IDC’s approach through developing Green Industries - Focussing on Energy Efficiency 24 May 2012 Presented by: Rentia va

1. IDC’s approach through developing Green Industries - Focussing on Energy Efficiency24 May 2012Presented by:Rentia van TonderHead: Green Industries SBU

2. Contents • Introducing the IDC; • South Africa: Energy approach; • Growing the Green Economy; • IDC Green Economy focus areas; • Non-fuel based green energy (Renewables); • Energy Efficiency & Fuel based green energy; • Green Energy Efficiency Fund (GEEF) • Characteristics of scheme • Funded cases • ESCO Market Study Overview • Study Objectives and Scope • Barriers and Enablers • Conclusion • IDC case study: • Conclusion.

3. The Industrial Development Corporation • Established: 1940 • Type of organisation: Development Finance Institution (DFI) • Ownership: South African Government • Main business area: Providing funding for entrepreneurs and projects that are contributing to the industrialisation and job creation • Geographic activities: South Africa and the rest of Africa • Products: Wide range of custom financial products to suit a project’s needs including debt, equity, guarantees or a mixture of these • Stage of investment: Early stage (feasibility), commercialisation, expansion • Project development: Identification and development of projects adding to the industrial base * At R6.90 per US$

4. Corporate Profile The vision of the IDC is to be the primary source of commercially sustainable industrial development and innovation to the benefit of South Africa and the rest of the African continent Provides financing to entrepreneurs engaged in competitive industries and enterprises based on sound business principles Pays income tax at corporate rates and dividends to the shareholder The IDC’s Head Office in Sandton (Johannesburg) Aims to maximize developmental and financial returns within an acceptable risk profile

5. The Green Economy in the NGP • The New Growth Path targets 300 000 additional direct jobs by 2020 to green the economy, with 80 000 in manufacturing and the rest in construction, operations and maintenance of new environmentally friendly infrastructure. • Additional jobs will be created by expanding the existing public employment schemes to protect the environment, as well as in production of biofuels. The IRP2 targets for renewable energy open up major new opportunities for investment and employment in manufacturing new energy technologies as well as in construction. • The main strategies to achieve these targets are: • Comprehensive support for energy efficiency and renewable energy as required by the IRP2, including appropriate pricing policies, combined with programmes to encouragethe local production of inputs, starting with solar water heaters; • Public employment and recycling schemes geared to greening the economy; • Stronger programmes, institutions and systems to diffuse new technologies to SMEs and households; • Greater support for R&D and tertiary education linked to growth potential and developing South Africa as the higher education hub for the continent; and • Continuing to reduce the cost of and improve access to broadband. Source: The New Growth Path - The Framework

6. The Green Economy in IPAP2 • Key Sectors • Wind power generation • Photovoltaic power generation • Concentrated solar power generation • Industrial energy efficiency • Water efficiency • Waste management • Biomass and waste management • Energy-efficient vehicles • Key action programmes • Roll-out of national solar-water-heating programme – manufacturing and installation capacity • Solar and wind energy • Development of an industrial energy-efficiency programme • Strengthen water-efficiency standards • Demonstrate viability of Concentrated Solar Thermal (CST) power as a major renewable energy generation source • Biomass Energy • Clean and Multi-Energy Stoves • Water- and Energy-Efficient Appliances • Efficient Motors, Variable-Speed Drives, Energy Metering and Control and Electricity Storage (Batteries and Fuel Cells) • Waste and Waste Water Treatment • The South African Renewables Initiative (SARI Source: Industrial Policy Action Plan 2011/12 – 2013/14 – February 2011

7. South Africa: Current Market and Energy Situation • Since the South African economy largely relies on coal reserves for electricity, many opportunities exist for Renewable energy (RE) and Energy Efficiency (EE) improvements. • Currently, future energy supply is not expected to be sufficient to match the anticipated demand, and increased pressure on price and energy security, force industry players to focus on green initiatives (mainly RE and EE). • Recurring power outages since early 2008 have highlighted the fact that electricity generation is unable to keep pace with demand.

8. Growing the Green Economy The development of Green Industries in the Green economy is becoming a key focus area for development in South Africa and especially the Industrial Development Corporation of South Africa (IDC). IDC has been at the forefront in supporting industrial growth and development in South Africa since its inception in 1940. More recently, IDC adopted a pro-active approach in developing the green economy and specific focus and effort has been given to green industries and technologies. The objective is to develop, grow and investin green industries focusing on investments to enhance the environment, support carbon emission reduction, avoidance and adaptation.

9. Investment in the Green Economy The IDC’s role in growing the Green Economy would be through investments in: • clean production, • clean energy, • energy efficiency, • demand side management interventions, • emission and pollution mitigation, • waste reduction and • bio fuels. A value chain approach will apply with the emphasis on industrial development (including localization) and job creation.

