South African Wind Market Entry Study

1. South African Wind Market Entry Study Presentation by David Williams, 24 June 2013

2. Contents • Wind history, status and policies in SA 1. 2. Market Outlook 3. SA Wind Value Chain 4. Stakeholders in South African RE market 5. SWOT analysis of the SA wind sector 6. General information for new entrants 7. Opportunities in SA wind sector

3. Experts in renewable energy Onshore & Offshore Wind Wave & Tidal Solar PV & CSP

4. Local understanding forms a global perspective Almost 1000 staff, in 42 locations, across 24 countries Heerenveen Sint Maarten Kaiser-Wilhelm-Koog Glasgow London Slough Copenhagen Hinnerup Oldenburg Hamburg Warsaw Bristol Cork Beijing Seoul Tokyo Shanghai Mumbai Bangalore Newcastle Melbourne Wellington Vancouver Ottawa Portland San Diego Montreal Peterborough Austin Querétaro Porto Alegre Santiago Paris Imola Lisbon Barcelona Zaragoza Madrid Izmir Cairo Cape Town

5. Providing lifecycle support to all stakeholders • Project Developers • Owner/Operators • Investors • Manufacturers • Governments/NGOs

6. Wind history, status and policies in SA

7. Wind power in South Africa • SA wind market is a new market by global standards • Brief History of utility-scale wind: • 2002: Klipheuwel 3.2MW wind farm, Eskom’s first (experimental) wind farm , Western Cape. • Darling Wind Farm (5.2MW but ongoing capacity additions), near Cape Town, first attempt by SA to create an wind energy programme (SAWEP) • First private development: Coega Wind Farm, single turbine near Port Elizabeth, (just in time for the 2010 World Cup) • Eskom’s Sere Wind Farm (100MW), under development (end 2013) • In general though, the country has seen low levels of activity, until recently.

8. Renewable Energy (RE) Policy in South Africa (1) • 1998 White Paper: first tentative steps promoting diversification of supply and Independent Power Producers (IPPs); • 2003 White Paper on RE: 10,000 GWh by 2013… • 2008 Energy Act: further support to RE in the SA energy mix (through the Integrated Energy Plan). This is turn has led to the Integrated Resource Plan (IRP) which outlines the national electricity plan. • IRP is 20-year outlook plan, revised every 2-3 years • Current: IRP 2010-2030 (new update imminent). IRP 2010-2030 went through several rounds of consultation finally arriving at:

9. Renewable Energy (RE) Policy in South Africa (2) Policy Adjusted IRP • 33% of new capacity allocation go to RE • 9,200 MW of wind by 2030 All renewables, capacity growth (annual installations) from DoE figures All renewables, capacity growth (cumulative) from DoE figures

10. Renewable Energy (RE) Policy in South Africa (3) Main outcome for RE: Renewable Energy IPP (Procurement) Programme (REIPPP) • SA Govt. committed to 3,725 MW of RE by 2016 1,850 MW of wind • Recent announcement adds another 1,470 MW by 2020 • In total equates to appr. 1,300 mid-sized (2.5MW) turbines to be installed General explanation of the REIPPP process: • Capacity allocated over (up to) 5 Rounds of competitive bidding. • SA Department of Energy has set maximum tariff and developers bid in below this. • 2 stage process of evaluation against a variety of criteria • So far 2 Rounds have been completed, 3rd Round about to commence

11. Round 2 wind projects REIPPP progress to date (1) • Round 1 wind projects • Projects in range 25MW -135MW. Small projects require similar effort and incur the same risks as larger projects, with less return. • Upper limit of 140MW was set to limit congestion for grid connections • DoE restricted capacity allocations to ensure some capacity for future bid rounds. • Rounds so far…

12. REIPPP progress to date (2) • REIPPP focuses on large scale project (have to be >1MW for REIPPP) • No provision at all for installations below that size (i.e. kW scale projects) Govt. has set up a “Small Projects REIPPPP”: • Original plan is for 100 MW (for all technologies) to be available over 4 Rounds, allocated to projects in 1MW - 5MW range • Programme dates to be announced soon Small-scale wind (grid connected)

13. Wind in other applications (1) Self-Generation on-site and “wheeling” for industrial applications”: • SA economy based on mining and heavy industry Big electricity users • Almost all electricity currently supplied by ESKOM – end-users subject to price fluctuations and power outages • Until recently none considered their own renewable energy plant (wind power not economically competitive with the subsidised electricity from the national grid). • This attitude could change in the future (example 1MW hybrid PV-Diesel plant for mine in Limpopo) • Wind’s contribution to this trend is however debatable… • Wind resource doesn’t easily match up to demand • Firm generation wind power will be combined with conventional generation or with a electricity storage facility. Source: infomine.com

14. Wind in other applications (2) • An electricity user establishes an electricity production installation far from the site of electricity consumption but uses the national grid to “transport” the electricity from the production site to the location of end-use. • Lack of legislation, regulations and technical expertise within industry and government “Wheeling” Other “off-grid” potential • Household electrification in SA at approximately 75%, so potential is there • Govt. focus on extending national gird not promoting off-grid solutions. Conclusion • Wind power could theoretically cover a proportion of the electricity needs • For the foreseeable future however, wind power, in these applications, will remain a niche market

