africa greenco introduction eapic september 2016 ana hajduka …€¦ · 01/09/2016 · or...
TRANSCRIPT
Context
Lack of creditworthy counterparties
Rehabilitation of utilities is key but sustainable and material improvements can only occur in the medium to long term
What happens in the meantime?
The current project-by-project approach to electrification of the continent is unsustainable.
The main issues created by the current funding model are that:
– Support through existing instruments is not sufficient to address funding gap;
– Credit enhancement of projects on a one-off basis adds cost and delays;
– No single project is able to shift the attitude of commercial investors to bankability – a systemic/structural change is required;
– Putting the burden on governments to provide explicit and implicit guarantees or counter-guarantees shifts the creditworthiness issue to the sovereign level;
African countries cannot continue to add contingent liabilities against these commitments given their current fiscal position and the medium term macro-economic environment
Overview of Need
Generation Need: AfDB: 160 GW by 2025
Generation Goals: COP 21 – AREI: 300 GW by 2030 of clean energy additions
Current Reality: 1990 to 2013, only 24.85 GW in SSA (South Africa accounted for 9.2 GW)
Funding Need: USD 70 bn per year between now and 2030 into the power generation, transmission and distribution infrastructure
Current Funding: estimated at USD 4.6 billion a year, 50% public funding
IPP/PPP Projects to date: Only 59 IPP projects in SSA (excluding South Africa), totalling $11.12 bn in investments and 6.8 GW of installed generation capacity
Context
In 2015/6, the South African Treasury updated its reporting framework on contingent liabilities in line with international best practice. This
resulted in the addition of ZAR200bn (USD13bn) additional liabilities representing Eskom’s 20 year PPA obligations – essentially an overnight
increase of 36%.
Other CLs (Social Security, Export Credit etc)
PPPsOther SOEs
Eskom Debt
IPPs
0
100
200
300
400
500
600
700
800
900
2013/14 2014/15 2015/16 2016/17 2017/18 2018/19
Tota
l Exp
osu
re, Z
AR
bill
ion
South Africa Contingent Liabilities, 2013-2019
Precedent: PTC India
Creating a Power Market in India and the neighboring countries to optimally utilize the resources available to generate power and encourage private investments into the power sector
Equity participation by Power Grid Corporation of India Ltd (POWERGRID), NTPC, Power Finance Corporation (PFC) and others
Concerned State Governments/State Electricity Boards (SEB’s) to also be co-opted, if found feasible
The purchase of power from the identified private projects and resell it to the identified State Electricity Boards / regional utilities
If feasible, PTC to supply power directly to a cluster, like licensees and industrial establishments
Enable large-projects to negotiate with one buyer only to eliminate large-projects risk regarding payments; Such security to substantially bring down the tariff from such projects
Attract viable investments in the power sector on the strength of a multi-buyer model
What is Africa GreenCo?
AND
Intermediary Creditworthy Offtaker and Aggregator
Power Pool Participant (Trader)
- Reduce transaction time, costs
- Improved project finance terms
- Increase financial capacity for
utilities and sovereigns
- Access point for better risk
management
- Grow competition in markets
- Facilitate growth off cross-border
and inter-regional power trading
- Increase market liquidity
- Reduce default and outage risk
- Inter-regional usage optimisation
AFRICA GREENCO
Investors IPPCapital
Utility End UsersPPA PSA Power
Intermediary & Creditworthy Offtaker
i) creditworthy offtaker under the PPA, thereby reducing the perceived risk of the project for investors and improving the quantum and cost of capital;
ii) having the technical and legal capacity and framework in place to execute transactions more efficiently.
AFRICA GREENCO
Investors IPPCapital
Utility 2 End UsersPPA PSA Power
Utility 1 End UsersPSA
Power
Private OfftakerPSA
AFRICA GREENCO
Investors IPPCapital
Utility 1 End UsersPPA PSA Power
Utility 2 End UsersPSA Power
Default on PSA
For more complex transactions, AGC will also act as an aggregator and diversifier of risks.
