South African Renewables Initiative Unlocking South Africa’s Green Growth Potential Update December 2010 Update briefing | June 2010
Renewables can drive South Africa’s green growth Electricity demand >>> g Renewables potential >>> Economic opportunity Growing Significant Untapped South Africa needs South Africa’s natural Developing a critical 52GW GW of new resources include mas s of renewables generation capacity some of the world’s would deliver major in the next 20 years. best sites for onshore economic and wind and solar power. industrial benefits.
Renewables do drive green growth Germany – “Ecological Industrial Policy” provided Ontario – seeking feed in tariff, capital to become the subsidy – over 275,000 ‘silicon valley of jobs, 400,000 expected renewables’ aim by 2020. to create 50,000 jobs in first three years of feed-in- tariff. Brazil – Since 1970s Proalcool Bioethanol strategy for China - Plans for 500GW India – Solar mission energy security renewables (mainly hydro and aims to generate and job creation. wind) by 2020. Local content 20GW from solar by rules enabled build up of wind 2022, for energy industry over past 10 years, security and to create recently removed. favourable conditions for solar thermal manufacturing
The South African Renewables Initiative A South African Government Initiative tasked to design options for unlocking the potential economic benefits of renewables Industrial strategy (technology strategy) • Financing strategy (institutional arrangements) • Stage: analysis, design and policy options Consultations/expert inputs: Commissioned technology, economic and institutional studies • Engagement domestically and internationally with technology providers, financing institutions, • academic experts, civil society organizations, leaders of other national public initiatives, etc Collaboration with World Economic Forum ‘Critical Mass’ initiative, Deutsche Bank ‘GET FIT’ initiative, • European Climate Foundation, UK Government’s Department for International Development
Economic opportunities from renewables in South Africa Industrial Contributing to development: energy security: creating new preventing jobs in the economic renewables disruption of value chain blackouts Mobilizing champions for deeper green growth Reducing Regional hub : emissions: developing new Greening export markets in electricity for of manufacture and energy intensive service for exporters renewables
Critical mass unlocks economic opportunities Approach to Ad hoc development Ambitious target renewables - Late start - Early start development - Gradual ramp up -Long commitment - Low overall target -Regular ramp up - Turn-key -Development of developments domestic capacity Industrial development Export competitiveness Regional renewables development Energy security Potential to mobilize green growth synergies Medium term $ $$$ incremental cost Benefits: Low High Costs: Low $ $$$ High
15% renewables by 2020-2025 would deliver critical mass Cumulative capacity requirements Sufficient to: GW Enable localization 15% Renewable energy by 2020 15% Renewable energy by 2025 and attract 25 investment. 20 Build capacity for an international 15 competitive industry. Contribute to 10 medium term energy security 5 Address export threat by helping to achieve national emission reduction goals. Assumptions: Capacity factors for all technologies from the following local and international sources. Source: Marquard et al (2008); LTMS 1 (2007); EIA (2007); E-on UK; EIA Annual Energy Outlook (2010); Lazard (2010); NREL (2009); US DOE (2009); expert interviews; SARI model v13.0; team analysis
Core challenge is funding incremental costs A critical mass of renewables i s needed to drive economic upside. Incremental costs of US$4-12 billion to achieve critical mass using best data on levelised costs. An unacceptable burden for the South African economy and its people. Source: NERSA (2009) REFIT 1 Decision with projected learning rates applied. NERSS (2009) Multi-year price determination. Team analysis
Unlocking South Africa’s virtuous green growth cycle International South African Unlocks support co-operation Government Commitment through to ambitious REFIT international backed by grants and supporting concessional arrangements and loans to reduce modest domestic investor funding risk International Citizens, labour, investors consumers Enables Catalyses green development of a growth in South critical mass of Africa, with minimal renewables burden. projects Creates industrial and economic benefits localisation, export competitiveness Domestic energy security industry
Focus on financing International South African Unlocks support co-operation Government Commitment through to ambitious REFIT international backed by grants and supporting concessional arrangements and loans to reduce modest domestic investor funding risk International Citizens, labour, investors consumers Enables Catalyses green development of a growth in South critical mass of Africa, with minimal renewables burden. projects Creates industrial and economic benefits localisation, export competitiveness Domestic energy security industry
Average incremental cost of US$1.2bn from 2012–2025 5 Equivalent to: • Present value of $9.1bn* • Cost per ton of carbon of $7.9* * Cash flows discounted at 6% p.a. Source: Team analysis, expert interviews, SARI model v13.0 Source: Team analysis
Concessionary debt and risk-related instruments can reduce costs Characteristics of renewables financing >>>> Opportunity to lower cost of renewables High capex • The cost of renewables can be • compared to opex for reduced by cutting the cost of renewables. .. capital employed. Capital intensive Opportunities to reduce the cost of Long exposure to • capital through: counterparty risk Concessional loans • Political risk insurance against • Technological and • High policy-related risks natural risk. capital Currency hedges • costs Policy risk. • Loan guarantees where a guarantor • takes on the project risk Providing a ‘one-stop shop’ of • Difficulty of • access to financial instruments to structuring finance High qualified developers would reduce for renewables deals. transaction the associated REFIT premium costs needed [Source: Center for American Progress/Global Climate Network (2010) Investing in Clean Energy: How to Maximize Clean Energy Deployment from International Climate Investments, and KFW (2005) Financing Renewable Energy, Discussion paper 38, interviews and consultations]
Using concessionary debt and political risk insurance the remaining funding gap can be reduced by more than 30% BASE CASE SCENARIO Average annual funding gap from 2012 to 2025 $m -17% -14% -31% Baseline With conessionary With political With insurance and debt risk insurance concessionary finance Assumptions: (1) Concessionary finance reduces cost of debt from 11.5% to 8.5% nominal, (2) 8.5% nominal cost of concessionary debt includes 2.5% hard currency denominated borrowing cost and 6% ZAR hedging cost; (3) Political risk insurance reduces cost of equity by 3% after netting purchase cost Source: Expert interviews; team analysis; SARI model v13.0
The remaining funding gap can be closed from a combination of two sources 5 Average annual gap in REFIT funding $m Sources for closing remainder of gap 1 South African domestic funding sources • An equivalent of a 3.8% immediate increase in the electricity tariff is needed to cover the gap • However, SA can cover 63% of gap through incremental tax revenue and industry contribution in respect of competitiveness uplift 2 International grant funding • Providing grants to cover the full gap would cost the equivalent of $5.5/tCO2e abated Gap with Impact of Gap with • Covering the gap beyond commercial concessionary concessionary domestic funding would require finance finance finance grants with a PV of $2.4bn Source: Team analysis, SARI model v13.0 Source: Team analysis
Funding the gap with domestic neutral impact condition International sources PV of funding needed from 2012 to 2025 Domestic sources $bn 9.1 -30% 2.7 6.4 -44% 4.0 2.4 -26% Funding gap Impact of Funding gap Neutral impact International concessionary with domestic grants finance concessionary contribution finance Source: Team analysis; SARI model v13.0
International grants’ high leverage rates International public finance and private investment per R of domestic contribution 16.28 Implied cost of carbon is 5.5 US $/tonne CO2e 6.03 1.00 Grants Concessionary debt Private investment Source: SARi model v13.0; team analysis
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