RENEWABLE ENERGY FINANCE

Small Project IPPs

Towards a Green future ...

Gerrit Kruyswijk

Webinar Session 1

1 August 2012

Introduction and housekeeping

• This WEBINAR is initiated and hosted by the Industrial Development Corporation of South Africa Limited

• The presenter is Gerrit Kruyswijk – Senior Specialist, Green Industries SBU

• The consultant : Tier One Capital is appointed to assist IDC with this initiative

• Date and time of WEBINAR: 1 August 2012 at 14:00 – 15:30 (GMT + 2)

• The programme is as follows:

– 5 minutes - introduction (R v Tonder, Head: Green Industries SBU)

– 30 minutes of presentation

– 30 minutes of Q&A and comments

– 10 minutes wrap – up and planning of next steps

• IDC expects that most SPIPPs will be PV projects

– Therefore the majority of participants are from the PV industry

– Most of the discussion will be focused on PV

– But wind projects are not excluded from this process

Slide 2

PARTICIPANTS

• The participants have been invited from relevant industry players including:

– Local PV Panel suppliers and PV suppliers that intend to set up local manufacturing facilities

– Local inverter manufacturers

– Local turbine manufacturers

– EPC contractors

– Developers

– Banks

– Technical Consultants

– Legal Firms

– Bid Managers (audit and PF consultants)

– SAPVIA representative(s)

– SAWEA representative(s)

• Participants can forward their consent to be listed and identified to other consenting participants (please forward consent to sian@tieronecapital.co.za)

• The IDC will provide a count of how many participants (per category listed above) had participated in the WEBINAR

Slide 3

Participation

• This presentation material has been distributed to all participants ahead of the WEBINAR.

• Invitees are welcome to nominate/invite additional participants by forwarding the invite to colleagues.

• During the WEBINAR the participants can email questions and comments in the following format

– Addressed to sian@tieronecapital.co.za

– State the nature e.g. a question or a comment

– Specify your sector i.e. panel supplier, EPC contractor, developer etc.

– Say if your comment or question & answer should be shared with the participating group or answered by mail to you only (which will be done after the Webinar).

DISCLAIMER

The IDC does not imply that it will procure or implement the proposals, actions or funding structures reflected in this discussion document. The IDC does not

hereby make any funding commitment or any other commitment to support the Small Project IPP in any way. Such commitment can only be made by its Executive

Committee and Board of Directors. The IDC reserves the right to not take any further action regarding the Small Projects IPP. Any and all proposals contained in

this document can be used by any participant in the industry provided that it is used for the benefit and promotion of the renewable energy industry at large and that

it is done in a competitive and non-collusive manner.

Slide 4

Purpose of the Webinar

• To communicate IDC’s proposal to enable the successful and financially viable implementation of Small Projects IPPs in order to meet the stated objectives of the DoE.

• To procure industry’s response on the practicality of the proposal and request suggestions to enhance the IDC proposal.

• IDC will present this proposal, with the envisaged enhancements, to the DoE and request certain modifications to the procurement conditions that may be necessary to reach the stated objectives.

Clarifications

• IDC does not suggest that the DoE’s design of the procurement process is flawed, but merely wants to respond to their request for comments, further to what was already provided on July 17th.

• This is an IDC response to the Small Projects IPPs and not an exclusive method for bidding.

• It will be designed to comply with DoE requirements.

• Developers are not in any way restricted to use this IDC process.

Slide 5

Small Projects IPPs (SPIPPs) Programme

• The stated objectives are to:

– allow South African citizens who are SMEs and / or emerging, smaller power developers an opportunity to participate;

– allow South African equipment manufacturers without international certification to supply and

– limit cost-at-risk for bidding.

• The Small Projects IPP (SPIPPS) bid requirements are onerous

• 5 consultants and advisors need to be appointed by stage 1 bidding

• This increases the cost of bidding:

– Consultants will need payment security as a condition for appointment

– This will result in R3m to R5m at risk at stage 1 for bidding

• Project capital is expected to range from R30m to R200m

• The DoE expects most of the projects to be financed on limited recourse finance

• Commercial banks have limited / no appetite to participate due to the small deal size

• 25MW allocation is quite restrictive

Slide 6

Summary: IDC Approach - Standardisation

• Standardisation could result in significant bid cost savings

• Standardisation will allow IDC to support multiple projects with limited resources

• Support for lesser proven technologies

• Standard

– Technical offer from EPC contractor(s) using only (existing) local panel suppliers

– EPC contractor and contract

– O&M contactor and contract

– One legal counsel for all

– One LTA review standard offers

– Bid manager to assist small bidders

– Financial model to be audited once before customised population

Slide 7

Summary: Ownership and funding structure

• Ownership requirements

– Debt::Equity = 70:30

– 20 - 51% ownership by EPC contractor and/or O&M contractor

– Developer retains 10% minimum

– 80% minimum local ownership (a DoE Requirement)

– 25% minimum community ownership

Minimum free carry of 2.5%

Grant - funded (indicative 10% of capital)

• Lease of PV panels

– Panels typically 45% of total project value

– Commercial bank finance for panels on a lease funding basis

– Aiming to fund 20% of total project capital

– One lease company could lease panels to multiple projects

Slide 8

Summary: Ownership and funding structure (2)

• IDC

– Too small and onerous for equity participation

– Too small for IDC financing of BEE or Community

– Senior Debt

One tranche of debt finance

Maximum 50% of total capital

Interest rate of 10% fixed for 15 years

No LEASE and no GRANT

• Share with DFI

– In event of leasing option not viable

– Supplements IDC’s 50% “hurdle”

– More complex with inter-creditor, security agent and external legal counsel for finance documents