AGC reduces dependence on individual offtakers and attracts investment on the back of a multi-buyer model
Intermediary & Creditworthy Offtaker
AFRICA
GREENCO
IPP
Utility-owned power asset
Utility
Industrial Offtaker
Utility
Forward Physical Market(weekly and monthly)
Day-ahead marketIntra-Day Market
Power Trader
In addition to its role as an offtaker, AGC will also participate in competitive power markets, promoting cross border power transactions and a more dynamic and
liquid short term power market.
AFRICA
GREENCO
African Ownership and Leadership
Leveraging development finance, international
and local capital markets
Private-sector managed and
financially sustainable operating model
Legally and Financially Creditworthy
Market Context for IPP Credit Enhancement and Cross-border power trading
Legal entity, capital required and options for taking on financial
exposure beyond AGC’s balance sheet
Coordination with other regional and global initiatives and tranching of capital structure
Structuring a legal entity and making the case for benefits to offtakers and
sovereigns
Main Structuring Considerations
AFRICA GREENCO
Independent Power Project
Consolidated contract design, negotiation and execution expertise
Coordination with existing procurement frameworks and regional standardisation
Robust and standardised contracts
Well capitalised PPA contract counterparty
Reduced likelihood of offtaker default
Ability to make payment even in case of offtaker default
Entry point for additional investment and credit enhancement from international, local investors
Lower cost and time for transaction execution
Transparent and consistent procurement and transaction execution
Lower financial risk for offtaker and therefore underlying project
Direct, and more transparent access to investors and credit enhancement
Better financial environment for investment in project development
Lower cost of capital through lower minimum equity returns thresholds, lower debt interest rates and longer tenors
Increase in the universe of investors and amounts of capital available for projects
More projects are bankable
More capital is available
More projects are implemented
What are AGC’s Objectives?
AFRICA GREENCO
UTILITY
Consolidated contract design, negotiation and execution expertise
Coordination with existing procurement frameworks and regional standardisation
Robust and standardised contracts
Well capitalised PPA contract counterparty
Lower cost and time for transaction execution
Transparent, consistent procurement and transaction execution
Lower cost to utility for quality transactions
Fiscal space for utility to invest in competing priorities (T&D, capacity building)
Higher installed capacity
Lower contingent liability impact for gov’t
More projects are implemented
Better private financing environment for IPPs as above
[Shorter term payment and liquidity terms]
Reduced requirement for sovereign guarantee
Lower cost of capital for projects
Lower minimum tariff for bankability
Trading in competitive power markets through regional power pool
Stronger financial performance of utilityFinancially efficient
contract management
More efficient use of existing assets
Deficits addressed through regional trade
Higher income from power production
Shift from expensive temporary power assets
Better grid and load management
What are AGC’s Objectives?
- 4 potential revenue streams:
- Margin on PPA/PSA
- Power trading
- Investing balance sheet
- [Carbon finance]
- Revenues and costs in line with peers
- Transaction execution
- Business development
- Power trading companies
- Insurance/guarantee entities
Feasibility Study Overview: Financial Viability
(3.50)
(3.00)
(2.50)
(2.00)
(1.50)
(1.00)
(0.50)
-
0 1 2 3 4 5 6 7 8 9 10
Op
erat
ing
Co
sts
(USD
m)
Model Year
AGC Operating Costs
Staff Office
Travel Recruitment Costs
Board/Governance Annual SH Meeting
Legal and consultancy fees Audit Fees
(5.00)
5.00
15.00
25.00
35.00
0 1 2 3 4 5 6 7 8 9 10
Rev
enu
e (U
SDm
m)
Model Year
Revenues by type - 100% Equity
ST Trading Margin
Net PPA Sales
Net Investment Income
Feasibility Study Overview: Financial Viabiltiy
- Total capital required
- PPA Liquidity
- Trading Liquidity
- Termination Value payment
- Credit risk analysis
- Long term default rate analysis
- Monte Carlo modelling
- Target Rating – A to AAA
- Scenarios for financing
- Fully paid in equity finance
- 50% leverage
- 67% leverage
