Case Study for the Southern African Power Pool Region

Martin Burian and Christof Arens

Corresponding Author: Martin Burian Tel. ++49 40 6030 6805 e-mail: martin.burian@gfa-envest.com

Wuppertal and Hamburg, October 2012

Carbon Market Case Study

Carbon REFIT

Table of Contents
ABBREVIATIONS AND ACRONYMS 1 1.1 1.2 2 2.1 2.2 2.3 2.4 3 INTRODUCTION AND BACKGROUND Introduction to the Carbon REFIT Background CARBON REFIT DESIGN AND IMPACT Design Options Determination of Carbon REFIT Potential Impacts of Carbon REFIT Environmental Integrity CONCLUSION II 1 1 1 4 4 5 5 7 9 10 11 13 15

REFERENCES ANNEX I MODEL CASH FLOW FOR HPP ANNEX II SAPP CAPACITY ADDITIONS ANNEX III FINANCIAL BENCHMARKS FOR ENERGY PROJECTS IN THE SAPP REGION

List of Figures and Tables

Figure 1: Revenue Streams of a Model Hydro Power Plant Table 1: Import to Demand Ratio for Selected SAPP Countries Table 2: SAPP Power Utility Members and Host Countries Table 3: Summary of the Regional SAPP GEF Table 4: Determination of Carbon REFIT Table 5: Hydro Power Plant - Financial Evaluation Table 6: Revenue Streams of a Model Hydro Power Plant Table 7: Hydro Power Plant Input Parameters Table 8: Hydro Power Plant - Basic Operating Parameter Table 9: Hydro Power Plant - Cash Flow Calculation Table 10: Hydro Power Plant - Financial Evaluation Table 11: SAPP Capacity Additions Table 12: UNFCCC IRR Benchmarks for Energy Projects 6 2 2 3 5 5 6 11 12 12 12 13 15

ABBREVIATIONS AND ACRONYMS

ACAD BM BMU CDM CDM EB CER CO2e COP CPA DNA DOE DRC GEF GHG GW GWh IPP IRR kW LDC MW MWh NAMA NMM NPV OM PES PPA REFIT RSA SAPP SAPP CC SADC SBL SSA SSC UNFCCC USD African Carbon Asset Development Facility Build Margin German Federal Ministry for the Environment, Nature Conservation and Nuclear Safety Clean Development Mechanism CDM Executive Board Certified Emission Reductions Carbon Dioxide and Equivalences measured in Carbon Dioxide Conference of the Parties to the UNFCCC CDM Programme of Activities Designated National Authority Designated Operational Entity Democratic Republic of Cong Grid Emission Factor Greenhouse Gases Giga Watt Installed Capacity Giga Watt Hour Independent Power Producer Internal Rate of Return Kilowatt Least Developed Country Megawatt Installed Capacity Megawatt Hour Nationally Appropriate Mitigation Action New Market Mechanism Net Present Value Operational Margin Project Electricity System Power Purchase Agreement Renewable Feed in Tariff Republic of South Africa Southern African Power Pool SAPP Coordination Centre Southern African Development Community Standardized Baseline Sub-Saharan Africa Small Scale United Nations Framework Convention on Climate Change US Dollars

II

1
1.1

INTRODUCTION AND BACKGROUND

Introduction to the Carbon REFIT

Many African countries do not offer incentives for the promotion of renewable energy projects through a Renewable Energy Feed-in Tariff (REFIT). Usually, the revenues of Independent Power Producers (IPPs) are negotiated through Power Purchasing Agreements (PPAs). In those countries which introduced a REFIT, such as the Republic of South Africa (RSA), the feed-in tariffs are subject to political debates and were changed several times. Both options, PPA and REFIT, may not offer the financial security to develop renewable energy projects with a lifetime of, for example, 30 years. Carbon Finance, even though subject to price changes (i.e. /CERs) is linked to registering a renewable energy project under the UN Framework Convention on Climate Change (UNFCCC). Such revenues are per se independent from political changes and the development stages of the national renewable energy framework. This short study sketches the idea of a Carbon REFIT for Southern Africa, covering the region of the Southern African Power Pool (SAPP). As such, this REFIT could link nine countries, providing an independent framework for the promotion of renewable energies in the region. Based on the Grid Emission Factor (GEF) of the region and a price of carbon, this would result in a financial incentive (in USDc/kWh) payable for each renewable kWh fed into the grid. This incentive could be financed by Annex I countries, for example as supported Nationally Appropriate Mitigation Actions (NAMA) (with or without crediting), or a sectoral New Market Mechanism (NMM), conceptualized for the electricity sector and potentially covering all nine countries.

