Coenraad Krige South Africa How to Play in

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
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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
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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
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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:
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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:
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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:
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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: Coenraad@Kensani.co.za
Work: +27 21 674 0403
Cell: +27 82 440 2554