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
4.50%
5.00%
Current Portfolio Credit Profile
Payments Received as % of Total Payments
"A" credit rating above 67% gearing
-
200.00
400.00
600.00
800.00
1,000.00
1,200.00
1,400.00
0 1 2 3 4 5 6 7 8 9 10
Am
ou
nt,
USD
m
Model Year
AGC Liability Exposure
PPA Specified Portolio Termination Payment
PPA Long term Growth Termination Payment
PPA Deemed Electricity Payment Liquidity
Short Term Trading Liquidity
0 1 2 3 4 5 6 7 8
Investor Tranche 4 27 37 40 37 50 56 62 73 87 95
African Gov't Tranche 6 41 56 59 56 74 84 93 109 131 143
Returnable Capital 10 68 93 99 93 124 140 155 182 218 238
-
50
100
150
200
250
300
350
400
450
500
Am
ou
nht
USD
m
Scenario 3 - 33% Equity
- Tranched structure: blended finance approach to capitalisation
Structure Investor Type Issues
Capital: “A-Share” DevCap Appetite from donors
ODA eligibility
Capital: “B-Share” African Govs Ratio of contribution
Where funding comes from
Appetite from governments
DFIs & Private Sector Terms and quantum
Capital: “Callable” Donors/ DFIs Appetite from donors
Rating implications
Leverage: Initial
period
MDBs/ MIGA Appetite and cost
Counter-guarantee or excess-loss/
re-insurance
Leverage: Long-
term
Insurance market
Institutional Investors
How would this transition unfold?
Feasibility Study Overview: Financial Viability
Feasibility Study Overview: Impact Potential
- Project-level Impacts
- Increase tenor of debt
- Reduce cost of debt
- Catalyse refinancing market
- Operational Impacts
- More RE projects developed
- More regional power trade
- More competitive markets
- Aggregation, diversification of risk
- Utility Impacts
- Lower contingent liabilities
- Lower transaction costs
- Better PSA terms
- Increase IRR - Increase DSCR - Unlock additional debt
- More installed capacity - Better energy access - Fewer outages - Better pricing
- Stronger balance sheets - Higher creditworthiness - Cheaper power costs
Feasibility Study Overview: Legal & Governance Structuring Options
- Legal entity, shareholding and/or membership in the company, will
be structured:
• for sovereign African countries to be members and have ownership;
• to attract capital from the donor/DFIs and the private sector;
• to allow different classes of investors with different risk appetites;
• to minimise political interference in governance and operations;
• to provide adequate international status and immunity
• to ensure the business can be operated efficiently
- Four principal legal structure options
Independent International Organization
An international treaty organisation
AU special agency / subsidiary with separate
corporate entity
National company with potential for regional
expansion via an intergovernmental agreement.
Example
AFC
ATI
ARC
AGF
1
2
3
4
Feasibility Study Overview: Implementation & Next Steps
Feasibility Study
Proof Of Concept
Scale
- Establish regional focus and pipeline of projects
- Review technical and other relevant requirements
- Prepare a credible legal and regulatory structure
- Learn from ARC, AFC and ATI
- Prepare a credible financial structure & business plan
- Create Case Study for specific pipeline project
- Leverage existing market infrastructure
- Complement parallel initiatives
- Use first transaction(s) for proof of concept
- Expand capital base to support portfolio
- Replicate initial transaction, tailoring strategy to new
markets
- Development of concept underway
Feasibility Study Overview: Current Implementation & Next Steps
Current Support Structure
Grant funding for the feasibility study has been generously
provided by The Rockefeller Foundation
The SE4AAll Finance Committee Report included Africa GreenCo
as a recommended option for scaling up private sector finance for
renewable energy projects in the region
Technical advice from PPA, whose staff are former leaders within
SADC utilities and have been involved with the SAPP
establishment and operations (governance, regulations, technical
constraints, commercial issues, trading etc)
Financial advisory from Lion’s Head, a specialized financial
advisory firm based in London and Nairobi, experienced in
designing, structuring innovative finance platforms, especially for
power (Africa50, AREF, GIIF, TCIFF)
Legal support on PPA/PSA terms from Sherman and Sterling, a
leading international project finance, corporate and commercial
law firms, active in Africa for over 50 years