Zimbabwe Mining & Infrastructure IndabaEnergy Options

Presenter: Jean MadzongweDate: 15 October 2015

AGENDA

• Sector Overview• Alternative Sources of Energy • Power trends in the Mining Sector• Options and Opportunities• SA REIPPP• Investment and Funding• Challenges for Project Implementation

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Source: World Bank: World Development Indicators database

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Sector Overview

An estimated 1.6 billion people in developing countries have no access to electricity of which about 70% are in Sub-Saharan Africa (SSA)

SSA and SADC has abundant energy resources that have not been exploited• Region accounts for 13% of global population, but only 4% of its energy demand:

half of this is biomass Nearly all countries in SADC experiencing power challenges and load shedding due:

- Growing demand, high industrial growth, urbanization, etc- Low levels of electrification (avg: 30% urban, 5-7% rural)- No new power generation in most countries- Limited transmission capacity- Ageing infrastructure, low maintenance- Poor reliability of power supply- Tariffs that are not cost-reflective

Energy drives economic and industrial growth • Energy sector policies have fluctuated from security of supply to increasing access

to self-sufficiency and now focus on increasing power supply for export and power trading

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Alternative Sources of Energy

Solar Photovoltaic (PV) Concentrated Solar Power (CSP) – Parabolic Trough, Tower, (offers storage for

peak times) Wind – Onshore, Off-shore Large Hydro and Mini-hydro Diesel, Heavy fuel oild (HFO), Light Crude Oil (LCO), etc Biomass Natural Gas – LNG, LPG, etc Landfill Gas, Waste-Treatment, etc Biogas Coal, Coal-bed methane (CBM)

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Africa is Rich in Energy Potential

Source : Africa Energy Outlook, BMI

GAS

COAL

OIL

OIL

OILOIL

GAS

GAS

In the last 5 years, almost 30% of global oil & gas discoveries were in sub-Saharan Africa; the region has vast untapped renewables potential, notably hydro & solar

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Power Trends in the Mining Sector

The mining industry is usually the largest consumer of electricity (ranges from 30-70%)

Unreliable power supply resulting in costly shut-downs Significant investment for self-generation (not core business) Many mines using high cost diesel/HFO as back-up power supply Cost of power tends to be high cost component of operations Special contractual arrangements and i.e. long-term

agreements, un-interruptible supply contracts Wholesale bulk tariff arrangements may provide lower cost Curtailment during times of peak when to avoid/reduce load

shedding (approx. 10% reduction)

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Source: World Bank: World Development Indicators database

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Options and Opportunities Options: Mining companies considering alternative solutions to solve their

power supply challenges Use of diesel generation, gas generation Renewable energy options, power stored from CSP plants Opportunities for Demand-side management (DSM) and energy

efficient measures Consider self-build transmission capacity

Opportunities: Mining companies can serve as ‘Anchor Customer’ or credit worthy

‘Power Off-taker’ to provide a bankable PPA Back-to-back power supply agreements Clubbing or group of small mines can consider special vehicle to

support PPA Can anchor imports

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Renewable Technologies

Limited development of alternative sources as renewable energy technologies tend to be small expensive and imported but now growing

Introduce Renewable IPP programme REFIT or competitive tariffs Mini and Off-grids are generally small electrical distribution systems

connecting multiple customers to multiple sources of generation and storage.

Technologies vary from PV, mini and micro-hydro plants, wind, diesel gens, biomass gasification, gas engines etc.

As the price of electricity increases, and the cost of PV becomes more affordable, an increasing trend in PV installations by private households is becoming evident. Electricity Costs

PV Costs

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SA Renewable Energy Programme SA REIPP introduced in 2011 and designed to procure 12,825MW of

renewable energy from Independent Power producers (IPPS) To date, 6,388MW procured in less than 4 years Total committed private sector investment approximately ZAR170 billion 37 projects connected with a capacity of 1,827MW Eskom provided 30 year PPA with Government guarantee for power off-take

and obligations of Eskom Bid Windows and technologies are determined by the Minister of Energy A total 64 out of 223 Bidders have ben selected in 3 Rounds Tariff has dropped over time for all technologies, started with tariff cap in

BW 1 and subsequently dropped to competitive tariffs from BW 2 onwards Wind: from R1,143 – R519/MWh Solar PV: from R2,738 – R659/MWh Solar CSP: from R2,686 - R1.460/MWh

Only BW3 had 3 preferred bidders for Landfill gas No preferred bidders have been announced for biogas Financing structures have been through a bond, corporate and project

finance illustrative of a maturing market

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DBSA Role & Strategy in the Energy Sector

• Invest in sustainable infrastructure for economic growth in Sub-Saharan Africa

• Increase regional co-operation and interconnectivity • Assist to alleviate power shortfall through investments

in power generation, transmission & distribution projects

• Provide funding for project preparation & development• Support delivery of access to basic energy services in

an environmentally friendly manner• Support diversification of regional power supply by

exploiting available energy resources • Capacity building in key energy institutions• Ensure job creation during and after construction

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DBSA Products and Services

• Direct investment in projects through term loans, subordinated debt and equity

• Credit enhancement through innovative structures, risk assumption and guarantees

• Invests in the development, rehabilitation and expansion of economic infrastructure

• Flexible and competitive lending terms and conditions• Offers a variety of products including co-financing arrangements

and loan syndication• Advocates maximum development impact• Mobilisation of funds from third parties• Provision of technical assistance and institutional capacity building • Support for black economic empowerment (BEE) initiatives and

indigenisation• Development of local capital markets in order to provide access to

local currency to offset exchange rate risk, access to long-term capital and increase investment alternatives

Project Due Diligence

InstitutionalCapacity to plan, implement, and manage projectCorporate structure and governanceLegal and Regulatory environment

Technical State of infrastructureCountry and regional market fitReliability and affordability Procurement and pricing policyIdentification and mitigation of risks

FinancialCommercial viabilitySponsor support during constructionRealistic assumptions

EconomicEconomic Cost-BenefitDevelopment Impact

EnvironmentalRisk assessment and managementPolicy compliance

SocialContribute to socio-economic development ConsultationSustainability

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Challenges in Project Implementation

Issue Comment

Political Will / Commitment

Government Policies, Sector Reforms, Sector Planning, Decision-making, bureaucracy, need for government guarantees, letters of support/comfort, Concession award,

Regulatory Environment

Predictable environment, Conducive and Regulatory framework, Independent Regulator, Cost Reflective Tariffs, Transparent Procurement Process

Institutional Project structure (SPV, BOT, BOOT, BOO) Strong Sponsor, Capacity to implement and operate, skills, Asset management and Monitoring, Strong Sponsor, Transaction Advisors

Technical Commercially viable technology, Feasibility studies, Hydrological and geological status, Availability of data, Reliable off-taker, Experienced contractors (EPC and O&M), Power evacuation,

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Challenges Cont’d

Environmental & Social Environmental compliance, EIA Studies, Resettlement Action Plan, Compensation, Water Use License, Occupational safety and health, increased ux of people from other areas bring in social ills into the area and dilution of culture, Benefits of jobs, socio-economic benefits

Financial Optimal structuring at project levelTerm of loanProposed guarantee framework for EPC and O&M contractsHedging to manage currency mismatchTransparent financial structures

THANK YOU