Funding and other support for Energy Efficiency

“Financing of ESCo’s in South Africa”

2016 ESCo REGISTER LAUNCH

Tony Nkuna

PDM: Industrial Infrastructure Unit

Industrial Development Corporation

ESCo Register Launch 2016

Emperors Palace, Ekurhuleni

November 10th, 2016

The Industrial Development Corporation

o Established: 1940

o Type of organisation: Development Finance Institution (DFI)

o Ownership: South African Government

o Total assets: R123 billion ($10.08 billion) as at end March 2015

o Main business area: Providing funding for private sector projects that are contributing towards

industrialisation and job creation

o Geographic activities: South Africa and the rest of Africa

o Products: Senior and sub-ordinate debt, equity, BEE and BBBEE Preference share funding

& project development funding

o Stage of investment: Early stage (feasibility), commercialisation, expansion

o Project development: Identification and development of projects adding to the industrial base

o Sector focus: Industrial Infrastructure (Energy & Logistics), New Industries, Agro-processing,

Agriculture & Forestry, Mining & Metals Value Chain, Chemicals &

Pharmaceuticals Value Chain, High Impact Sectors (Textiles, Media, Heavy

Manufacturing, Light Manufacturing & Tourism)

Positioning of DFIs within the financial system

• Non-commercial focus

• Fiscal transfers and grants

• Development objectives (social)

Government / NGOs

• High commercial focus

• Private sector capital

• Financial objectives

• Known risks

Commercial Financiers

• Commercial and development focus

• Sharing risk

• Internally generated funds, government funds, loans

DFIs (e.g. IDC)

Greater importance on financial objectives

Greater importance on social and developmental objectives

IDC encourages cooperation with these institutions to achieve its goals

IDC addresses market failures / gaps by supporting investments, which may otherwise not happen, in partnership with private sector companies

Partnering for industrial development

IDC

• 75 years of experience in industrial development

• Appetite to take risk

• Early stage investment

• Financial muscle

• Targeted funding for specific interventions

Industrialists/ Entrepreneurs

• Investment plans

• Projects under development

• Technology

• Operating/management expertise

Long-term view on

investments and a

commitment for the

development of the

industry

Introducing IDC:Historical perspective

• World War 2 – Shortage

of industrial goods

• South African economy

largely based on

agricultural production

and gold mining

1940s

• IDC established to

provide financing for

industrial undertakings –

at this stage only in the

manufacturing industry

• Food processing;

• Textiles

• South Africa facing

threat of isolation from

the rest of the world

1950s & 1960s

• Securing energy

resources for South

Africa a priority

• Increasing natural

resource beneficiation

• Petroleum

• Fertilizers

• Wood processing

• Chemical beneficiation

• Mining and minerals

• Decentralisation policy

by government

• Increasing isolation

• Self sufficiency

• Balance of payments

1970s & 1980s

• Import replacement

• More resource intensive

industries established –

mainly to bolster export

earnings in non-gold

sectors

• Initiation of high-tech

industries

• Agriculture explored as

a foreign exchange

earner

• Industrial real estate

development

• Resource beneficiation

• Micro-electronics

• Change in government

• South Africa introduced

to a globalising world

• Addressing the

disparities created by

apartheid

1990s

• Moves to encourage

regional integration

• Black economic

empowerment

• Export promotion

• Services related

industries

• Investments elsewhere

in Africa

• Tourism

• ICT

• Unemployment

• Diversification of

economy

• Reducing inequalities

• Infrastructure

constraints

Early and mid 2000s

• Job creation

• Developing rural areas

and other previously

underdeveloped regions

• Downstream industries

• Entrepreneurial

development

• Sector strategies

• Film

• Franchising

• Healthcare

• Financial services

• Transport

• Construction

• Industrial infrastructure

Over its history, IDC has adapted to

South Africa’s changing priorities and

expanded into new industries as the

economy developed and policies

evolved

Late 2000s & 2010s

• Recession

• New Growth Path and

Industrial policy

• Mandate overlap of

DFIs

• Growing financial sector

liquidity

• Climate change

• Focus on NGP,IPAP2 &

NDP

• Phasing out funding to

service industries not

aligned to priorities

• Job creation through

development of key

sectors/value chains

• Expansionary and

broad-based BEE

• Funding to distressed

companies

• Green-industries

• Phasing out:

– Franchising

– Financial services

– Transport

–Construction

Highlights:IDC Performance 2015

Our values are is reflected in what we measure.

