Sandriver_Solarpark

| Sand River Solar Park | A large photo-voltaic (PV) solar park in the Free State Province of South Africa | | Aldham, Hogarth, Jakobsen, Krawitz, Mustafa and Narikawa | 11/27/2011 | | Contents THe South African Economy 3 Size, composition and Function of economy 3 Trade 3 Human Development 3 Business Regulation, Institutional Integrity and the Financial Sector 4 SWOT Analysis (Appendix B) 5 The Sand River Solar Park 6 Project Overview 6 Development Benefits 6 Infrastructure, Access To Electricity: 6 Human CapitaL: 7 Foreign Direct Investment (FDI): 7 Trade: 7 Project Constraints 8 Financial Projections 8 Appendices 0 Appendix A: South Africa Data Table 0 Appendix B: SWOT analysis 2 Appendix C: Sand River Solar PArk Location 2 Appendix D: South African Employment and Skills Statistics 3 Appendix D: Clean Energy Projected growth 3 Appendix E: Assumptions And Financial Projections 4 THe South African Economy Size, composition and Function of economy South Africa is a multi-cultural democracy with an estimated population of close to 50 million inhabitants. South Africa is Sub-Saharan Africa’s largest economy with a GDP of USD 363.7 billion in 2010 – approximately 35% of Sub-Saharan Africa’s total GDP according to World databank. The GDP per capita (PPP, current international USD) of USD 10,486 in 2010 classifies the country as an upper middle income economy and the country is ranked by the IMF ahead of its Sub-Saharan African peers in competitive advancement with the exception on Mauritius as a Stage 2 Efficiency Driven Economy. In 1994, the African National Congress (ANC) won the first multi-racial elections, marking the end of the apartheid regime and establishing full democracy in the country. The ANC adopted conservative monetary policy aimed at controlling inflation. As a result, GDP grew 2-3% per year on average until 2004 when macroeconomic stability begun to allow higher speed of growth. As a result of that stability and commodity boom, GDP grew on average 5% per year from 2004 to 2007 (Appendix A). The power crisis of 2008 was followed by the lagged effect of the global financial crisis that resulted in an almost 2% decrease in GDP in 2009. The IMF forecasts South African GDP growth at between three and four percent to 2016. South Africa is abundant in resources such as gold, chromium, coal, iron ore, manganese, platinum, copper, gems and diamonds. The rents from these natural resources contribute to 5% of the country’s GDP, lower than the 15% average in Sub-Saharan Africa (Appendix A). Although rich in mineral wealth South Africa’s economy is diversified; in 2009 the two largest sectors were the Finance, Real Estate and Business Services Sector comprising 21% of the country’s GDP and the Manufacturing Sector making up 15% of GDP. Trade South Africa also ranks highest in the Logistics Performance Index (3.46) compared to other countries in the continent and occupy the 28th position in the World. South Africa is in a unique strategic position with developed infrastructure of 16 noteworthy ports along 2954 km coastline, equipped to service both the Atlantic and Indian Oceans. In 2010 Three of Sub-Saharan Africa’s larger landlocked countries Zambia, Zimbabwe and Malawi were reliant on South Africa for more than 24% of their imports. South Africa’s largest trading partners are China, US, UK, Germany and Japan which together account for over 40% of the value of exports and imports. Although a net exporter of coal, South Africa is highly dependent on primary energy stocks in the form of oil imports from Saudi Arabia and Iran. Human Development Economic progress made so far has not substantially improved the inequality established during the apartheid. Currently, South Africa has one of the highest Gini coefficients in the World – 0.67 (Appendix A) and a poverty headcount ratio (at $1.25 a day) of 17%. The country also has one of the lowest labor participation rate in the continent, at 55% (vs 60-70% in the developed world), reflect of the low life expectancy (52 years) and high AIDS/HIV incidence (18% of the population) (Appendix A). Unemployment remains high at 24% particularly affecting half of the young black population (15-24 years old). The South African government has announced plans to decrease unemployment to 15% by 2020 through creation of 5 million jobs. According to the Finance Minister, Pravin Gordhan, an average 6-7% GDP growth rate [substantially higher than the IMF forecasts] is required in the next 20 years in order to achieve the target. Business Regulation, Institutional Integrity and the Financial Sector South Africa is a beacon of hope for economic prosperity in a poorly governed and consequently under-capitalized continent. The business regulatory environment is rated highly by the World Bank’s Ease of Doing Business Survey, which ranks South Africa 34th, the second highest in Sub-Saharan Africa behind Mauritius. Governance in South Africa is good by African standards and South Africa’s Corruptions Perception Index ranking is 54, behind the Cape Verde Islands (45) and Mauritius (39). South Africa has independent supervisory institutions and an independent Judiciary as well as a free press. Major macro-level policy reforms over the past decade have increased institutional transparency and focus on corporate and government accountability to the South African public. Legislative measures included the creation of the Competition Commission through the passing of the Competition Act of 1998, and the Consumer Protection Act of 2008 laid the platform for the development of the National Consumer Commission. These policy reforms illustrate the sophistication of institutional development and that has allowed South Africa, unlike most Sub-Saharan countries, to use its mineral wealth to create a well developed financial sector. The financial sector is well regulated by the independent Financial Services Board (FSB). The market is broad and sustained by sophisticated consumer banking and insurance, a well-developed capital market, a local bond market, a domestic private equity market, tradable external debt and a stock market (the Johannesburg