Exxaro Resources Ltd Comments to NERSA Consultation Paper: Review of Renewable Energy Feed-In Tariffs, March 2011 - Chikoma Kazunga 06 May 2011
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Exxaro Resources Ltd Comments to NERSA Consultation Paper: Review of Renewable Energy Feed-In Tariffs, March 2011 Chikoma Kazunga 06 May 2011
Presentation outline 1
• Exxaro Resources: Who we are
• General Comments
• Comments regarding financial assumptions
• Comments regarding Cost estimates
• Comments on impact of declining tariff
• Comments regarding PPI escalation
• Proposed tariff range for wind projects
1Exxaro Resources: Who we are 2 • One of the largest South African diversified resource companies • One of Top 40 companies on the JSE • Over 50% BEE ownership • Employs about 11,000 people • Currently developing a portfolio of cleaner energy generating assets for sale of electricity into REFIT and other markets
General comments 3
NERSA needs to strike the right balance…
. . . and the establishment of a viable
Between affordability…
cleaner energy industry in South Africa
• Renewable Energy developers must not • Tariffs must reflect the true cost of
earn outsized returns at the expense of production and risk
South African consumers
• Tariffs must be attractive enough to
• Renewable Energy Feed-In Tariffs need to overcome significant risk capital that will
be reviewed periodically in order to ensure continue to be spent
that consumers are getting fair value
• Methodology for tariff-setting must be
transparent and understood by all
• Initial tariffs must be attractive enough to
attract private and foreign investment
• Long-term certainty regarding tariffs can
help to kick-start the green economy in
South Africa
3Financial assumptions used for revised tariff calculation
4
are not a fair indication of risk or cost
NERSA Financial assumption Exxaro Recommendation
• NERSA return calculation ostensibly • A minimum 18% nominal rate of return
provides a 17% “real” return to investors should be targeted in the calculation of the
tariff
Calculation methodology not clear and
not reproducible given inputs
• Cost of finance is based on current • The long-term cost of fixed debt should
historically low cost of debt finance be used for the calculation of total cost of
debt
Long-term debt tenors will require that
the debt be fixed in order to determine
annual cash flows
• Cost of finance does not consider cost to • Contingencies for the cost of hedging the
hedge Rand contracts rand should be included in the total cost of
debt or in the EPC price
Long lead times on certain capex items
raises risks due to rand volatility and will
require hedging
4NERSA cost estimates significantly underestimate actual
5
capex for a typical wind farm construction. . .
Actual Exxaro Capex values for 40 MW wind farm project
Millions of Rands per MW 22.7
18.3 3.3
1.1 NERSA values
underestimate the capital
cost of this wind project by
~16%
• NERSA EPC cost
estimates are ~90 % of
actual
• Finance costs are ~41%
NERSA Capex estimates1 for a 50 MW wind farm of actual due to non-
Millions of Rands per MW inclusion of costs to fund
Debt Service and
19.0
16.4 1.4 Maintenance Reserve
1.3 accounts, as well as debt
raising and lenders fees
EPC costs Development Financing costs Total capital
costs expenditure
1 Includes EPC overnight cost obtained from EPRI document, 2% for land costs, 6% for developers costs and 9%
for interest during construction. . .and underestimate opex as well
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Estimated Exxaro levelised Opex for 40 MW wind farm NERSA levelised
project Opex estimates1
c/kWh c/kWh
15.1
11.8
9.2
3.2
1.6 0.3 0.4
0.5
Parts and Insurance Power Admin BOP O&M Total Total
services from grid maintenance contract
NERSA estimate of the levelised cost of operations is approximately
78% of Exxaro’s actual costs
1 As indicated in NERSA REFIT consultation paperThe entire tariff must escalate at CPI in order to ensure
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projects are bankable and offer a reasonable return
c/kWh Potential margin squeeze
110 Nominal tariff Tariff declining
in real terms
100
Fixed costs
90
80 Only fixed O&M
component of proposed
70 wind tariff escalates at CPI • Tariff escalating
at an effective
60 0.7% annual rate
will not yield a
50
reasonable
40 return for
Actual fixed costs escalate at investors
30 greater than CPI due to • A declining tariff
increased maintenance in real terms risks
20 requirements as turbines age project
bankability due
10 to margin
squeeze
0
2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032
7Capex estimates do not take into account increases in
8
South African PPI since 2009
South African annual percentage change in the producer price index
• Significant portion of
the cost of a wind
NERSA Capex farm installation driven
estimates based on by the price of basic
composite material and commodities, such as
labour costs in mid 2009 steel and cement
• 2009 costs for basic
commodities have
increased by about
10-25%
• Costs are expected to
increase substantially
over the next few
years as global
commodity price
increases start to filter
through to the domestic
economy.
8Exxaro proposed wind tariff
9
On the basis of actual cost estimates obtained from vendors, realistic financial costs and
bankability considerations, Exxaro believes that the following tariff for wind energy will
offer an attractive rate of return for most South African wind projects:
• An initial tariff in the range of R1.05 – R1.10 per kWh for wind
• 100% of this tariff should escalate at CPI over the entire duration of the power purchase
agreement. This provision should apply equally to solar PV and CSP projects as well
as other renewable energy projects covered under REFIT
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