15. SA wind market outlook

16. SA wind market outlook Recap of SA Govt. targets GL GH forecast scenarios Creation of three scenarios: • Central case: based on the DoE’s Integrated Resource Plan (IRP) • High case: short term build rates are limited but then assumes an aggressive but plausible development to robust industry • Low case: projects under the REIPPPP proceed more slowly; it is assumed there is minimum annual capacity addition

17. GL GH forecasts SA wind market outlook REIPPP wind capacity growth (Annual installations) REIPPP wind capacity growth (Cumulative) Conclusion • Wind power annual installations rates could be anywhere between 350MW and 800MW Average financial volume, to 2020, of appr. EUR 564 million per year

18. Other potential SA wind markets REIPPP Small wind project (1MW-5MW) market • 100MW over 4 Rounds • Details of timings still to be announced • Overall though, unambitious target, but too little detail to accurately forecast • Assuming half of each round allocation is for wind power (as per large REIPPP) Financial volume predicted at appr. EUR 25 millions per Round Offshore wind • South Africa has offshore wind potential, off Eastern and Western Capes • Due to relative costs, onshore wind would have to be saturated before offshore becomes a viable approach No developments in the foreseeable future

19. South African “value” chain

20. “chain of activities that one or more firms perform to be able to deliver a product or service in a specific industry” SA value chain General Value chain Government Financing Bodies Project Owner / Developer Industry Decommission Construction O&M Development

21. SA value chain (2) Covers such activities as: • Site screening, selection and land lease; • Wind resource assessment and site studies; • Turbine selection and project design; • Electrical connection feasibility and off-taker arrangements; • Obtaining necessary permits including environmental assessments; and • Project management. Project Development The natural habitat of the “consultant”: • Engineering: energy production assessments, BoP design and grid connection studies; • Environment: EIAs and other impacts; • Financial: financial planning, fund raising • Legal: all contractual interfaces and interactions with major stakeholders (e.g. land owners);

22. SA value chain (3) Two major inputs to this stage: Wind turbine OEMs : • International players: most major established players already in the market • South African players: small scale producers exist, but don’t have any major share; Balance of Plant providers: • Civil/Mechanical works contractors: usually local companies • Electrical suppliers/contractors: local; components imported Project Construction Project Operations and Maintenance • Wind Turbine Suppliers: warranty terms 2-5 years (some 10 years or longer in the South Africa market); • Owner In-House O&M • Independent O&M

23. Stakeholders in South African RE market

24. Government Research & Planning (e.g. SANEDI) ESKOM Research /Academia Financial Institutions Government of South Africa Research Institutes and Standards (CSIR, SABS etc) Private Banks (e.g. Standard Bank, Nedbank, ABSA, Rand Mutual Bank, Investec etc.) Dept. of Labour Dept. of Science and Technology Dept. of Labour Universities (University of Pretoria, University of Stellenbosch, University of Cape Town etc.) NERSA Dept. of Economic Development REIPPP Dept. of Planning Development Banks (e.g. DBSA, IDC) Dept. of Environmental Affairs Dept. of Public Enterprises IPP • Contractors • Consultants • (e.g. engineering, legal, environmental etc.) • Construction subcontractors(e.g. EPC) • OEMs (e.g. wind turbines, elec. Components) National Treasury Dept. of Trade and Innovation Dept. of Energy NGOs/Associations NGOs & Civil Society (e.g. Friends of the Earth, Greenpeace, WWF etc.) B-BBEE entities Chambers of Commerce Industry Associations (e.g. SAREC, SANEA, SAAEA etc.)

25. SWOT analysis of the SA wind sector

26. The boxes below present a summary of the SWOT analysis, with respect to the SA wind market, from a Dutch company perspective. SWOT analysis Helpful Harmful Strengths Weaknesses • Wind resource • Public awareness and support • Community involvement • Industrial base • Business climate and infrastructure • Economic Climate • Still maturing Industry • Level of skills in country • Climate and terrain • Policy environment • Change of focus (to fossil/ nuclear power) • Existing infrastructure in remote locations • Permitting and licensing Internal Opportunities Threats • Supply chain developments through partnerships • Manufacturing base • Market leadership potential • Wind development services • Wind integration opportunities • Wind O&M market • Small wind (REIPPP and outside it) • Established players (international) • Local companies (up-and-coming) • Local Content • B-BBEE certification • Grid transmission capacity • Planning procedures • Other energy sources (both RE and fossil) • Currency instability External

27. General information for new entrants

28. General Information (1) All major issues covered by RfP documentation (Rand 15,000 download fee) • Open to all companies (local and international) • If bidding directly with projects (i.e. as developer) requires the creation of an SPV • All parties (incl. subcontractors) need to divulge detailed company and contract information. 2 stage process (Qualification and Evaluation): • Submitted bids assessed against compliance with the Qualification Criteria, Price and Economic Development objectives • Compliant bids assessed against a set of Evaluation criteria relating to Price and Economic Development aspects, and are ranked, per Technology, on a comparative basis. • Relative scoring: price (70%) and economic development (30%). • Once awarded “Preferred bidder” status, Eskom offers standard PPA REIPPP process