– Different interest rates (IDC subsidised)

– Currency complexities

Slide 9

OBJECTIVE AND CHALLENGES

DoE Objective Challenges Proposed Solution

1. SME and small

developers to

participate in

the programme

• Small developers cannot afford

development costs

• Standardise process to reduce costs

• DoE to reduce requirements (fewer

consultants with lesser role)

• Ability to fund own equity is

limited

• 30% equity; 20% Lease of equipment (PV

Panels) and 50% IDC debt

• EPC contractor to co-invest 15% - 51%

equity

• Grant funding to reduce equity requirement

and t benefit Community ownership

• Limited experience and

“bargaining power” to negotiate

EPC and O&M agreements

• EPC contractors’ time will be

wasted negotiating with many

different small developers

• IDC to provide 2 - 3 standard EPC and

O&M offers to developers that have been

negotiated on a competitive basis and

standard contracts

Slide 10

Standardisation

1

• 3 Standard EPC offers with (existing) local panel manufacturers

• Standard O&M offers (preferably same as EPC contractor)

• Standard EPC & OM contracts

• One LTA to review EPC standard offers

2

• Standard financial model – audited once

• Standard finance documents

• Standard funding structure

• Standard insurance package

3 • Bid manager for multiple projects for less experienced developers • One Lender Legal Advisor • One Insurance underwriter

Slide 11

Local technology without international certification

• Renewable energy is (still) more expensive than coal – generated electricity

– Immediate cost of generation benefits are not the primary aim of the RE procurement programme

– The benefit to South Africa must be realized through job creation

– In practice, this means the the threshold local content needs to be high

• IDC is aligned with DoE, DTI and NT on the need for local content, therefore:

– Only locally assembled panels / wind turbines will be considered for IDC financing

– Only locally manufactured tracking systems will be considered

– Mechanisms and criteria will be recommended to promote this target

Slide 12

OBJECTIVE AND CHALLENGES

DoE Objective Challenges Solution / Proposal

2. International

certification is not

required - to

enable locally

manufactured

equipment

Thus

PV - tracking and

concentrating

wind - local

assembled

• Local technologies are not

proven enough to be

commercially “bankable”

• IDC will be the only lender but would

require grant funding

• Certain components e.g. PV panels

could be “asset financed”

• and commercial banks to

• Financiers and

shareholders still require

guarantees

• Apply for assistance from DTI to

back/underwrite for manufacturer

guarantees (MCEP fund)

• Local solutions are more

labour-intensive and cost

more but this is not

recognized in the

development scoring

• DoE to give higher scoring to job-

creation for operating entity

• DoE to allocate more weight to ED and

less to pricing (50:50 is proposed)

Slide 13

OBJECTIVE AND CHALLENGES

DoE Objective Challenges Solution

3. Lower cost-at-risk for

developer

• Small developers cannot afford high

development costs

• The protracted bidding and selection

process adds to the cost-at-risk

• No success fee is allowed, which is

intended to be reward for risk

• Standardise process to reduce costs

• DoE to reduce requirements

• The timetable should be accelerated

• A capped success fee should be a allowed, this is one

mechanism by which small developers can acquire equity

in the project.

• The allocation of (only) 25MW per round

is too small (it is understood that DoE

wants to ensure competitiveness in each

round with capping it to 25MW) .

However, this reduces the chance of

success and increases the risk, and the

cost-at-risk.

• The full 100MW to be available immediately with the

condition that 1MW will be allocated for every 2MW

compliant bid capacity received. (i.e. 2 x over-subscribed)

• [Allocate all capacity that is left under technology (wind &

PV) after Round 3. Make this available for SPIPPS that

bid under the maximum bid price in round 3 for the

respective technologies.]

• Many PV and some wind developers

have developed sites that are either too

small or marginal to be competitive in the

large RfP. It is expected that these will be

scaled down to less than 5MW

• Standardisation could render these projects more

competitive and successful under SPIPPs.

• Programme timetable should be truncated as many

projects are ready to be submitted (delaying it just costing

more)

Slide 14

Process for LTA and EPC Selection

1

• IDC shortlists Lender Technical Advisors (LTA)

• IDC develops scope of work and issue enquiry to LTA

• IDC appoints LTA

2

• LTA develops EPC scope and technical specification's

• IDC issues RfQ for EPC

• IDC shortlists 4 EPC contractors

3

• Lender Legal Advisor (LLA) drafts a standard EPC contract

• IDC and LLA negotiates EPC contracts with 4 EPC contractors

• IDC selects 3 EPC contractors for IDC’s SPIPPs Standard Offer

Slide 15

Other appointments

Other appointments that need to be made on a competitive basis but for multiple project, in order to standardise, include

• Legal counsel (need some suggestions on this)

• Bid manager – if this is proved to be necessary

• Model auditor – Deloitt best placed due to familiarity with model

Timetable

Action Duration Target

Collate input and present to DoE 2 weeks Mid Aug

Appoint LTA 2 weeks End Aug

Procure EPC and O&M proposals 2 months Nov

Appoint legal counsel 1 month Sept

Negotiate and finalise EPC and O&M 2 months Jan 2013

……. Slide 16

Questions and Comments

• The success of the proposal largely depends in the response from industry.

• You may want to make comments and ask questions in confidence and IDC will respect the confidentiality but we still need to make the final proposal public.

• Please do not hesitate to comment. As stated in the beginning, you can email questions now or later.

Slide 17

Industrial Development Corporation

19 Fredman Drive, Sandown

PO Box 784055, Sandton, 2146

South Africa

Telephone 011 269 3000

Facsimile 011 269 2116

E-mail callcentre@idc.co.za

Thank you