Stock Exchange [JSE]). The local bourse is the 18th largest in the world, even though highly concentrated. Many multi-nationals companies are increasingly looking to South Africa as an entry point into the African continent. SWOT Analysis (Appendix B) South Africa’s strengths are well established as a leader on the continent in terms of its financial sector and its relatively sophisticated infrastructure, regulatory environment and corporate governance regime as well as its macro-economic stability. Its weaknesses are a dearth of skills (Appendix D), high unemployment and very high HIV infection rate. Furthermore the economy is energy constrained. Both the energy intensive industrial growth in output and the human development associated to connecting a previously disadvantaged rural community to the grid will require significant investments in electricity producing infrastructure. The developmental opportunities are in creating jobs, skills transfer to address the imbalance of skills in the labor market, and combating HIV through raising levels of education and awareness. However based on the country’s unique energy related challenges and recent policy developments the Renewable Energy Sector has become an area of immense opportunity. Currently Eskom produces 95% of the country’s power and there is a policy imperative to disaggregate Eskom and transform the previously monopolistic industry to attract donor funding from the World Bank and best address the power crisis. To this end, the government has a target of procuring 30% of its energy from Independent Power Producers (IPPs). The transformation of the industry includes addressing sustainability issues and the reliance of South Africa on coal-fired electricity for over 90% of its needs. South Africa has immense solar power potential and the government has stated a target of 10 000 GWh of electricity produced from renewable energy sources by 2013. In addition to this South African and foreign investors are interested with the World Bank already having issued Eskom with a $USD250m grant for Renewable Energy Projects. The main threats are government stability and failure to continue implementing policy reform, as South Africa has yet to unbundle the vertically integrated electricity monopoly, Eskom.. In the energy sector the ability of the Department of Energy, the National Energy Regulator of South Africa (NERSA) and Eskom, to eliminate the historical pricing distortions and provide incentives for industry transformation are the key risks going forward. Underpriced electricity in South Africa was caused by the previous apartheid government’s policy that reduced electricity prices to attract investors in energy intensive industries. NERSA could also present barriers to becoming a licensed IPP with onerous compliance requirements and inefficient licensing processes that can delay project implementation and delays can increase project costs. The Sand River Solar Park Project Overview The development project we have chosen to focus on is to provide an energy solution to the electricity scarcity dilemma in South Africa. As the analysis above shows there is a growing demand for electricity from industry which will only intensify the developmental challenge of connecting approximately 12.5 million or 25% of the country’s population who are currently without electricity. Based on the strong government interest in improving this electricity dilemma we are proposing to build a 482MW Solar Park on a 1428 hectare land lot in the Free State Province of South Africa (Appendix C). The land lot is well positioned geographically for some of the highest solar radiation in South Africa and ample sunlight hours, and is in close proximity to major transmission lines running through the Free State, thus reducing costs to achieve inter-connection to the grid. The relevant project management phases have been identified as investment, stakeholder management, regulatory permits, technology procurement, development, grid connection, ongoing ownership and maintenance. The intention of this Sand River Solar Park Project is to directly address the country’s energy shortfall, and in doing so, make a valuable impact on industry, education, workforce and the community. Development Benefits Infrastructure, Access To Electricity: Looking at the millennium development goals it can be seen that provision and access to electricity will assist in nearly all of these goals. It has been shown that access to electricity benefits the community more than other forms of aid infrastructure investments, This is because electricity has many flow on effects for instance; lighting enables children to study at night, with electricity people are able to be more productive as they do not have to spend their time gathering fuel, health benefits occur from using cleaner fuels and citizens have greater freedoms such as access to information (radio, tv or internet). Demand for electricity is expected to double to over 80 000MW by 2020 and will require substantial investments in expanding electricity producing capacity. The increase in demand will be fuelled by economic growth in energy intensive mineral extraction and the governments mass electrification scheme which aims to improve on the current 75% electrification rate. The proposed solar farm will provide a direct injection of 482MW into the grid to alleviate the constrained electricity supply and help keep pace with growing demand as much needed power is provided to communities so they can perform even the simplest of activities needed for development. Human CapitaL: This project will create jobs allowing individuals to earn a living and not have to rely on aid or government support, this will enable them to break out of the poverty cycle. This project will also lead to technology and knowledge being transferred to South Africa. This kind of transfer assists countries break into new markets, moving up the value chain from agriculture towards manufacturing and services. The project intends to partner with local solar panel providers in South Africa to generate jobs and transfer skills. The training and work provided throughout