The Carbon REFIT may be designed with or without crediting of emission reductions, which may depend on the political preferences of Annex I countries as well as the outcome of further UNFCCC negotiations. But the payment may be based on the volume of renewable energy fed into the grid (i.e. performance oriented).

1.2

Background

In the Southern African Development Community (SADC) region, many countries depend on electricity imports, and electricity trade between countries is very common. In five countries, imports account for a particularly substantial share of their electricity demand (Table 1). The SAPP as a SADC entity manages electricity trades of all SAPP members through the SAPP Coordination Centre (SAPP CC) based in Harare, Zimbabwe. As a coordination center, the SAPP CC not only arranges regional electricity trades, but also fulfils regional coordination functions with respect to the planning of capacity additions and the development of energy regulations / policies. As such, the SAPP CC is an important hub for the development of a regional grid emission factor. SAPP currently comprises 15 power utilities as members (Table 2). These system-interconnections result in serious consequences for CDM project development. Countries with a high share of hydro power generation, such as Zambia or Democratic Republic of the Congo (DRC), encounter difficulties in showing that renewable energy projects conducted on their territory result in CO2 emissions reductions (i.e. even though hydro power reduces CO2-intensive electricity imports and / or exports may replace CO2-intensive electricity generation in other countries). This is due to the Grid Emissions Factor, which is generally developed at the national level.

Table 1: Import to Demand Ratio for Selected SAPP Countries

Botswana Lesotho Namibia Mozambique Swaziland Source: Data provided by SAPP CC 63.5% 28.5% 52.0% 50.0% 59.0%

The GEF determines the amount of Certified Emission Reductions (CERs) that a renewable energy project can generate from feeding 1 MWh of electricity into the electricity grid. If the GEF amounts to, for example, 1 tCO2/MWh, a CDM project generates one CER per MWh. In case the GEF is zero, renewable energy CDM projects cannot generate any CERs.

Table 2: SAPP Power Utility Members and Host Countries

No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Country Angola Botswana DRC Lesotho Malawi Power Utility Empresa Nacional de Electicidade de Angola Botswana Power Cooperation Societ Nacional dElectricit Lesotho Electricity Corporation Electricity Supply Commission of Malawi Abbreviation ENE BPC SNEL LEC ESCOM EDM HCB Motraco NamPower Eskom SEB TANESCO ZESCO CEC ZESA

Mozambique Electricidade de Mozambique Mozambique Hidroelectrica de Cahora Bassa Mozambique Mozambique Transmission Company Namibia RSA Swaziland Tanzania Zambia Zambia Zimbabwe NamPower Eskom Swaziland Electricity Board Tanzania Electricity Supply Company Zambia Electricity Supply Corporation Copperbelt Energy Corporation Zimbabwe Electricity Supply Authority

As can be seen in the Table 2, there are 12 public utilities and three private sector power utility members in SAPP, which were admitted based on their substantial contribution to power trades in the SAPP region. The three private entities are: HCB, an IPP with an installed generating capacity of 2,075 MW in Mozambique, Motraco, the owner and operator of 1,450 MW cross-border transmission infrastructure from the Republic of South Africa (RSA), to Mozambique via Swaziland; CEC, the owner and operator of power infrastructure in the copper belt of Zambia that currently accounts for about 50% of ZESCOs demand. 2

With the current changes in the regulatory frameworks in the SADC energy sector, it is expected that there will be more private sector actors such as Power Brokers and others in SAPP in the future. In the context of the African Carbon Asset Development (ACAD) facility, GFA ENVEST and the Coordination Center of the Southern African Power Pool developed a technical solution for the GEF problem: the regional GEF (Burian / Maviya 2012). It is based on an energy model covering the nine interconnected countries: Botswana, Democratic Republic of the Congo, Lesotho, Mozambique, Namibia, South Africa, Swaziland, Zambia and Zimbabwe. All these countries are members of the SAPP. The nine countries were included into one regional socalled Project Electricity System (PES). The PES is the geographical area for which the Build Margin (BM) and the Operating Margin (OM) are determined. The development of one regional PES was conducted in accordance with UNFCCC rules and procedures by proving that there are no transmission barriers according to the CDM EBs definition. Based on standard weighting of the BM and the OM, the SAPP region offers a GEF of 0.9176 tCO2/MWh. Details can be found in Table 3. Guidance on the selection of alternative weights can be found in the tool (CDM EB63, Annex 19, page 18f).

