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Grand Inga Treaty 4 November 2014

Grand Inga Treaty 4 November 2014. Introduction. Purpose of the presentation Background of the Grand Inga Project The strategic importance of the Inga Project to RSA and Africa The tenets of the draft Grand Inga Treaty Conclusion. Background on the Grand Inga Project.

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Grand Inga Treaty 4 November 2014

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  1. Grand Inga Treaty 4 November 2014

  2. Introduction Purpose of the presentation Background of the Grand Inga Project The strategic importance of the Inga Project to RSA and Africa The tenets of the draft Grand Inga Treaty Conclusion

  3. Background on the Grand Inga Project • Westcor project terminated and certain lessons learnt from the failure • Win-win essential otherwise risk another termination • Meeting internal DRC energy requirements must be integral to the approach • “transit countries” come into serious play, otherwise no evacuation corridor • The Grand Inga MOU signed on 11 /11/ 2011 and provisions paved the way for the development of the Grand Inga draft treaty • Grand Inga Project phases are: • Phase 1 Inga 3 Low Head 4755 MW; • Phase 2 Inga 3 High Head 3030 MW; • Phase 3 Inga 4 about 7180 4200 MW; • Phase 4 Inga 5 about 6970 MW; • Phase 5 Inga 6 about 6680 MW; • Phase 6 Inga 7 about 6700 MW; and • Phase 7 Inga 8 about 6740 MW. • Interdepartmental team with DOE, NT, EDD, DIRCO, ESKOM, DEA, DOJCD, DTI, DPE and SSA

  4. Description of the Grand Inga project • The Grand Inga Project is a multi-phased hydro power station to be built on the Congo River on the Inga site, with potential to generate approximately 40 000MW. • The Inga dams are located in the western DRC 50km upstream of the mouth of the Congo River and about 225km south west of Kinshasa. • Associated with the Grand Inga are transmission lines to evacuate power from the generators to the markets in the DRC and to export markets. It is foreseen that a new transmission line to South Africa will be associated with the first phase of the Grand Inga project. • The transmission line will probably go through Zambia and Zimbabwe and Botswana.

  5. Strategic considerations • 2011 SAPP dominate by SA support based in Mpumalaga • Uncertainty of large new SAPP project implementation • Significant reversal of power flow in SA over time. • Reduced significance of Mpumalanga • Large excess capacity in the Cape and Limpopo 2030 Net (MW)

  6. RSA negotiating for interconnection on two fronts: East and West • Three key corridors Central, East & West spanning DRC, Zambia, Zimbabwe and Mozambique – multilateral nature of the project should not be missed • Inga on the West (~ 12 000MW) and North Mozambique on the East (~ 10 000MW) are key generation centres • Important to diversify the risk if RSA to depend on these cross-border sources • Generation + Transmission corridors ownership and domination? • Eskom/RSA Inc participation? Strategic considerations

  7. Strategic importance of the Grand Inga Project Potential to generate 40 000 MW of relatively cheap, clean energy, of which RSA has potentially secured rights to import 12 000MW Contribution to the universal energy access agenda and alleviation of energy poverty on the African continent Regional economic development and integration within SADC with potential to stabilize DRC, a country strategic for African development For South Africa - reduction of the carbon footprint, diversification of energy risk, energy security, positive tariff impact – in line with IRP. COP 17 legacy project.

  8. Tenets of the Draft Grand Inga Treaty The purpose of the Treaty is to develop an enabling framework, linking the DRC and South Africa into the Project, and allowing for the two countries to jointly explore economically feasible options for the development of the Project. Provides for the establishment of certain institutional arrangements (INGA Development Authority (ADEPI), Joint Ministerial Committee, Joint Permanent Technical Committee) to facilitate the development, operation and management of the Project in the DRC, through concessionaires.

  9. Governance of the Project - JPTC The JPTC shall be established by the JMC. The composition of the JPTC shall include RSA representatives and the DRC shall be represented by the Agency. The Agency representatives will interact with the JPTC and work with the JPTC to prepare project documentation, structuring issues as well as to conduct feasibility studies, financing arrangements, generation, transportation and delivery of generated power. The JPTC will report to the JMC which is responsible for providing guidance on the project development where the RSA is involved. JPTC makes recommendations to the Agency where there is disagreement, the matter will be tabled to the JMC for resolution.