29. General Information (2) Some further points on qualification: • Statement of complete familiarity with relevant SA laws required • Particularly for companies outside of South Africa, a declaration stating that suitable South African legal counsel has been employed • SPV must provide guarantee equal to R100,000 per MW of project (to qualify) • Once awarded, new guarantee of R200,000 per MW (first guarantee returned) • Development Fee equal to 1% of the total project costs once certain agreements have been signed. Evaluation: • Emphasis placed on the social and economic development aspects, in line with Government strategy. REIPPP process

30. General Information (3) REIPPP process Each factor has a ‘threshold’ and ‘target’ value. Threshold and target values increase with each successive bid round. • Job creation: certain statistics required such as the percentage of South African nationals, Black citizens and people from local communities employed in the project company; breakdown for construction, operation and maintenance. • Localisation: measured by capital costs, costs of services procured for the construction

31. General Information (4) REIPPP process • Ownership: REIPPPP requires a Bidder to have a South African Entity Participation of 40% as well as setting certain thresholds on the actual level of (B-BBEE) certification of the partners. • Bidders are required to indicate the percentage of equity owned by Black People, Black Enterprises and Local Communities, • Socio Economic Development: Bidders required to identify needs of the communities surrounding the project site and formulate strategies to meet these needs by utilising Contributions from the project’s revenue stream, i.e. setting up Community Trusts.

32. General Information (5) Broad-based Black Economic Empowerment (B-BBEE) • Broad-Based Black Economic Empowerment (B-BBEE) Act in 2003, (with an amendment in 2011) governs many of the working aspects of the South African economy. Codes of Good Practise (2007) developed to provide objective measurement of BEE achievements across all sectors. • Require that all companies operating in South Africa make a contribution towards the aims of B-BBEE • All state bodies and public companies consider the Codes when making decisions on issues such as procurement, licensing/concessions, partnerships and sale of state-owned assets • Provisions for foreign companies to make contributions to the B-BBBE requirements in lieu of a direct sale of an equity stake of their company. • As foreign companies will most likely be expected to contribute towards the B-BBEE goals, a thorough understanding of the relevant regulations is an important aspect of any business plan.

33. Available Funds (examples) General Information (6) International/Development Banks: Nederlandse Financierings-Maatschappij voor Ontwikkelingslanden N.V. (FMO) • Access to Energy Fund • Infrastructure Development Fund • Fund Emerging Markets (FMO – FondsOpkomendeMarkten) Other funds available from Development Bank South Africa (DBSA) and International Development Corporation (IDC) but not directly accessible by Dutch enterprises. Private Banks: • South Africa’s “Big Four” have all been involved in RE:, Nedbank, Standard Bank, ABSA, and (less for wind) Rand Merchant Bank. Other notable: Investec. • Usual financing options available: debt/equity, mezzanine etc.

34. General Information (7) Incentives (examples) South African Dti offers a variety of incentive schemes to promote business but: • some are aimed specifically at South African businesses • applicability to RE projects/businesses should also be confirmed Examples: • Manufacturing Investment Programme (MIP) • Capital Projects Feasibility Programme (CPFP) • Critical Infrastructure Programme (CIP) • Enterprise Investment Programme (EIP) • Technology and Human Resources in Industry Programme (THRIP)

35. General Information (8) Rules and regulations in general Wind market in South Africa still developing, so framework is fluid. However: • South Africa is a WTO signatory i.e. must align itself to international norms • SABS (National standardisation authority), is modifying existing standards to match international ones (e.g. from SANS to IEC ) • In general, all products sold in SA are expected to conform to international standards (quality, HS&E etc.), but there are a few cases of country-specific variations (e.g. grid-connected components).

36. Opportunities in the SA wind sector

37. 5 main threads identified: Opportunities for Dutch companies (1) Partnering with local companies and creation of local facilities • local manufacturers setting up partnership with foreign firms to produce components or whole machines under license • alternatively, SA engineering firms seeking support and expertise from foreign companies (consultancy). • Trend of local companies seeking external partners is also likely to increase as local content rules provide local players with added incentive to become involved. • Government strongly backing this idea • Wind development/ consultancy • New market so scope for additional players to enter the market. • In particular, scope for provision of specialist consultancy services (given the particular environmental and social requirements in REIPPP)

38. Provisionof wind farm O&M • In future, market for independent O&M (once the initial warranties on Rounds 1 and 2, expire) • Development of indigenous skill-sets so might be advisable for foreign firms to consider finding or developing a local presence now Opportunities for Dutch companies (2) • Small scale wind • This segment of the market is unlikely to appeal to the larger established players tendering for the large-scale REIPPPP Rounds, and should therefore provide a fertile ground for other players • Again potential consulting/partnering opportunities (see first point) Skills training provision • clear skills gap in the South African workforce • creation and provision of a training schemes