
- If there is a risk of not getting a ROD or land use right approved on time, then consider deferring your
bid to BD4 as it is expensive doing all the Due Diligence and then not being able to submit
- The 53 mineral rights approvals are going to take a lot of time to get approved going forward given
the recent changes to the legislation which are a lot more onerous than were the case
- Use advisers who have been through at least one of the previous bidding windows
23
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