Coenraad Krige How to Play in a Competitive Environment South Africa INTRODUCTION  Kensani was established in 1997 as an investment holding company for the economic upliftment and empowerment of women in South Africa.  Kensani is a Broad-Based Black Economic empowerment business with a dedicated focus on the Southern African infrastructure sector including renewable energy.  Kensani’s activities in the renewable energy sector includes:  Independent project and corporate finance advice;  Empowerment equity investment; and  Economic development.  Kensani has successfully participated in the first and second South African Department of Energy (“DOE”) REIPP Procurement Programme (“REIPPPP”) bidding windows as financial advisor and empowerment equity partner. INTRODUCTION  The Kensani Eaglestone Capital Advisory team combines indepth local experience with international best practise to deliver independent project finance financial advisory services to its clients in the South African renewable sector.  The team has raised over R15 billion of project funding for the first 2 bidding windows:  375 MW of solar PV projects; and  200 MW of wind energy.  Kensani is in the process of closing 2 first round solar PV projects, totalling 128 MW with a total funding requirement in excess of R5 billion.  Other infrastructure areas include PPPs, toll roads, energy (gas and coal), rail, etc. South African Renewable Energy Competitive Landscape       The DOE REIPPPP intends to procure circa 3 800 MW of renewable energy in 5 bidding windows. The DOE REIPPPP is based on 2 parts:  Part B: Qualifying Criteria; and  Part C: Point Scoring (Tariff and Economic Development Commitments). DOE REIPPPP has already awarded over 2 200 MW of projects to successful bidders in two bidding windows. Round One was characterised by meeting Part B Requirements. Round Two projects had to qualify, deliver a competitive tariff and have high Economic Development Commitments. For future rounds, probability of success will be determined through delivering projects that are:  Fully compliant (Part B); and  Outperforms the market average on tariff and Economic Development Commitments (Part C). South African Renewable Energy Tariff Progression Solar PV Tariff Progression 3 Wind Energy Tariff Progression 1.2 Maximum Tariff (Per REIPPPP) Maximum Tariff (Per REIPPPP) Average Preferred Bidder Tariff 2.5 Average Preferred Bidder Tariff 0.8 Tariff (ZAR/Kwh) 2 Tariff (ZAR/Kwh 1 1.5 0.6 Market average submission tariff range/deviation 0.4 1 Market average submission tariff range/deviation 0.5 0 Round 1 Solar Round 2 Solar 0.2 Future Rounds 0 Round 1 Wind Round 2 Wind Future Rounds “Round 3 may be Categorised by the Desperation Factor” South African Renewable Energy Key Tariff Drivers  What really drives the tariff? Construction Costs Good Resource Operational Expenses TARIFF Debt Financing Equity Return Expectations South African Renewable Energy Understanding the Cash Flows  Revenue and operational costs linked to inflation.  Operational costs generally form approximately 10-15% of total Revenues (Operational cost risk is low).  Majority of revenues allocated to debt service and equity returns:  Optimising the capital structure is important; and  Cost of debt and equity key value driver. Stable Cashflow Profile in Real Terms Real Cash Flow Waterfall Nominal Cash Flow Waterfall Inflation Linked Costs and Revenues Total O&M Costs Senior Debt Principal Senior Debt Interest Remaining Cash South African Renewable Energy Expected Equity Returns  Contracted and predictable revenue and operational expenditure patterns result in stable, low risk equity distributions over the life of the Project.  Based on the current Renewable Energy IPP Procurement Programme, investors can expect project level real IRRs of between 14-17% (USD 11%-14%). Predictable Yield Profile Cumulative Real IRR Profile 30% 20% 60% 10% 50% 0% Project Level Real 40% -10% IRR’s of 30% -20% approximately 14%-30% 20% 18% (USD 11%-40% 14%) 10% -50% 0% -60% -1 1 3 5 7 9 11 13 15 17 19 21 23 -70% Equity Contributions (Real) Equity Cash Flows (Real) -80% Real project level IRRs of between 13-17% (USD 11% - 14%) Real Equity Profile / Yield 70% South African Renewable Energy Risk determination, allocation and pricing Risk determination, allocation and pricing becomes a key value driver pre bid     All risk except for forex (spot price) resides with the project. No room for price adjustments post bid. Balance between risk contingency and competitive tariff (how much risk are you willing to take?). Remove “uncertainty pricing”. Market Impact and Considerations     Detailed development work pre bid. More development costs at risk. Time factor. Downward pressure on development returns. “Eliminating Risks Creates Greater Certainty and Lower Costings” South African Renewable Energy Economic Development Commitments  Economic Development commitments an important driver of success:  Qualifying criteria; and  Part C Evaluation (30 out of 100).  Economic Development spans across all aspects of a project:       Job creation (Construction and Operations); Local content spend (Construction); Ownership; Management; Procurement; and Social economic development.  An active Economic Development strategy could differentiate a project from the market (Points Only). South African Renewable Energy Economic Development Commitments  However, Economic Development commitments remains a balancing act: TARIFF ED South African Renewable Energy Conclusion  Why will your project win:      Quality and proven resource; Grid availability and ease of connection (Time and Costs); Easy build out; Experience in development; and Size matters.  It is not just technical:      Financial analysis; Project and capital structure; Risk allocation and management; and Economic development. Make use of experienced advisors (across legal, financial, technical, environmental). Thank You Coenraad Krige Managing Director Email: [email protected] Work: +27 21 674 0403 Cell: +27 82 440 2554