  10. Governance of the project - JMC • JMC shall consist of Ministers responsible for electricity from both countries. • The JMC shall ensure that implementation of the Project is accordance with the provisions of the Treaty • Consider reports and matters from the JPTC • Shall meet at least twice a year or when necessary. • Shall make decision by consensus. SECRET

  11. Commercial aspects of the Treaty • In the Treaty, if certain conditions are met, RSA commits to buy power generated from Phase 1 and subsequent phases. • Phase 1 is associated with the following: • costs due to the development of the Common Works; • Costs due to the transmission line to Kolwezi (the Delivery Point); • investment by South Africa in the construction of the transmission infrastructure from the Delivery Point to South Africa, • the commitment to off-take 2500 MW by RSA and 2300 MW by DRC and assistance in the mobilisation of funding. • In return DRC agreed to give RSA the Right of First Refusal (ROFR) for both equity and off-take in respect of any and all future Phases of the Project or any related hydroelectric development of the Congo River in and around the Inga complex, if South Africa proceeds with Phase 1 (“lock-in”) SECRET

  12. The Right of first Refusal Off- Take • RoFR (Off-Take) provides that South Africa:- • is guaranteed a minimum of (20%) of generated power equal to 9 540 MW and a maximum of 13 060 MW; anything beyond this could still be negotiated. • It is anticipated that the economics of the project will be more favourable (due to common works completed and project significantly de-risked) as more phases are added and generation cost per megawatt will decline – critical that RSA has this RoFR. • RSA will be guaranteed access to cheaper and cleaner power if future project phases go ahead. SECRET

  13. Conditions for securing the ROFR Off Take • RSA must commit to take 2500 MW from Phase 1 of the Project if the feasibility and commercial terms are acceptable • US$ 10 million is payable into an escrow account by RSA as commitment fee • the governance protocol of the escrow account is to be developed in terms of the Treaty under a separate protocol. • RSA will be charged the lowest possible tariff and no other off-taker can receive better terms than RSA • ROFR shall take precedence over any other possible 3rd party agreement or arrangement to be entered into by the DRC • May negotiate additional volumes of energy SECRET

  14. RoFR - EQUITY • RoFR (Equity) provides for the following for South African entities (public or private):- • DRC to ensure that for each phase of the project, the developer company will reserve at least 15 per cent of the available equity to RSA, and RSA shall be the first to be offered such share capital; and • The mechanism, timetable and procedures to be followed on the allocation and purchase of the equity shall be negotiated in a separate protocol. SECRET

  15. Tariff Setting Principles • Tariff setting shall be subject to negotiation and based on the following principles:- • Covers the cost, the return and fees imposed by the DRC • Takes into account the price of energy that could be supplied by alternative projects • In the RSA case the alternative price is the cost of the generation from coal. • A tariff setting protocol will be negotiated. SECRET

  16. Challenges: time sensitivity of the project • The ADEPI Agency will take time to be established and it has been proposed that an interim structure needs to be created and mandated to execute the responsibilities of ADEPI • The Treaty might also take long to ratify by respective Parliaments and it has been proposed that an Electricity Agreement be developed and within it provide for the operation of working groups that will advance the project. • Transmission line “transit countries”- The feasibility study did not scope the transmission line from the delivery point to RSA. There is urgent need for engagement of Zambia, Zimbabwe to initiate the negotiation on the transmission lines. SECRET

  17. Challenges Continued • Designated delivery point- at Kolwezi which is about 150 km from the DRC/Zambia border. RSA will be responsible for the 150 km line • DRC to either grant a concession to enable RSA to construct and operate that protion of the line to the Zambian border, or • To commit to develop it themselves. • Any investment in a foreign country poses political and security risks • Political risk- the DRC has not experienced political stability for years. • RSA and other international partners have been assisting to stabilise the country • Security risk- DRC has been unstable for years especially in the North Eastern Region which is more than 2000km from the Inga site. • Notwithstanding, the DRC has been trading with SADC countries for years especially during civil war without interruption of transmission. SECRET

  18. Next Steps Start offtake negotiations with preferred consortium identified by DRC/ alternatively provide offtake conditions (secure PFMA and political mandate) Engage DRC and lenders on the bankability of concept based on Tx proposal: World Bank, EIB, AfDB, etc Enter into supporting agreements with Zim, Zam on Tx and offtake Complete Tx Integration Concept – Eskom and utilities Conclude offtake to reach financial close Sign Grand Inga Treaty Oct 2016 Mar 2015 Nov 2014 Jan 2015 August 2014 Negotiate Tx scheme with Zim, Zam –elevate from utilities to political (Treaties)

  19. Way forward Treaty to be introduced to Parliament for ratification. Negotiations on the outstanding protocols on tariff setting, management and operationalization of the Right of First Refusal, terms of management of the escrow account. The negotiating with potential transit countries and the commissioning of a feasibility study on transmission lines on critical path

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