Table 3: Summary of the Regional SAPP GEF

OM Emission Factor (in t-CO2/MWh) BM Emission Factor (in t-CO2/MWh) Weight of the OM Wind and solar power generation project activities for the first crediting period and for subsequent crediting periods All other projects for the first crediting period All other projects for the second and third crediting period 0.75 0.5 0.25 0.9346 0.9007 Weight of the BM 0.25 0.5 0.75 CM Emission Factor 0.9261 0.9176 0.9092

The GEF calculation was submitted to Carbon Check, a Designated Operational Entity (DOE) located in South Africa. The DOE validated the GEF according to all applicable rules and confirmed the final value in a validation statement. In an effort which was well coordinated by UNEP/ACAD, all nine countries submitted the GEF on 17 August 2012 as a Standardized Baseline (SBL) to the UNFCCC Secretariat. Following the CDM Executive Boards procedures (CDM EB66, Annex 49), an initial assessment was conducted in September 2012. Thereafter the SBL was evaluated by two members of the CDM Methodology Panel and forwarded as first SBL worldwide for consideration by the CDM EB. At its 70th meeting the CDM EB noted: The Board welcomed the first standardized baseline Grid emission factor for the Southern African power pool submitted for its consideration (CDM EB70, 48) but requested the Secretariat to further work on issues such as institutional procedures for future updating. Thus, though being the most advanced SBL so far, the approval of the SAPP Grid Emission Factor is pending for the time being.

2
2.1

CARBON REFIT DESIGN AND IMPACT

Design Options

The SAPP GEF Standardized Baseline defines baseline emissions for energy projects feeding electricity into the Southern African Power Pool grid. Therefore, it could be used as the baseline for a regional carbon finance scheme beyond the CDM incentivizing renewable energy projects. Different design options for such a sectoral scheme are theoretically possible: First, it could take the form of a regional supported NAMA (here: RAMA). NAMAs are defined as mitigation actions by developing countries ... supported and enabled by technology, financing and capacity building, in a measurable, reportable and verifiable manner (Decision 1/CP.13). The current scientific discourse accompanying the UNFCCC negotiations comprises the concept of credited NAMAs which may generate offset credits. Such credits may be issued on the basis of the installation of renewable energy installations which were triggered by a national / regional REFIT scheme. The revenues made from selling the carbon credits would go directly into financing the feed-in tariff. As the baseline for the scheme would be the SAPP GEF standardized baseline, a regional NAMA or RAMA would be possible that covers all nine countries. Second, following the EUs suggestions for sectoral crediting mechanisms, the scheme could cover the sector (renewable) energy generation in the region. This mechanism would need to take the projected installation of renewable energy as baseline and would issue credits in case the scheme triggers a higher penetration rate of renewable energy projects. As such, the scheme would rather have a technology penetration target and would be based on the performance of the sector. Third, a combination of CDM and other policy instruments is possible. Puhl (2011) sketches a system that links a REFIT in Thailand with programmatic CDM and NAMAs/sectoral crediting schemes. This sketch is arranged in three major layers: The promotion of renewable energy through a REFIT results in additional costs covered by the electricity consumers through higher prices. The increase in electricity prices is subsequently reduced to an appropriate level by adding two more layers. Second Phul proposes the development of a CDM Programme of Activities under current rules. The carbon revenues are used to partially refinance the cost of the existing REFIT, so that the payments of consumers are reduced. On top of this scheme, a NAMA layer is put which helps limiting the price increase due to the REFIT. This NAMA support may set in once the additional cost burden for electricity consumers reach an appropriate level.

