“To grid or not to grid: that is the question”

1. “To grid or not to grid: that is the question” Energy Days 2012 Document type February 23, 2012 CONFIDENTIAL AND PROPRIETARY Any use of this material without specific permission of McKinsey & Company is strictly prohibited

2. 1.5 Billion people without access to electricity and 2.9 Billion without access to modern energy services | SOURCE: NASA; WEO 2009 (IEA); team analysis McKinsey & Company 1

3. Maximizes economies of scale in generation Economically rational choice Compatibility if integration is a future possibility “Off-grid or not to off-grid”: a question about trade-offs CONCEPTUAL High Demand density (function of population density and consumption per capita) Grid Micro-grid Off-grid Low Near Far Distance to grid (directly drives cost) SOURCE: Team analysis

4. A • Off-grid is the best alternative to lack of supply • Lack of supply brings costs incomparably higher than any type of generation and unacceptable social burdens • Off-grid renewables 10-20% cheaper than diesel engines 1 Off-grid (renewable) presents attractive characteristics Off-grid generation is already today a highly interesting option, with selectively competitive price, deployable in large scale in limited time and with limited complexity SOURCE: Team analysis

5. 1A Off-grid is the best alternative to lack of supply USD/kWh Estimated cost from lack of supply Cost of electricity generation 5-25 2-5 Range accounting for technologies and local specificities Highly dependent on fuel and CO2 costs 0.25-0.4 0.10-0.25 0.12-0.18 0.12 Developed countries Developing countries Diesel RES Gas Coal SOURCE: World Bank; team analysis

6. A • Off-grid is the best alternative to lack of supply • Lack of supply brings costs incomparably higher than any type of generation and unacceptable social burdens • Off-grid renewables 10-20% cheaper than diesel engines B • RES reaching grid parity with more untapped potential • Cost of renewables decreased by 75% since 2008, with further 11% p.a. expected until 2015 • Grid parity achievable with availability >15-20%, if system costs properly accounted for (i.e. no/low tariff subsidies) 1 Off-grid (renewable) presents attractive characteristics Off-grid generation is already today a highly interesting option, with selectively competitive price, deployable in large scale in limited time and with limited complexity SOURCE: Team analysis

7. Renewables cost reduction opens unprecedented opportunities 1B PV module spot market prices USD/Wp, monthly Impact on PV generation cost USD/MWh -12% p.a. Jan ‘12 2008 2009 2010 2011 • Industrial scale operations • Leap-frogging other technologies, still with vast scope for improvements • Demand increasingly based on commercial fundamentals • Transformational scale and scope in generation, equipment manufacturing and as an investment area 2000 2005 2011 2015 SOURCE: SolarServer; pvXchange; PVinsights; McKinsey Global Solar Initiative

8. 5 West Africa ( diesel) : ~1 USD/kWh 1B As costs are reduced, ever more markets are “in the money” Total power sector size 2010 TWh /Year 1; Residential segment example Countries/Locations Annual solar generation where solar is potentially 2000 weighted solar yield is economically viable option 2001 - Average power price for households (2010) , USD/kWh 2007 0.40 2008 2009 0.35 Denmark Full installation cost 2 of solar cells , 0.30 Germany USD/Watt peak; (Year) 2010 California (tier 3) Italy 6 0.25 Sweden Netherlands 2011 Spain 5 (~2009) 4 0.20 India (peak rate) UK Japan New York Mali (residential) 4 (~2010) Finland Greece 0.15 California (base) German subsidy schemes support learning curve, building competitiveness of solar; Less thoughtful schemes in higher solar yield countries skews the installed base towards moderate yield countries 3 (~2011) France Australia Canada 0.10 Texas S. Africa 2 S. Korea China 0.05 1 India 0 700 800 900 1,000 1,100 1,200 1,300 1,400 1,500 1,600 1,700 1,800 1,900 3 , Specific annual solar energy yield kWh/ kWp 1 2 Electricity consumption of residential, services, agriculture; Cost to generate power with solar cells corresponding to solar i ntensity, using the following 3 assumptions: 5% cost of finance, 30 yr lifetime, 0.3% degradatio n, fixed O&M 1% of full installation cost, 33% income tax; Amount generated by a south - facing 1 4 kWp module in 1 year (a function of solar intensity); Only 2008 data available. Peak rate refers to rate without artif icial cap imposed to close the peak power deficit 5 filled by diesel generated power; Small - scale, off - grid diesel SOURCE: Enerdata; EIA; PV Watts; SERC; India Central Electricity Authority; Utility publications; McKinsey Global Solar Initiative | McKinsey & Company 4

9. A • Off-grid is the best alternative to lack of supply • Lack of supply brings costs incomparably higher than any type of generation and unacceptable social burdens • Off-grid renewables 10-20% cheaper than diesel engines B • RES reaching grid parity with more untapped potential • Cost of renewables decreased by 75% since 2008, with further 11% p.a. expected until 2015 • Grid parity achievable with availability >15-20%, if system costs properly accounted for (i.e. no/low tariff subsidies) C • Large scale reachable with limited complexity • EU countries have deployed 1+ GW of RES per year • Emerging markets often under estimate costs and complexity of deploying efficient fossil technologies (e.g. grid connection, construction delays, cost of crises…) 1 Off-grid (renewable) presents attractive characteristics Off-grid generation is already today a highly interesting option, with selectively competitive price, deployable in large scale in limited time and with limited complexity SOURCE: Team analysis

10. 1C Large scale achievable with limited complexity Large additions of renewables are possible GW years, 2007-2010 average Emerging markets often face issues with fossil capacity Wind Solar PV • Under-estimating execution challenge (e.g. in Asia and Africa strong delays in coal generation projects) • Over estimating cost benefits of fossil fuels (i.e. target availability and execution costs) • Struggling to ensure security of supply (i.e. mainly gas) 5,8 5,1 vs. 3,1 2,1 US Spain Italy Germany SOURCE: Global Data

11. Off-grid deployment faces several constraining factors 2 • Limited consideration vs. centralized capacity (e.g. RES 1% of Africa and ME installed capacity) • Low access to financing (sub-scale for private and for international donors, above scale for public and local communities) Low relevancy Off-grid limits • Limited viability of stand-alone solutions vs. integrated RES/ back-up capacity/ storage/demand management • Standardization for scalability and compatibility with grid extension • Building and renewing local skills (installation, O&M) • Supply chain (spare parts) • Governance of deployment (central vs. regional vs. communities) Technology integration and scalability Need for local enabling SOURCE: Team analysis

12. Relevancy – Limited perceived impact and investment opportunity 2 ROUGH ESTIMATE OUTSIDE-IN Average capacity for a single project Size of the investment - South East Asian country MW per project USD billion per year 100-1,000 5-7 0.25-0.5 1-10 Electrification/ Off-grid Grid investments (G-T-D) Off-grid On-grid Off-grid projects are perceived as low priority to address capacity gaps and support economic growth… … and the investment opportunity is limited to attract sizable investors

13. What innovative financing (matching profile of front-loaded needs, available resources and L/T potential)? 1 2 Which role for private vs. public? Can local specificities be addressed creating attractive size and scalability? 3 Can an efficient roll-out model be defined for local skill gaps, policies...? 4 3 Thought starters for our discussion