8

IDC Structure: Operations Deal-making

Machinery & Equipment

Automotive & Transport Equipment

Div

isio

ns

Un

its

Basic Metals and Mining

CEO

Key:

Entirely new unit/division

Modified resourcing / structure / objective(s)

Unchanged

Dotted reporting line from specific front-line

individuals toValue Chains

Ops. Head Office

PIBC

Region 1

Region 2

…

Note: All strategic development moves to Ops units

Clothing & Textiles

Basic and Speciality Chemicals

Chemical Products & Pharmaceuticals

Media and Motion Pictures

Agro-processing and Agriculture

New Industries

Industrial Infrastructure

Ops. Head Office

Light Manufacturing & Tourism

Heavy Manufacturing

Rest of Africa Support

Metals Value Chain

Agro-Processing Value Chain, Industrial

Infrastructure & New Industries

Chemicals Value Chain,

TextilesHigh Impact

Introducing the Unit:Industrial Infrastructure

• Established in April 2015

• Enabling industrial development through infrastructure investments

• Mainly driven by IDC value chains

1) Energy

– Renewable energy

– Fuel based energy

– Energy efficiency

– Base load energy

– Biofuels

2) Logistics, Water and Telecoms Infrastructure

– Telecoms and broadband

– Water infrastructure

– Rail, road, warehousing

– Industrial hubs etc.

A value chain approach apply with emphasis on industrial development

(including localisation) and job creation

Role: Industrial Infrastructure Business Unit

Objectives

• Support specific infrastructure that unlocks or enables industrial capacity development and economic

opportunities

• Ensure that Value Chain projects have all the necessary infrastructure requirements to achieve their

developmental outcomes

Approach

• Support private sector or PPP industrial infrastructure where it is necessary to specific projects within IDC value

chains or New Industries or targeted industrial capacity building

• Play a coordination role to ensure that requisite infrastructure is funded and developed by other funders

• Invest selectively in strategic, economy wide, large scale interventions

Measures of success

• No Core VC projects delayed by infrastructure requirements

• Total disbursement amount facilitated by actively influencing other funders

• Number of direct and indirect jobs unlocked through infrastructure investments

• Quality of portfolio

Role: Industrial Infrastructure Business Unit (cont’d)

Focus Areas

• Energy: Renewable Energy, Base load (Coal and Gas), Fuel Based Energy (Waste to Energy, Cogeneration),

Energy Efficiency (Grid), Biofuels

• Logistics: Industrial Hubs, Rail, Aerial Ropeways, Port, Pipelines (excl. oil & gas), ICT Broadband, Transmission

Lines, Maritime (Operation Phakisa), Road Corridors, etc.

Proactive Strategies

• Relieve electricity demand pressure on the grid through implementation of new energy capacity

• Optimisation of Energy Efficiency interventions to reduce energy consumption and pressure on the grid

• Ensure logistics system that will allow local industries to be competitive and be able to access new markets/

suppliers in the RoA and be globally competitive

• Introduction of the biofuels sector in the RSA economy through the development and execution of the Cradock

Ethanol Plant

Reactive Strategies

• Providing strategic input to water development

• Providing Strategic & Technical input to the SIP18 projects and influencing government in policy formulation/

review

• Increase existing broadband network capacity/redundancy and extend coverage to underserved areas

Energy Efficiency:Policy environment and enabling legislation

20

08

20

08 National

Energy Efficiency Strategy for South Africa 2005

(NEES), Revised 2012

- Targets energy intensity reduction of 12% by 2015

20

09

20

10

20

11

2012

20

12

20

13

/14

1 million Solar Water Heater

Government Target

Announcement by Minister of

Energy 23 June 2009

Government

Objectives

>>>

Energy

Efficiency

Projects

through the

various

ESKOM

EEDSM

programmes

>>>

Energy

White

Paper of

1998

1 million

SWH

Target by

2014

(revised

to 2016)

Integrated

resource

plan (IRP)

2010

Industrial

Policy

Action

Plan

(IPAP2)

2012/2013

– 2014/15

Green

Industries

a key

sector

Building

Regulati

ons &

Building

Code

(SANS

10400-

XA:2011)

with

SANS

204

NGP

Green

Accord

0

500

1000

1500

2000

2500

3000

3500

4000

Jan-04 May-05 Oct-06 Feb-08 Jul-09 Nov-10 Apr-12 Aug-13

Energy Efficiency Projects (MW Savings)

