Quantifying the capital requirement: 19% RE by...

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Presentation at IDC Offices

Quantifying the capital requirement: 19% RE by 2030

Megan Sager, Consulting for

Sustainable Solutions

29 August 2014

WWF RE Vision 2030

Overview

WWF Renewable

Energy Vision 2030Articulating the Capital Requirement

29 August 2014 - 2

• 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

Overview

WWF Renewable


29 August 2014 - 3





• Achieving a meaningful renewable energy share will require creative

problem solving: public/private capital and the grid

The IRP2010-2030 Update allows for a

9% share of renewable energy by 2030

69%

12%

5%

9% 4%

Coal NuclearGas RenewablesHydro & other

29 August 2014 - 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.

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.

SA electricity mix, 2030

(IRP Update Base Case scenario)

Source: Own calculations based on DOE (2013)

WWF Renewable


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Renewable energy generation share and share growth

in emerging markets, 2013

29 August 2014 - 5

This is not ambitious by

international standards

Brazil and Chile have

already met or exceeded

South Africa’s targeted RE

share for 2030.

China and Turkey will

reach 9% within the next 3

years if current RE share

growth rates continue.

Source: BP (2014); own calculations.

11%9%

5% 4% 4%

19%

25%

9%

37%

28%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Brazil Chile India China Turkey

Share of electricity generation by renewables, 2013

Annualised growth in share of renewable electricity generation, 2010-2013 (CAGR)

WWF Renewable


The WWF calls for a 19% share

of renewable energy by 2030

29 August 2014 - 6

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

WWF Renewable


SA electricity mix, 2030

(WWF high growth scenario)

66%4%

6%

19%

5%

Coal Nuclear Gas Renewables Hydro & other

This will cost SA 1-2% GDP p.a.

but with likely multiplier effects

29 August 2014 - 7

High

economic

growth (5.4%

p.a.) scenario

Low economic

growth (2.9%

p.a.) scenario

Capacity (MW) Generation (TWh) Fiscal cost : 2015-2030 (Rand)

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

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

WWF Renewable


Overview

29 August 2014 - 8

WWF Renewable





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

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Price of electricity, 2013 (R/kWh)

29 August 2014 - 9

0 0,5 1 1,5 2

Coal

Nuclear

Solar PV

Wind

International Reference Prices, 2013 Rand Local Reference Prices, 2013 Rand

Citi Research: 2013 Rand IRP Update: Adjusted, 2013 Rand

Sources: DOE (2013); Citi Research (2013); Papapetrou (2014); Own analysis

In the IRP Update, coal

and nuclear are very

cheap internationally

speaking. PV expensive.

Nuclear is likely to cost

much more, while PV

averaged R0.88/kWh in

REIPPPP Round 3.

RE technologies compete favourably with

conventional technologies on price

WWF Renewable


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Best-in-class global utility-scale solar PV costs,

2010-2013 (USD/W)

29 August 2014 - 10

Source: BNEF (2014)

The dollar price of utility-

scale solar PV has halved

in the last 3 years.

Drivers:

• Shift to China

• Low commodity prices

• Weak global economy

In US PPAs are being

signed for $60/MWh.

The recent rapid drop in PV prices

is not an anomaly

1,85

0,72

0,3

0,11

0,5

0,26

0,41

0,31

0,18

0,15

0

0,5

1

1,5

2

2,5

3

3,5

2010 2013

Module Inverter Balance of Plant EPC services Other

WWF Renewable


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Projected tariff trajectory,

2014-2030 (2014 Rand)

29 August 2014 - 11

Source: Own analysis; Donnelly (2014)

Notes: CSP estimate refers to CSP with 3 hours storage

The average price of grid

electricity to Eskom was

R0.82/kWh in 2013. Wind

is already cheaper.

PV will be the cheapest

RE source by 2020. CSP

is an alternative to nuclear.

A weakening Rand may

increase the wind price.

Indeed market forces will support long term

grid parity for wind and PV

-

0,20

0,40

0,60

0,80

1,00

1,20

1,40

1,60

201

4

201

5

201

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9

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0

202

1

202

2

202

3

202

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202

5

202

6

202

7

202

8

202

9

203

0SOLAR PV SOLAR CSP - 3HR

WIND AVE COST GRID ELECTRICITY, 2013

WWF Renewable


29 August 2014 - 12

Local factors may drive further price

advantage

Tariff (Levelised cost of electricity)

Capital cost Discount rate Capacity factorLearning rate

Price

Variable

Lever 1:

WACC

Lever 2:

Local-

isation

• 1% cut ~ 6% tariff

reduction

• Change in capital

structure OR

better terms (e.g.

CPI linked debt)

• 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

WWF Renewable


Overview

29 August 2014 - 13

WWF Renewable






• Achieving a meaningful renewable energy share will require

creative problem solving: public/private capital and the grid

The first challenge to

consider is grid integration

Transmission and distribution infrastructure is

inadequate. The Cape* region will be worst affected: grid

stability limit = 15GW.

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.

Information descriptor

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the numbers

29 August 2014 - 14

WWF Renewable


Source: www.eskom.co.za

SA grid map, 2011

* This comprises the Western, Northern and Eastern Cape

Grid balancing is required to

ensure smooth power supply

RE has limited predictability and dispatchability:

challenging for system operator which needs to balance

the electricity system.

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. Mid-

merit combined cycle gas turbines running off

natural gas are 1 option (e.g. Ankerlig conversion).


Can appear below

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29 August 2014 - 15

Source: www.eskom.co.za

WWF Renewable


Ankerlig OCGT station, Atlantis

The second challenge is

Eskom as only offtaker

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.

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.


Can appear below

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29 August 2014 - 16

WWF Renewable



Can appear below

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5 MW PV plant, India

Source: www.nrdc.org

The third challenge is policy

coordination and certainty

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.

29 August 2014 - 17

Source: Wikipedia

WWF Renewable


Union Buildings

Finally, wider private investor

participation is required

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.


Can appear below

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29 August 2014 - 18

Source: FirstRand (2013); Standard Bank (2014);

Nedbank (2014); ABSA (2014); Creamer 2013(b).

WWF Renewable


Commercial bank exposure to RE, 2013

0%

1%

2%

3%

4%

5%

6%

7%

8%

0

2

4

6

8

10

12

14

16

18

20

Nedbank Standard Bank RMB ABSA

Funds committed to RE, Rbn

Funds committed to RE as share of wholesale banking assets, %

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

WWF Renewable


As financiers and stakeholders in the SA RE sector,

you are a vital part of the solution

Thank youMegan Sager

Director, Consulting for Sustainable Solutions (Pty) Ltd

[email protected] / 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.

mailto:[email protected]

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