Malcolm GreenNiel Theron

Kakamas Hydro Electric Power

(Pty) Ltd

Abstract

”The wind and solar renewable energy industries are in some regards creatures of project finance; having largely developed alongside the advent of project finance. Whereas project finance might lend itself to the delivery of large scale hydro power projects, how do you shoehorn a 10 MW hydro power project into a project finance arrangement and ensure that the project remains financially and technically viable?

This was the challenge faced by Kakamas Hydro Electric Power (Pty) Ltd on the Neusberg project and this presentation will address the various technical and contractual challenges faced on the project and how a collaborative approach by all project participants brought about a structure and technical solution that is considered best for the project.”

What is project finance?

• “Project finance is a financing arrangement under which the loans for a project are repaid primarily from the project’s cash flow, with the project’s assets held as collateral. It enables the sponsor of a project to arrange financing with no recourse, or limited recourse, to the sponsor’s balance sheet.”

(University of Melbourne, 2012)

• Project finance is complex given:

• the number of parties involved

• the security that is taken over the project’s cash flow and assets and the lenders rights

Allocation of risk under construction contracts

• A contract may be considered a means for the allocation of risk between parties

• The efficient or optimal allocation of risk (to the party that is able to manage the risk at the least cost) is an essential ingredient to the achievement of value for money outcomes on any project

Dealing with Construction Risk under project financing

• The EPC (Engineer, Procure and Construct) form of contract is a fixed price (lump sum), fixed time, turnkey contract typically used for the delivery of works under project finance arrangements

• It is essential therefore the EPC contractor assumes risks that it is able to manage if value for money outcomes are to be achieved

The Neusberg 10 MW hydro power project

• Neusberg was identified as a potential site for a run-of-river hydro project in 2009

Neusberg characteristics

• Orange River = good hydrology

• River topography in South Africa � Net effective head of 16m achieved by conveying water some 1.7km

• The requirement to convey a large quantity of water (design discharge 90m3/sec) some 1.7km leads to a large civil component of the works

Scheme Layout

Inlet

Headrace Canal

Powerhouse

Tailrace

Neus IslandN

eusberg Weir

Allocation of construction risk

• Generally speaking, the construction costs are represented 70:30 civil works vs electrical & mechanical works (the generation gear)

• Allocation of risk – which party (the civil works contractor or the E&M contractor) is best placed to assume the risks?

• Under a traditional EPC arrangement, should the civil works contractor (responsible for 70% value of the works) assume risk in something in which it might not possess particular skill and expertise? (or vice versa)

Who are the participants?

• Civil Works Contractor – CSV Hydro (Pty) Ltd (a joint venture comprising CSV Construction (Pty) Ltd and Rigamani Construction) – good, experienced South African civil contracting organisations

• Electrical and Mechanical Works – Entura, the engineering and consulting business of Hydro Tasmania (a generator with 2,600MW of hydro power installed) with electrical and mechanical equipment to be provided by Hydro Power Plant (France)

Split construction obligation

• Splitting the work obligations you would think would be quite simple

• Financiers however look for a sole point of responsibility for construction risk (single point of recourse)

• Contractors however should not be required to assume responsibility for work (and risks) not within their control

• Obligation to coordinate and integrate the works is of fundamental importance

Implementing the solution

• Contract documents are being drawn by DLA Piper (Australian law firm experienced in drawing arrangements for the delivery of works by project finance) that are:• consistent with the structure adopted for the delivery of the works

• ensure risk is allocated to the party best able to manage the risk

• ensure Kakamas Hydro Electric Power (Pty) Ltd’s and the financier’s interests are protected

• On balance, an approach that is best for project

Questions

• For any further information in connection with the project, or the implementation of solutions to suit a specific small hydro application please do not hesitate to contact us.

Malcolm Green: malcolm.green@hydro.com.au

Niel Theron: niel@hydro-sa.com

• Kakamas Hydro Electric Power (Pty) LtdPhone: +27 21 934 5550