From the outset, the RAMA option promises the best results as it directly targets the installation level and can therefore directly finance the feed-in tariff. Moreover, additionality matters can be addressed well under such regimes, see below. The layer-system is regarded as too complicated at first sight when considering the regional coverage that is intended here. The advantage of such a Carbon REFIT system would certainly be the existence of a reliable scheme incentivizing renewable energy production which would be independent from political preferences and debate in the different countries. The difficulties with the South African REFIT are a viable example of these constraints. A possible anchor point for the scheme would be the SAPP Coordination Centre. Being a SADC entity, it facilitates the operation of the common energy market and monitors the transactions between the members. Its technical knowledge and coordinating role may make it an appropriate hub for innovative energy projects in the region.

2.2

Determination of Carbon REFIT

In order to evaluate the potential impact of a Carbon REFIT (subsequently referred to as CR), the potential carbon revenue of such a scheme shall be estimated. This builds on: the grid emission factor, which was determined for the nine countries to amount to 0.9176tCO2/MWh. That is, for the generation of one MWh, the regional electricity system emits approximately 0.9176tCO2. the price of one tCO2e reduced, which was assumed to be at 10USD/tCO2. This may be high compared to the current CER price but seems reasonable when using historical mid to long term CER prices as benchmark for the financial contributions under a future supported NAMA/NMM scheme.

Based on above values, the CR is determined as follows: !" !"#$ !" = !"# !"#2 !" ! !"#$% !"#$%&&%!' !"#$%&!"# (!"#$ !"#2) Following above formula results in Carbon REFIT of 0.9176 USDc/kWh. The input and output data is presented in below table. Table 4: Determination of Carbon REFIT Item Price of Emission Reduction Grid Emission Factor Carbon REFIT Unit USD/tCO2 tCO2/MWh USDc/kWh Value 10.00 0.9176 0.9176

2.3

Potential Impacts of Carbon REFIT

This section evaluates the potential impacts of the Carbon REFIT. The evaluation builds on a model cash flow for a hydro power plant. The cash flow and its input parameters are presented in Annex I. The cash flow is based on an average discount rate (based on UNFCCCs financial benchmark data for the SAPP Region) as determined in Annex III. This cash flow gives a first and rough approximation of the financial framework for hydro power projects (which may be the financially most attractive renewable energy project type). Based on this cash flow, the financial attractiveness of a model hydro power plant is evaluated. As financial indicators, the Internal Rate of Return (IRR) and the Net Present Value (NPV) are determined. Both, IRR and NPV are determined for the scenario with and without carbon revenues. The findings of the financial evaluation are presented in table 5. Table 5: Hydro Power Plant - Financial Evaluation
IRR w/o Carbon Revenues NPV w/o Carbon Revenues in % in USD 10.90% -3,995,979 IRR with Carbon Revenues NPV with Carbon Revenues in % in USD 15.70% 3,766,217

In the without Carbon REFIT scenario, table 5 shows that the projects Internal Rate of Return amounts to 10.90% and its Net Present Value is negative. In CDM terms, in order to prove additionality, the projects IRR must be below the benchmark of 12.88%, as determined in Annex III. Hence, this model hydro power plant would qualify under the CDM. The with Carbon REFIT scenario shows a more favorable picture. Based on the Carbon REFIT, the proposed projects IRR lies significantly above the benchmark. Also the projects NPV becomes positive. Also in terms of significance, the Carbon REFIT may be a substantial contribution. The evaluation of the revenues of electricity sales and from the Carbon REFIT indicates that the REFIT may make up for approx. 29% of the model hydro power plants revenues. Table 6: Revenue Streams of a Model Hydro Power Plant Item
Electricity Revenue Carbon Revenue Total

USDc/kWh
2.25 0.92 3.17

%
71.03% 28.97% 100.00%

Figure 1: Revenue Streams of a Model Hydro Power Plant

Electricity Revenue Carbon REFIT

29%

71%

This first approximation shows that the above sketched Carbon REFIT may be central to promoting renewable energy projects in the region. Still, this issue may require a more detailed evaluation, such as the evaluation of cash flows for different technologies (wind, biomass residue projects, solar and hydro power plants of different sizes) as well as different business models (operation under a PPA or e.g. operation under the power pool).