10. Green Industries SBU focus areas GREEN INDUSTRIES SBU FORMED 1 APRIL 2011

11. IDC Rising to the Challenge IDC is closely aligned with government, especially in implementing strategies and developing new emerging sectors by providing support at various levels. R100bn has been earmarked for investment over the next 5 years with R25bn for the green economy.

12. IDC’s role in Renewable Energy RFP Community Trust Developer Community “HoldCo-C” Ownership and IDC funding Round 1 & 2 ( ca R7,5bn, 19 projects) • Development partner • Equity participant • BEE and BBBEE (community) funder • Preference shares • Trickle dividend • Trustee training • Vesting • Debt provider Project Company IDC BEE# “HoldCo-B” Strategic Equity Partners BEE# IDC Funding with Preference Shares Ordinary shareholding # This could also be a BBBEE or NPO

13. IDC RE projectsConcentrated Solar Power (CSP) – Trough & Tower Photovoltaic solar power Wind & Hydro power

14. Green Economy Catalyst through EE Developing other sectors of the Green Economy through innovation ... Energy Efficiency: • IDC has created an enabling environment by securing cheaper funding, with long debt tenures to act as a catalyst in the Energy Efficiency Markets. • Green Energy Efficiency Fund was launched recently that offers the market debt at concessionary rates with debt tenures up to 15 years by partnering with the German DFI – KfW. • IDC has structured the repayment of these loans to effectively match the savings profile of the technology installed. eg. On a Roof Top PV the savings over 15 years are equivalent to the debt service repayment and hence the facility of 15 years is then proposed. Hence not an out of pocket expense for the company.

15. Green Energy Efficiency Fund Competitiveness through energy savings

16. Facility size: R500 million Loan size: R1 – 50 million Interest rate: Prime less 2% Term: Up to 15 years, based on payback period of the investment Standard fees will apply IDC has structured the repayment of these loans to effectively match the savings profile of the technology installed. e.g. On a Roof Top PV the savings over 15 years are equivalent to the debt service repayment and hence the facility of 15 years is then proposed. This is to ensure that the savings justify the investment without the business incurring out of pocket expenses GEEF characteristics

17. Eligibility Criteria

18. A Cape Town-based company that produces sport wear and leisurewear under license to an international brand. The company has embarked on a project to install a grid connected (grid-tied) rooftop PV system to generate 25% of the company’s annual electricity requirement “Electricity accounts for more than 90% of our carbon emissions and is a scarce resource that is vital to the successful operation of our business. We are confident that the solar installation will generate between 30 – 40% of our energy requirement, thereby reducing our carbon footprint, save money and improve our sustainability into the future.” William Hughes, MD, Impahla Clothing Funded cases Case Study 1: 25% Reduction in Grid Electricity Consumption by Installing a Solar Photovoltaic (PV) System

19. The chemical production company wants to use the waste gas as fuel for a 7.8 MW CHP plant to replace part of the power supply from the grid. This results in 18% savings from using the waste gas to feed the CHP plant. “The company spends close to R7-million on electricity a month, and this new co-generation plant will cut this bill by about 20%. The additional 8 MW capacity will enable the company to operate at full production compared with the 70% capacity because of electricity constraints. „ Claudio Siracusano, GM, SACC Case Study 2: 18% Energy Savings from Utilisation of Waste Gas to feed a Combined Heat and Power (CHP) Plant

20. ESCO Market Study OverviewDeveloping a vibrant ESCO Market IDC motivation • In conducting the study, the IDC seeks to enhance its position in effectively addressing market related barriers in the energy efficiency and renewable energy sectors. • To develop financial instruments that support ESCOs and enhance investments in energy efficiency Study objectives: • To perform a review of international best practice in ESCO market development as a benchmark for the assessment of the situation in South Africa • To undertake a detailed analysis of the South African ESCO marketbased on structured interviews and questionnaires. • To identify and analyse existing and/or perceived technical, financial, social and regulatory barriers in the market • To investigate plausible support measures to overcome these barriers based on international expertise and experience.

21. Study timeline

22. Classification of ESCOs in developing markets ESCOs have been classified in several ways in the literature depending on their origin, target customers and type of services, etc. ESCO markets in the developing countries generally adopt the following classification • Vendor ESCOs are equipment manufacturers and generally do not operate in the utility driven DSM industry and tend to focus on large industrial clients. • Utility ESCOs bid to serve as providers for utility funded DSM programs and are paid based on electricity savings. • Contractor ESCOs typically work with contractors in green field construction projects by installing more energy efficient equipment than what might have been provided otherwise. • Engineering ESCOs perform design and other services but are seldom involved in performance contracts. Transitioning to: • Energy Performance Contract ESCOS enters into a shared savings or guaranteed savings energy performance contract. The ESCO is willing to take financial, technical and other risks with the ESCO’s payment directly linked to the amount of energy saved (in physical or monetary terms).

