RAINMAKER ENERGY Comments to 2011 NERSA REFIT Review Tariffs 1
About Rainmaker Rainmaker Energy is developing Wind projects within South Africa Two flagship projects are in final stage of development, having received Environmental Authorisation (formally ROD) Experience gained through development of these projects enables us to accurately comment on the real Cost of Capital as well as real Operating and Maintenance costs of Wind farms to be built in South Africa. 2 2
Summary of Comments 1. CAPEX and OPEX Pricing 2. Financial Assumptions 3. Expected Returns 4. Tariff & Escalation 5. PPA Rainmaker Energy s comments relate to the Wind industry only 3 3
1. CAPEX Pricing Full EPC CAPEX costs are closer to USD2,400 per KW if one takes proven technology and takes a view of lowest life cycle cost The new grid code add at least 3% to the overall CAPEX cost. This code did not exist in the REFIT 2009 pricing and is seen as more stringent than most EU countries and not entirely necessary 4 4
2. OPEX Pricing In the NERSA Consultation paper, OPEX for a wind energy plant is R0.1180 per KWh Full Operations, Maintenance and Servicing, including overhead, insurance and balance of plant maintenance is over R0.20 per KWh Model has assumed a flat OPEX rate. OPEX costs will increase as the plant ages 5 5
3. Cost of Debt According to the Consultation Paper, NERSA have based the interest rate on the 2010 JIBAR rate plus premium to get a rate of 9.93% We feel that an 8 year interest rate swap (7.62%) is more realistic as Lenders will require us to fix The fixed interest rate plus risk premium and credit spread will thus be 12% or higher 6 6
4. Tariff & Escalation ROI of 17% at the proposed tariff is not possible, especially escalation only being applied to the O&M component Besides not reaching 17% ROI, the proposed tariff will make a 70:30 Debt-to-Equity ratio difficult due to Debt Service Coverage Ratios not meeting lenders requirements of 1.3 to 1.4 using P90 wind data The proposed tariff would necessitate a Debt-to-Equity ratio of 50:50, again lowering equity returns 7 7
4. Tariff & Escalation /cnt d Even very strong projects will not be able to be funded under the current proposed pricing Furthermore, International investors will find it difficult to invest in ZAR based return projects without currency insurance through escalation A Tariff without full escalation skews the price of Renewable Energy against Eskom power, which is escalated over the long term 8 8
5. PPA Determining the Price without site of the PPA is difficult The PPA is as important as the price and can substantially affect the price Current example of PPA is dated and we believe not accurate We are concerned that no emphasis and feedback is given on PPA Industry needs at least 4 months to understand unique characteristics of the PPA and to ensure competitive bidding 9 9
Conclusions Taking into account the higher CAPEX and OPEX costs, higher debt costs, lower tariff and CPI only being applied to the estimated O&M portion of the tariff, our model (Audited by Deloitte) calculates a return of 5-9% on R0.938/KWh Such returns will not attract foreign investors to a developing market like South Africa, while local investors will be better placed investing in government bonds at 9% 10 10
Questions? 11 11