Eskom Verified Savings (MW)

Income Tax

Act –

Regulation

s on tax

allowances

for Energy

Efficiency

Savings

(Section

12I and

12L)

Carbon

Taxes-at

R120 per

ton

National

develop-

ment plan

DSM 3 year target:

To save another 1074 MW

Energy Efficiency:Challenges in SA Context

• Energy Efficiency is not business as usual – rather invest in core business

• Financial Strength of ESCO’s

• Lack of funding for energy audits

• Repayment of investment outside targeted investment horizon

• Upfront capital outlay needs for long term benefit

• Lack of incentives

• Historically low electricity tariffs relative to international benchmarks.

• However current and future tariff increases will encourage further investment.

Late2010

2011

2012

2013

• Market Launch of the R500M Green Energy Efficiency Fund(GEEF)- 10% of FUND committed at launch

• Aggressive marketing with Industry Associations & Partnership with Eskom

• IDC and KFW sign loan agreement for €48M and €2. 1M Technical Assistance and Capacity Building Grant

• ESCO Market Study published-access to finance barrier to entry• R400 million AFD credit line established to finance PPA based

1MW- 10 MW and greenfields EE

• 17 companies financed at R174 million ( ca 35% of GEEF)• 69% of funds committed to SMEs• Total Energy savings of 387 GWh/yr• Carbon emission reduction – 383 KtCO2/yr• MoU with Green Fund – projects demonstrate additionality

MARKET SITUATION

Constrained

electricity supply

and high prices

Access to

finance barrier to

EE/RE

investments

RESPONSE

Increased

demand for

ESCO services

High cost of

small scale RE

development

HIGHLIGHTS

8MW Cogen plant -45GWh/yr and 46ktCO2

Mass rollout of

310 GWh

/34MW

showerheads

60% of

committed

funding to

ESCOs

27 FREE Walk

through

audits and 4

investment

grade audits

Industrial

Energy

Efficiency

Energy Efficiency:IDC response - Innovative funding GEEF & AFD

IDC funded cases: Energy Efficiency and small scale Renewables

Roof top solar PV

Biomass/Biogas

Lighting

Solar Water Heaters & Commercial Water Heating

Refrigeration

Variable speed drives

Energy efficient plant and machinery

Other

Energy Efficiency:Is there a business case?

• Current economic conditions

– Revenue pressure due to a slowing economy

– Increasing raw material costs squeezing margins

– Labour law requirements limiting flexibility in terms of staff costs

– Capital market pressures increasing cost of funding

– Increasing electricity costs due to a push for cost reflective electricity prices

• Electricity costs, alongside Rental and Salaries are amongst the highest costs in most businesses

• Reduction of Rental? Usually outside the control of business

• Reduction in salaries & wages affects output / service delivery and staff morale

• So what other options for competitiveness?

Energy Efficiency:The business case

Energy

Efficiency

(reduced

consumption)

Same Output

(higher

productivity)

Saving

Costs

(lower energy

bill)

Higher Profit

Competitive Advantage

Savings pays for capital expenditure

Positive Image Transfer

Contribution to addressing climate change

SUSTAINABILITY!

Energy Efficiency: Its role in terms of SA energy & economy

• Emissions and pollution mitigation

• Localisation of manufacturing capacity and sourcing of local components

– IDC requires PV panels and inverters to be locally sourced

• Regional and rural development and diversification of economy (i.e. can

be implemented in these contexts)

• Social impact and job creation (manufacture, installation and

maintenance)

• Substantial private sector expertise which benefits skills development

objectives of the country

• Competitive industry that benefits the country through competitive

manufacturing

Energy Efficiency:Where to from here?

• Continue to support projects that are aligned to our strategic imperatives

(incl. EE)

• However more focus is on projects that provide a differentiated

participation e.g. supporting black developers and operators, have

significant localisation opportunities, etc.

• Support projects that have new technologies where IDC will provide a

catalytic role

• Have high appetite for projects in marginalised provinces – achieve

regional equity

• Watch the space for developments

The Industrial Development Corporation

19 Fredman Drive, Sandown

PO Box 784055, Sandton, 2146

South Africa

Telephone (011) 269 3000

Facsimile (011) 269 2116

E-mail callcentre@idc.co.za

THANK YOU