the development will continue for the life of the project and beyond because this project is not only to be managed by the local community but there will be a number of satellite off-grid solar stations on the farm that will be managed by the local communities and thereby provide ongoing skilled employment and a perpetual energy stream for their needs. Foreign Direct Investment (FDI): The construction of this project will be facilitated by FDI. The benefits of FDI are many; it helps stimulate the formation of capital markets, drives economic growth, improves management expertise and governance as (investors will require good governance). If managed well the project’s success will create a virtuous cycle where the project success improves the reputation of the country as an investment option leading to more investment. The size of this project requires a large amount of capital and to raise this FDI is a crucial part of the projects success. The intention is to engage the World Bank and private institutions to sell the need for electricity in South Africa, to raise awareness for the issue but also appeal to their interests by offering a healthy ROI within an acceptable risk threshold. Trade: The renewable energy industry is still in its infancy with huge growth potential and limited trade restrictions (Appendix D), . Africa’s climate and location should give it a comparative advantage with the potential not only to supply the countries own power needs but also the potential to export it. The renewable energy sector is one area where there is cooperation between African countries with organizations such as the African Renewable Energy Alliance (AREA). These groups, working with NGOs are developing the governance structures and policy’s to enable Africa to take advantage of this opportunity. The proposed Solar Farm is the largest in Africa and one of the largest in the world. This is intentional as it will draw attention to the power challenges South Africa faces and help lift South Africa into the world market for renewable energy expertise. The skills attained could provide the foundation stones for other renewable energy companies to enter South Africa and for South Africa to export their services and technology to other developing countries. Project Constraints There are a number of historical factors that have been taken into account to form this risk analysis. These include but are not limited to; the poor policy making and progress on reforming the power sector and historical underpricing that contributed to the Power Crisis in 2008. Financial Projections These estimates are based on the calculations in our financial model submitted as a supporting Microsoft Excel file. As prices for electricity in South Africa are still lower than the cost of producing electricity from solar parks, the project’s future is dependent upon winning in a competitive bidding process that is set in place by the Department of Energy (DME). Each bidder submits the price (c/kWh) at which he is willing to produce. The projects bid at the lowest prices win, as long as prices are below the capped level of 285 c/kWh (additionally projects must meet specific development criteria to qualify for the bidding process). Our bid was calculated based on our financial analysis of the project (in our financial model). The project breaks even at 125 c/kWh, but in order to prevent the winners curse we increased our bid by 15%. This will result in a Project NPV of € 235M, and should generate an NPV of approximately € 70M for equity investors at an internal rate of return on equity of 25%. The potential financial returns are substantial, and reflect the advantage of having a solar park in South Africa, where very high annual sunshine hours help drive profitability. Appendices Appendix A: South Africa Data Table Source: World Bank (www.databank.worldbank.org) Source: World Bank (www.databank.worldbank.org) Source: http://apps.thedti.gov.za/econdb/GDPRegions.html#South Africa Appendix B: SWOT analysis Appendix C: Sand River Solar PArk Location Appendix D: South African Employment and Skills Statistics Appendix D: Clean Energy Projected growth Appendix E: Assumptions And Financial Projections Our financial analysis is simplified and is included in order to show that the project probably is profitable. The analysis is based on several assumptions and we will briefly explain the most important ones. An average price for plane units per watt and cost of installing is the main driver on the cost side. These costs were obtained from http://thinkprogress.org/romm/2011/07/06/261550/solar-pv-system-cost-reductions/ and from the class “Renewable Energy” at IE, this is also the case for the assumptions in our model that are not discussed below. The interest rate being used for the long term loan is 11 %. This rate implies lending abroad (at a rate that is lower than 11 %) and locally (rate higher than 11%). The cost of equity is assumed to be 20 % which relative to the lending costs seems reasonable. These rates incorporate the fairly high risk of the project. The price per kWh that is being bid is 15 % higher than than the break even cost per kWh . In our opinion this bid balances the risk of running a non-profitable project with the risk of not winning the bid. The expected annual increase in the price of electricity is assumed to follow a normal distribution with mean of 7 % and standard deviation of 1 %. This implies that approx. 68 % of the future growth rates will be between 6 and 8 %. This seems reasonable given the historical under pricing of electricity in the country and the expected inflation of around 5 %. This variable generates different scenarios and thereby drives volatility in our model (this is of course a big simplification). We used Crystal Ball to run the model. The output produced is calculated by multiplying the size of the farm with the average hectare/kWp ratio of five different South African solar farm projects. The annual production is the kWp multiplied by the average annual hours of daylight in South Africa. The capacity factor thus obtained is similar to that of solar farms in Spain and the US.