2.4

Environmental Integrity

Within the system sketched above, two elements need to be accounted for when ensuring environmental integrity: the risk of double counting as well as the additionality of the emission reduction. These two issues are subsequently discussed in detail. Double counting occurs if a project applies for the Carbon REFIT while at the same time making use of the CDM. This would result in double counting of emission reductions, one time through the CDM, one time through the Carbon REFIT. This problem may besolved by requiring that projects covered by the Carbon REFIT must apply for being registered under the CDM or under a similar mechanism. This may documented e.g. by signing a respective agreement between the power project and institution in charge for the management of the Carbon REFIT. Moreover this may controlled by regularly screening of UNFCCCs CDM database. not be the be

The question of additionality is a more complex and challenging task. The additionality proof usually is accomplished by demonstrating that the proposed CDM projects IRR is below the benchmark for (energy) projects as e.g. stipulated by the Guidelines on the Assessment of Investment Analysis (CDM EB62, Annex 5). Not considering additionality hence involves the risk that also projects with IRRs above the benchmark may be accounted towards the climate change mitigation objectives of Annex I countries. Subsequently two design options for managing additionality of a Carbon REFIT are briefly laid out. First, it may be agreed to define an eligibility list. Such a list may specify scales and types of projects which may be eligible for participating in the Carbon REFIT. In general terms, it shall be noted that all SADC countries are characterized by difficult investment climates for energy projects. Annex III evaluates the investment benchmark for energy projects for all nine SAPP countries as specified by the UNFCCC for the additionality proof. The benchmark ranges from 10.8% (Botswana) to 14.5 % (DRC and Mozambique), the simple average for the SAPP region amounts to 12.88%. Consequently, if a project is above this benchmark, it may not be additional. The small number of renewable energy projects developed in the past years indicates that these high investment benchmarks pose a financial barrier for project finance. Against this background, an eligibility list may be developed, in order to allow only for those projects under the Carbon REFIT, which may not be financially attractive with additional revenues. This list may be constrained to e.g.: Including a maximum size for hydro power plants, e.g. 100 MW, as small hydro schemes are tentatively more expensive (in USDc/kWh) than large power plants, Hydro power plants shall be compliant to the guidelines of the World Commission on Dams (WCD); The power density of dams shall be at least 4W per square meter (as specified in ACM2 Grid Connected Electricity Generation from Renewable Sources, (CDM EB67) Biomass projects shall be restricted to the use of biomass residues (as specified in ACM6 Consolidated Methodology for Electricity and Heat Generation from Biomass), or Biomass from dedicated plantations (e.g. reforestation) without the clearing of intact forest sites (e.g. AM42 Grid-connected Electricity Generation Using Biomass from Newly Developed Dedicated Plantations).

Among above project types, hydropower is considered as the financially most attractive technology. Chapter 2.3 above provides a model cash flow for a 50MW hydro power station, which has been adapted to the region. As discussed above, even though hydropower being the financially most attractive technology, the cash flow shows that due to the high financial costs, such a project may be additional under current CDM rules. The above approach shall 7

be considered as a first sketch and will need further evaluation and close coordination with local stakeholders. The second design option for additionality may build on a CDM-style investment test and a barrier analysis (Okubo et al. 2011). As for the investment test, one would need to calculate the difference between the REFIT and the electricity price. On top of that, the difference between the typical cost for renewable energy-generated electricity and the cost of fossil fuelbased energy would need to be assessed. The test would be passed as long as both values are positive. The barrier test would look at the capital investments needed and assess whether the existence of the crediting scheme helps removing the investment barriers by increasing revenues. It would also be possible to work with a technologic penetration analysis for a country with similar development indicators but with a REFIT. Finally, it may be the case that the overall emissions of the regional electricity system increase, even despite the financial support through the Carbon REFIT. This may be as new fossil fuelled power plants are commissioned and / or the load of the existing fossil power plants is increased. In this regard, the sketched Carbon REFIT may not be considered as a sectoral benchmark for Southern Africa with an absolute or relative baseline. It is merely an instrument for promoting and supporting renewable energy on a project-by-project case similar to a CDM Programme of Activities for Southern Africa.

