National Electrification Program Investment Prospectus (2015–2019) Draft Final Results

1. National Electrification Program Investment Prospectus (2015–2019) Draft Final Results Alex Sundakov, September 2014

2. PRESENTATION outline • Roll out program for 5 years • Financing need • Donor support rationale • Potential Tariff Paths • Funding Gap and Government Support Needed

3. Roll-out plan for universal electrification by 2030 Total Planned Connections (2030) • Earth Institute estimates that the total number of connections required for universal electrification by 2030 is apprx7.2 million • Majority of connections on the grid by 2030 • About 11,000 households permanently off-grid and around 250,000 possiblepre-electrification Source: Earth Institute

4. National least-cost roll-out This means that the cheapest connections, wherever they happen to be in the country, are made first. Biggest “bang for the buck” Resulting Connections in Each State 2015-2019 Central corridor prioritizedin the first 5 years for grid connection. Mini-grids and household elsewhere Connected earlier Connected later Source: Earth Institute

5. Projected connections targets over entire roll-out Projected National Electrification Rate 100% After 2019, over 517,000 connections have to be made each year to reach full electrification by 2030 76% 47% 30%

6. Why consider pre-electrification connections? No. of Households Electrified NEP Program Years Temporary electrification solution while waiting for the grid (e.g. mini-grids, micro-grids, SHS) may be efficient and provide social inclusion to household slated for grid connection at the end of the roll-out • Although it will add some costs to the roll-out program, some pre-electrification in the early part of NEP may be efficient because: • There will be time to amortize the costs of investments in temporary solutions (for e.g. diesel mini-grid) • Some renewable generation sources serving off-grid solutions can remain viable on the grid We estimate that approximately 250,000 householdswill use pre-electrification solutions in the first 10 years of the program

7. How many connections are feasible in the first 5 years? Technically and physically feasible to implement about 1.7 million additional connections from FY2015-19 • Pace of ramp-up limited by: • Institutional weaknesses • Available skilled labor • Procurement practices • Approximately125,000total mini-grid and off-grid household solution connections can be made. Includes both permanentand estimated pre-electrificationconnections

8. What is the financing need to achieve 1.7 million connections? With national least-cost roll-out, US$650 million of loans will be needed from FY 2015-19. This amount will cover the expansion program’s gross capital expenditures. Additionally the implementation of the Institutional Roadmap will require Technical Assistance of $24 million Numbers are in constant US$, does not include inflation

9. Strong development rationale to meet financing need from donor sources Low interest, long tenor donor-backed loans will: • Enable Myanmar to achieve the targeted 1.7 million connections in next 5 years. This will: • Contribute to Myanmar’s economic development by giving those households access to electricity • Underwrite the ramp-up in both technical and institutional capability required to achieve full electrification by 2030 • Ensure that the burden on consumers and on Government is consistent with ability to pay. Long tenor loans ensure that future electricity users—who will be better off than the current users—pick up a fair share of the burden • Over time, as the economy becomes integrated with the global financial system and as local banking system matures, commercial finance will become available on tenors and other terms that can replace concessional finance without a material shock to tariffs.

10. Size of funding gap depends on decisions about tariffs Funding gap = (Revenue + Loan Amount Received) – (Capex + Opex + Loan Repayment) • Funding gap is $2.2 billionover a 40-yr period at the current tariff • Reduced to $1.1 billion with an existing system cash neutral tariff • Reduced to $0.25 billionwith maintaining a residential tariff equivalent to Vietnam Myanmar current tariff Funding Gap US$ Billion Vietnam tariff Existing system cash neutral tariff Average Residential Tariff $/kWh Note: Assumes all loans are concessional, at 1.25% with 25 year repayment and 5 year grace period

11. What tariffs are needed to make the existing system cash neutral? Steady tariff increases in real terms would be needed to accommodate rising generation costs…. Comparison of Various Tariff Paths for National Least Cost Connections Scenario

12. Effect of tariff choice on PV of funding gap If tariffs are increased such that the existing system is made cash neutral, the PV of the funding gap about US$1.1 billion. If tariffs kept constant in real terms, the PV is US$2.2 billion Cash Outflows Cash Inflows Cash Inflows Funding gap period 2015-2070, 10% discount rate for PV calculation, figure is for National Least -cost Tariffs increased to make existing system cash neutral Tariffs maintained in real terms

13. Government support is needed to close the funding gap Government will need to subsidizeoperating losses(revenues-opex) and pay debt service (principle repayment & interest) every year to close the funding gap over time. • Support needed starts low and quickly ramps up • Current total budget support to MOEP is US$567 millionper year • Access to financing reduces need for support

14. Conclusions • Assuming that financing can be secured, initial pace of ramp-up in roll-out is determined by institutional and technical constraints • To achieve the target of nearly 100% electrification by 2030, annual new connections must be ramped up to more than 550,000 per year five years from now: a more than two-fold increase • Donor commitment to meet the financing need of the 5-year program is essential to achieve the ramp up • The Government must make difficult decisions about future tariffs. The funding gap will depend on the tariff path • The roll-out program is financially viable. Institutional weakness is the biggest risk to the roll-out

15. Alex Sundakov 36-38 Young Street Sydney, NSW 2000 Australia Alex.Sundakov@castalia-advisors.com www.castalia-advisors.com Contact Us