Review of Renewable Energy Feed - in Tariff Consultation Paper

In this presentation:

Who is BG Solar?

What makes us different?

Why would an ODM be interested in REFIT?

What ruffled our feathers?

What else ruffled our feathers?

Recommendations

Who is BG Solar? BG Solar is SA incorporated, Original Design Manufacturer

(ODM) / Original Equipment Manufacturer (OEM) of PV related products All automated manufacturing facilities are located abroad

All labour intensive manufacturing facilities are located locally

Although we are capable of providing all of the project/engineering services ourselves, we prefer to partner with local engineering companies, thus broaden the industry involvement

We design and manufacture the full range of system components that we use in the PV Systems we subsequently build and offer to potential IPPs to purchase

All products and systems are manufactured under the trademark of ALT.NRG, the IP rights to which are held locally

What makes us different? First we import an engineering know-how we used to design and

manufacture all our products and systems into SA, transfer that specialist knowledge while training and employing generally unskilled labour in all ALT.NRG projects, we create employment opportunities in the rural/remote areas in the Upper Karoo / Lower Kalahari regions of SA

We offer our ALT.NRG systems as business-plan backed turn-key-projects, our business models are supported with our own empirical data derived from the production-grade pilot-demonstration plant we build and which has been operational (its output available to audit and study to qualified parties) since July 2010

We also offer innovative O&M plan to all ALT.NRG systems we build –being local manufacturer gives us the key competitive advantage, the ability to provide the most rapid response to any level of service request; using local technical resources allows us to provide the service at the lowest possible cost

Why would an ODM be interested in the REFIT? Having developed extended expertise in PV, our interests are reflected in the REFIT

Phase II framework Being engineering/manufacturing firm, our interest in the RE is quite specific – we

manufacture PV systems that we [try to] sell to potential investors in the RE industry as well as candidate IPPs For that reason, our success is this field is indirectly determined by the realities and the

dynamics of the REFIT and/or other relevant NERSA policies

We have developed a version of our ALT.NRG Large Scale PV System to perfectly meet the qualifying principles outlined in the REFIT Phase II paper 2-axis tracking, extremely efficient at 2ha/MW, demonstrating capacity factor north of

30%, connecting straight into the available grid @ 132kV Being modular, our system (and business model) scales extremely well – we demonstrate

feasibility in any generation system block size - from 50kW to 1GW – having no problem to adopt the minimal block size of 1MW so to comply with REFIT-II qualifying of Large Scale PV (>1MW)

Having own manufacturing capacity as well as controlling the build-project ourselves gives us the clear advantage to be able to build 1-10MWsystems in 6months, 10-100MW in 12 months, our current foreign manufacturing capacity being limited to 300MW per annum

We secured up to 22,000 ha of land (additional first right refusal of 45,000 ha) for all our future projects, all in conformance to DEA requirements, EIA concluded, with ample capacity to connect straight into the transmission network in the vicinity

What ruffled our feathers? The LCOE REFIT model is completely detached from reality

We have submitted 42 proposals to number of international and local potential-investors in 2010, we could not find any interest in investing in a “country risk” 20 year horizon green-field RE investment, where the real cost of capital was greater than 14% and the assumed IRR was 17%

For such risk the international investors were more interested to see IRR>30% geared at 20/80 and local investors were happier to see IRR>50%, geared at 30/70

Going back to the REFIT-II reason for decision paper Para 67 – Generic PPA was promised by Nov 2009 Para 4 - Revision to the Generic PPA, as well as REFIT guidelines was promised

to be made in 6 months None of the two papers ever materialised (although some draft copies of the

PPA are still floating around)

In 2010 we lost more than Euro 100M of potential investments from international sources (to which we had confirmed matching manufacturing capacity to deliver on) to eroded investor confidence and the perceived lack of ability of the regulator to deliver the stable investment platform as stated

What else ruffled our feathers? Going trough this Review of REFIT Consultation paper

Para 3.4 “due to the lack of local real-time project data, a reduction rate will currently not be applicable to REFIT. Tariff adjustments

providing a tariff line-of-sight will be taken into account in subsequent reviews as and when the local market become established” The subsequent drastic reduction of tariff we see reflected in Table 5 seems to contradict the above intention

Para 3.7 (also Para 10) The regulator again promises the industry a working PPA Can we have a firm timeframe, a commitment form the regulator that we can take to the bank?

Table 3 PV technology suddenly gets limited to only fixed and 1-axis tracking (from not being limited at all in the 2009 REFIT) This action is completely unjustified and it contradicts to prior stated intent Our technology is based on a locally manufactured 2-axis tracking, perhaps one can understand our frustration

The effect of this artificial unjustified limitation of technology is to promote less performance and penalise the latest generation, higher performance technologies

Para 6.2 States that nominal cost of debt in 2011 is 9.3%

We consider this figure to be without any grounds Two major banks in SA provided us with indicative term-sheets, where the average of all forms of capital on offer brings the

blended cost of capital to an average of 14% (12% - 15%) mostly determined by the level of senior debt in the debt/equity mix

Para 7.1 The removal of the 100% CPI adjustment is detrimental to the investor confidence

Two major banks in SA, as well as one PE firm indicated to us that the models show significant material change in value when the REFIT is adjusted with CPI in its entirety or partially (O&M component only)

Recommendations We reject the principle that Review of REFIT = reduction of

tariff

We support the regulator’s intention to freeze any reductions until such time as industry is established and real-time data becomes available

Therefore, we recommend (1) That this Review of REFIT paper is rejected in its entirety

(2) that the REFIT Phase 1 and Phase 2 papers stay in force

(3) Generic PPA is published ASAP so to break the dead-locked process

(4) REFIT freeze is imposed for a period of 5 years to boost investor confidence