CONCLUSION

This short study outlines the opportunities for using the SAPP GEF Standardized Baseline for a regional carbon crediting scheme. Especially when designed as a regional version of Nationally Appropriate Mitigation Action (RAMA), the scheme looks promising, as many prerequisites for a possible NAMA crediting are fulfilled. These include a well calculated baseline emissions factor (the SAPP GEF), excellent monitoring conditions (renewable electricity produced), and good options for assessing additionality. Such a scheme would help promoting renewable energy in southern Africa and would align perfectly with feed-in programmes already under consideration (such as in Zambia) and with existing schemes facing implementation difficulties as in RSA. Another option to be explored could be a pilot scheme for a New Market Mechanism as currently discussed under the AWG-LCA in the climate negotiations. Further research would be needed in order to develop a robust approach for such a scheme. Inter alia, conceptual detail needs to be analyzed further, such as different design options or the evaluation of cash flows for different technologies. At the international level, questions such as whether policy-based actions such as REFIT could qualify as a NAMA need to be answered. The impact of varying carbon prices is a major issue. This could be accounted for, e.g. by defining the scheme as a strategic partnership between Annex I and Non-Annex I countries. This partnership would guarantee the purchase of the credits generated at a fixed carbon price. Further questions relate to the entity administering the regional scheme. The SAPP Coordination Centre may be well suited for this task. On the other hand, one has to account for, inter alia, different national approval procedures and laws. Therefore, it might be better to chose a light umbrella framework and have national schemes under it. Taking these two issues together, it might be worth exploring whether a regional development bank could administer the scheme in the form of a fund or facility. This could take away the responsibility from the national governments which are confronted with budget constraints and limited capacities. This approach would also help securing a fixed carbon price. One option would be a partnership with a regional development bank and the German KfW which both has a wealth of experience with incentive schemes and is active in the region.

REFERENCES
Burian, Martin and Johnson Maviya (2012): Unlocking CDM Development in Southern Africa Developing a Regional Grid Emission Factor. In: German Federal Environment Ministry (Ed.): Mitigating Climate Change, Investing in Development. Berlin. CDM EB70 (2012): Meeting Report CDM Executive Board Seventieth Meeting, Version 1, Date of Meeting: 10 to 23 November 2012, Place of Meetoing: Doha, Qatar, CDM EB69 (2012): ACM6 Consolidated Methodology for Electricity and Heat Generation from Biomass, Version 12.1.1, UNFCCC. CDM EB67 (2012): ACM2 Grid Connected Electricity Generation from Renewable Sources, Version 13, UNFCCC CDM EB66, Annex 49 (2011): Guidelines for Quality Assurance and Quality Control of Data used in the Establishment of Standardized Baselines, Version 1, UNFCCC. CDM EB62 Annex 5 (2011): Guidelines on the Assessment of Investment Analysis, Version 5, UNFCCC CDM EB55, (2010): AM42 Grid-connected Electricity Generation Using Biomass from Newly Developed Dedicated Plantations, Version 2.1, UNFCCC Okubo, Yuri, Daisuke Hayashi and Axel Michaelowa (2011): NAMA crediting: how to assess offsets from and additionality of policy-based mitigation actions in developing countries. In: Greenhouse Gas Measurement & Management, 1, 2011, 3746. Puhl, Ingo (2011): Linking Domestic Incentives (feed-in-tariff) with Carbon Market Mechanisms and NAMA to Deliver Renewable Energy at Scale. Presentation at IETA side event, 5 Dec 2011, UNFCCC COP 17. Durban.

10

ANNEX I MODEL CASH FLOW FOR HPP

In order to evaluate the potential impact of a Carbon REFIT, this section presents a model cash flow for a hydro power plant. This model builds on the Levelized Electricity Cost model of the World Bank and was adopted to a hydro power plant of 50MW installed capacity. The discount rate was determined at 12.88%, based on the UNFCCC benchmarks for energy projects in the SAPP region, please refer to Annex III. The electricity price was estimated at 2.5 USDc/kWh and shall reflect the revenues that an IPP can realize under a PPA. Table 7 below presents the basic input parameters. Table 7: Hydro Power Plant Input Parameters Item Installed Capacity De-Rating by Use Project's Own Electricity Demand Net Effective Capacity Load Factor Net Electricity Generation Total Investment Non-Fuel Variable Cost Fixed OM Cost Plant Life Discount rate Electricity Price Grid Emission Factor Price of Emission Reduction Carbon Revenue Amortization Unit MW in % in % MW GWh/yr Million USD USD/MWh Million USD/yr Years in % USDc/kWh tCO2/MWh USD/tCO2 USDc/kWh Million USD/yr Project Case 50.00 0.40% 0.30% 49.65 40.00% 173.97 30.00 0.11 0.12 50.00 12.88% 2.25 0.92 10.00 0.92 0.60

Profit Tax in % 0.20 Calculated based on the Levelized Electricity Generating Cost Model of the World Bank included in Islamic Republic of Iran - Power Sector Note, World Bank, 2006, Annex 5.