23. Scope :10 countries covered US, Canada, UK, Germany, Italy- fully matured ESCO industry Brazil, India, China, Japan and Australia- market transformation and developing Survey Size and Range: 30 responses from 146 questionnaires covering ESCOs , Financial Institutions and End users Focus Areas Inception and history of development Present size and scope Key barriers and enabling factors Future growth potential Key lessons Categorization and Grouping of barriers The various barriers identified and discussed were grouped in seven different characteristics in the development of any emerging industry. Benchmarking exercise Barriers

24. Awareness, information & understanding There is a low level of awareness and a lack of information and understanding of the ESCO concept, capabilities and benefits in South Africa. This extends to a common definition of what an ESCO is. As a result of this potential customers are not in a position to assess the benefits of the ESCO’s offerings. Limited knowledge of the industry exists within FI’s, resulting in a lack of funding products. Trust and scepticism Trust and Scepticism is considered by all stakeholders within financial institutions, end user group and ESCOs. This is due to lack of accreditation within the ESCO industry. No common definition and standards for ESCOs leading to the perception that many “fly-by-night” ESCOs exist that are not capable of providing a professional service. Complex contracting with no standard contracts create uncertainty for end-users in terms of cost, savings potential, risk transfer, etc. Financing and resources No tailor made financing instruments: lack of financial instruments designed for the ESCO industry, combined with a lack of understanding of the industry, means that many start-up and small ESCO’s struggle to raise capital for projects. ESCOs and projects perceived as high risk: Conventional financial institutions tend to view ESCO’s and energy efficiency projects as “business as usual” finance applications, and do not apply credit assessment criteria specifically designed for the ESCO industry. As a result of the nature of energy efficiency projects, limited collateral associated with energy efficiency projects, the EPC model and uncertain cash flow, these projects can be assessed as high risk by FI’s. SA barriers

25. Reasons for difficulties in raising finance - survey results • ESCO’s generally funded themselves from their own cash flow and have not requested funding from FI’s • The small size of operations was of particular concern for the smaller ESCO’s, who believe FI’s will only fund larger ESCO’s or those with a strong balance sheet. • Uncertainty cash flows was considered a major reason for lack of funding • Limited financial collateral was of particular concern to small ESCOs.

26. Reasons for difficulties in raising finance - survey results • The knowledge and understanding of the EE and the ESCO model was particularly low amongst financial institution surveyed. • Poor visibility of the industry was a reason for lack of funding by the banks (generally been focusing on larger Renewable Energy projects • FI’s expressly stated that the underlying structure of the project and the contractual arrangements between Eskom, the client and the ESCO’s were important when assessing whether to fund projects. • Heavy reliance on client figures. • Risk averse nature of FIs meant standard business models and technologies get preference over new models

27. Measurement and Verification – Energy Audits The measurement and verification (M&V) process and the base-lining of projects was relatively well understood in principle, however the survey found that the M&V protocols are not well understood National policies, legislation, regulations and incentives There are a number of national policies, legislation and incentives within the South African Industry, however many stakeholders do not know or understand these policies, regulations or incentives. External factors There two main external factors are the relatively low energy prices that make energy efficiency projects and the payback on energy efficiency savings more difficult than in other markets globally. Project approval times The time taken to approve project funding means that ESCO’s loose project opportunities as clients sometimes decide that they no longer require the ESCO’s services. Other barriers identified by South African ESCOs

28. Key growth drivers for the South African Market • 92% of ESCOs indicated that high energy prices are a key driver for market growth • While 67% of ESCOs indicated that access to finance at competitive rates and terms would enable energy efficiency investments

29. End Users Lack of dedicated staff to EE projects – require ESCO interventions Often no dedicated EE department Fear of rolling black out/Interrupted supply King III sustainability – more focus by IEU Some believe that ESCOs will be important in meeting their EE savings Tax incentives Carbon Tax 2013/2014 Enablers : Financial Institution and End User View • Financial Institutions • DFI Funding initiatives and soft loans to commercial institutions • Grants • Standard methodology for loans • Mandate to assist ESCO / EE projects • Possible funding to drive projects from development to bankability • Training of banking staff on-going • Simplifying lending criteria.

30. Conclusion • Pro-active approach to develop Green Industries • Renewable energy • Energy efficiency • Fuel based green energy & Emission and pollution management • Bio fuels • As well as localisation opportunities • Focus on early phase project development; • Develop specific funding interventions; • Support and development of an emerging industry at various level ie Energy Efficiency (ESCO study). • Value chain approach with an objective to develop a long term sustainable industry.