11

The below table shows the basic operating parameters of the model hydro power plant ranging from investment costs up to the potential revenues from a Carbon REFIT. These revenues and costs are presented from year 1 to year 50 (i.e. the end of the plant life time). Table 8: Hydro Power Plant - Basic Operating Parameter Item
Investment Net Electricity Generation Non-Fuel Variable Cost Fixed OM Cost Total Annual Costs Amortization Electicity Revenues Emission Reductions Carbon Revenues

Unit\Yea r
USD/yr GWh/yr USD/yr USD/yr USD/yr USD/yr USD/yr tCO2/yr USD/yr

1
15,000,000 121,000 15,121,000 - -

2
15,000,000 121,000 15,121,000 - -

3
174 19,137 121,000 140,311 600,000 3,914,406 159,638 1,596,382

4
- 174 19,137 121,000 140,311 600,000 3,914,406 159,638 1,596,382

5
- 174 19,137 121,000 140,311 600,000 3,914,406 159,638 1,596,382

- 174 19,137 121,000 140,311 600,000 3,914,406 159,638 1,596,382

50
- 174 19,137 121,000 140,311 600,000 3,914,406 159,638 1,596,382

Based on the above operating parameter, the below table presents the cash flow of the model hydro power plant. Amortization, as determined in Table 4, was added back to the cash flow. The results are presented twice, as Net Profit with Carbon Revenues and Net Profit w/o Carbon Revenues. Table 9: Hydro Power Plant - Cash Flow Calculation
Electicity Revenues Carbon Revenues Total Annual Costs Amortization Gross Profit Profit tax Net Profit with Carbon Revenues Net Profit w/o Carbon Revenues USD/yr USD/yr USD/yr USD/yr USD/yr USD/yr USD/yr USD/yr - - 15,121,000 - 15,121,000 15,121,000 15,121,000 - - 15,121,000 - 15,121,000 15,121,000 15,121,000 3,914,406 1,596,382 140,311 600,000.00 5,970,477 1,194,095 4,776,381 3,499,276 3,914,406 1,596,382 140,311 600,000.00 5,970,477 1,194,095 4,776,381 3,499,276 3,914,406 1,596,382 140,311 600,000.00 5,970,477 1,194,095 4,776,381 3,499,276 3,914,406 1,596,382 140,311 600,000.00 5,970,477 1,194,095 4,776,381 3,499,276 3,914,406 1,596,382 140,311 600,000.00 5,970,477 1,194,095 4,776,381 3,499,276

Based on above cash flow, it is possible to determine the financial attractiveness of the hydro power plant. The financial attractiveness is expressed through the Internal Rate of Return (IRR) and the Net Present Value (NPV). Both, IRR and NPV are determined for the scenario with- and without carbon revenues. The findings of the financial evaluation are presented in below table. Table 10: Hydro Power Plant - Financial Evaluation
IRR w/o Carbon Revenues NPV w/o Carbon Revenues in % in USD 10.90% IRR with Carbon Revenues -3,995,979 NPV with Carbon Revenues in % in USD 15.70% 3,766,217

12

ANNEX II SAPP CAPACITY ADDITIONS

Table 11: SAPP Capacity Additions
No. 1 2 3 4 5 6 7 8 9 Country Angola Angola Angola Angola Botswana Botswana Botswana DRC DRC Mambas Gove rehabilitation Cambambe II Cambambe II Orapa Morupule B Expansion (Phase1) Mmamabula (MDDP) Inga 1 Rehabilitation Nseke Inga 1 Rehabilitation Inga 2 Rehabilitation Nzilo Busanga Inga 3 Lesotho Wind Muela II Kapichira Songwe Lower Fufu Ngana Mpatamanga Moamba Moatize Benga Moatize Benga Moamba HCB North Bank Mphanda Nkuwa (Phase I) Anixas Ruacana Wind Orange River Kudu Baynes New Lubhuku Magududza Komati Eskom Co-generation Komati OCGT IPP Project Name Capacity [MW] 25 60 260 260 90 600 300 15 60 110 320 25 240 4320 25 73 64 150 100 300 310 150 300 300 300 300 150 1245 1500 22,5 83 60 43 800 500 300 140 430 100 288 1050 Expected Commissioning Date 2011 2011 2013 2014 2011 2012 2015 2011 2011 2012 2012 2013 2016 2018 2012 2014 2013 2014 2015 2016 2018 2013 2014 2014 2015 2015 2015 2017 2017 2011 2012 2013 2013 2015 2018 2015 2020 2011 2011 2012 2013

10 DRC 11 DRC 12 DRC 13 DRC 14 DRC 15 Lesotho 16 Lesotho 17 Malawi 18 Malawi 19 Malawi 20 Malawi 21 Malawi 22 Mozambique 23 Mozambique 24 Mozambique 25 Mozambique 26 Mozambique 27 Mozambique 28 Mozambique 29 Mozambique 30 Namibia 31 Namibia 32 Namibia 33 Namibia 34 Namibia 35 Namibia 36 Swaziland 37 Swaziland 38 South Africa 39 South Africa 40 South Africa 41 South Africa

13

42 South Africa 43 South Africa 44 South Africa 45 South Africa 46 South Africa 47 South Africa 48 South Africa 49 South Africa 50 South Africa 51 South Africa 52 South Africa 53 South Africa 54 South Africa 55 South Africa 56 South Africa 57 South Africa 58 Tanzania 59 Tanzania 60 Tanzania 61 Tanzania 62 Tanzania 63 Tanzania 64 Tanzania 65 Tanzania 66 Tanzania 67 Tanzania 68 Tanzania 69 Zimbabwe 70 Zimbabwe 71 Zimbabwe 72 Zimbabwe 73 Zimbabwe 74 Zimbabwe 75 Zimbabwe 76 Zimbabwe 77 Zimbabwe 78 Zimbabwe 79 Zimbabwe 80 Zambia 81 Zambia 82 Zambia 83 Zambia 84 Zambia 85 Zambia 86 Zambia

OCGT IPP Ingula Pumped Storage Eskom Solar Medupi Ingula Pumped Storage Kusile Medupi Kusile Medupi Eskom Coal Kusile Medupi Eskom Coal Kusile Eskom Coal Eskom Coal Singida Wind Sao Hill Co-generation Ubongo Mwanza Kiwira Mnazi Bay Kiwira Kinyerezi Mchuchuma Ngaka Ruhudji Hwange 1& 2 Rehabilitation Small Thermals Rehabilitation Chisumbanje Chisumbanje Kariba South Extension Hwange 7 Hwange 8 Lupane Lupane Gokwe North Batoka Lunsemfwa Hydro Kariba North Bank Extension Itezhi-Tezhi Kabompo LHPC Kalungwishi Kafue Gorge Lower

800 100 100 722 999 1446 1444 723 722 600 1446 722 1200 722 600 1200 50 10 100 60 200 300 200 240 600 400 358 140 105 20 20 300 300 300 150 150 1400 800 6 360 120 34 160 220 600

2013 2013 2013 2014 2014 2015 2015 2016 2016 2016 2017 2017 2017 2018 2018 2019 2011 2011 2012 2012 2014 2014 2014 2014 2015 2016 2017 2011 2011 2011 2013 2015 2016 2017 2017 2018 2018 2020 2012 2013 2014 2015 2016 2016 2017

Source: SAPP Power Pool provided by SAPP CC

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ANNEX III FINANCIAL BENCHMARKS FOR ENERGY PROJECTS IN THE SAPP REGION

Table 12: UNFCCC IRR Benchmarks for Energy Projects

No. Country 1 Botswana 2 DRC 3 Lesotho 4 Mozambique 5 Namibia 6 RSA 7 Swaziland 8 Zambia 9 Zimbabwe Average Benchmark (in %) 10.80% 14.50% N.A. 14.50% 12.90% 10.90% 12.90% 13.25% 13.25% 12.88%

Source: CDM EB62, Annex 5, Guidelines for the Assessment of Investment Analysis, Appendix 'Default values for the expected return on equity', 8

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