Grand Inga Treaty

4 November 2014

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Introduction

• Purpose of the presentation

• Background of the Grand Inga Project

• The strategic importance of the Inga Project to RSA and

Africa

• The tenets of the draft Grand Inga Treaty

• Conclusion

Background on the Grand Inga Project• Westcor project terminated and certain lessons learnt from the failure

• Win-win essential otherwise risk another termination• Meeting internal DRC energy requirements must be integral to the approach• “transit countries” come into serious play, otherwise no evacuation corridor

• The Grand Inga MOU signed on 11 /11/ 2011 and provisions paved the way for the development of the Grand Inga draft treaty

• Grand Inga Project phases are:– Phase 1 Inga 3 Low Head 4755 MW;– Phase 2 Inga 3 High Head 3030 MW;– Phase 3 Inga 4 about 7180 4200 MW;– Phase 4 Inga 5 about 6970 MW;– Phase 5 Inga 6 about 6680 MW;– Phase 6 Inga 7 about 6700 MW; and – Phase 7 Inga 8 about 6740 MW.

• Interdepartmental team with DOE, NT, EDD, DIRCO, ESKOM, DEA, DOJCD, DTI, DPE and SSA

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Description of the Grand Inga project The Grand Inga Project is a multi-phased hydro power station to be built on the Congo

River on the Inga site, with potential to generate approximately 40 000MW. The Inga dams are located in the western DRC 50km upstream of the mouth of the

Congo River and about 225km south west of Kinshasa. Associated with the Grand Inga are transmission lines to evacuate power from the

generators to the markets in the DRC and to export markets. It is foreseen that a new transmission line to South Africa will be associated with the first phase of the Grand Inga project.

The transmission line will probably go through Zambia and Zimbabwe and Botswana.

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Strategic considerations

2030 Net (MW)

• 2011 SAPP dominate by SA support based in Mpumalaga

• Uncertainty of large new SAPP project implementation

• Significant reversal of power flow in SA over time.

• Reduced significance of Mpumalanga• Large excess capacity in the Cape and Limpopo

Strategic considerations

• RSA negotiating for

interconnection on two fronts: East

and West

• Three key corridors Central, East &

West spanning DRC, Zambia,

Zimbabwe and Mozambique –

multilateral nature of the project

should not be missed

• Inga on the West (~ 12 000MW) and

North Mozambique on the East (~

10 000MW) are key generation

centres

• Important to diversify the risk if

RSA to depend on these cross-

border sources

Generation + Transmission

corridors ownership and

domination?

Eskom/RSA Inc participation?

Strategic importance of the Grand Inga Project

• Potential to generate 40 000 MW of relatively cheap, clean energy, of

which RSA has potentially secured rights to import 12 000MW

• Contribution to the universal energy access agenda and alleviation of

energy poverty on the African continent

• Regional economic development and integration within SADC with

potential to stabilize DRC, a country strategic for African development

• For South Africa - reduction of the carbon footprint, diversification of

energy risk, energy security, positive tariff impact – in line with IRP.

• COP 17 legacy project.

Tenets of the Draft Grand Inga Treaty

• The purpose of the Treaty is to develop an enabling framework,

linking the DRC and South Africa into the Project, and allowing for

the two countries to jointly explore economically feasible options

for the development of the Project.

• Provides for the establishment of certain institutional

arrangements (INGA Development Authority (ADEPI), Joint

Ministerial Committee, Joint Permanent Technical Committee) to

facilitate the development, operation and management of the

Project in the DRC, through concessionaires.

Governance of the Project - JPTC

• The JPTC shall be established by the JMC. The composition of the

JPTC shall include RSA representatives and the DRC shall be

represented by the Agency.

• The Agency representatives will interact with the JPTC and work

with the JPTC to prepare project documentation, structuring issues

as well as to conduct feasibility studies, financing arrangements,

generation, transportation and delivery of generated power.

• The JPTC will report to the JMC which is responsible for providing

guidance on the project development where the RSA is involved.

• JPTC makes recommendations to the Agency where there is

disagreement, the matter will be tabled to the JMC for resolution.

Governance of the project - JMC

• JMC shall consist of Ministers responsible for electricity from both

countries.

• The JMC shall ensure that implementation of the Project is

accordance with the provisions of the Treaty

• Consider reports and matters from the JPTC

• Shall meet at least twice a year or when necessary.

• Shall make decision by consensus.

SECRET 10

Commercial aspects of the Treaty

• In the Treaty, if certain conditions are met, RSA commits to buy power generated from Phase 1 and subsequent phases.

• Phase 1 is associated with the following:– costs due to the development of the Common Works; – Costs due to the transmission line to Kolwezi (the Delivery Point); – investment by South Africa in the construction of the transmission

infrastructure from the Delivery Point to South Africa,– the commitment to off-take 2500 MW by RSA and 2300 MW by

DRC and assistance in the mobilisation of funding.• In return DRC agreed to give RSA the Right of First Refusal (ROFR) for

both equity and off-take in respect of any and all future Phases of the Project or any related hydroelectric development of the Congo River in and around the Inga complex, if South Africa proceeds with Phase 1 (“lock-in”)

SECRET 11

The Right of first Refusal Off- Take

• RoFR (Off-Take) provides that South Africa:-

– is guaranteed a minimum of (20%) of generated power equal to 9 540 MW

and a maximum of 13 060 MW; anything beyond this could still be negotiated.

• It is anticipated that the economics of the project will be more

favourable (due to common works completed and project

significantly de-risked) as more phases are added and generation

cost per megawatt will decline – critical that RSA has this RoFR.

• RSA will be guaranteed access to cheaper and cleaner power if

future project phases go ahead.

SECRET 12

Conditions for securing the ROFR Off Take

• RSA must commit to take 2500 MW from Phase 1 of the Project if the

feasibility and commercial terms are acceptable

• US$ 10 million is payable into an escrow account by RSA as commitment fee

– the governance protocol of the escrow account is to be developed in terms of

the Treaty under a separate protocol.

• RSA will be charged the lowest possible tariff and no other off-taker can

receive better terms than RSA

• ROFR shall take precedence over any other possible 3rd party agreement or

arrangement to be entered into by the DRC

• May negotiate additional volumes of energy

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RoFR - EQUITY

• RoFR (Equity) provides for the following for South African entities

(public or private):-

– DRC to ensure that for each phase of the project, the

developer company will reserve at least 15 per cent of the

available equity to RSA, and RSA shall be the first to be offered

such share capital; and

• The mechanism, timetable and procedures to be followed on the

allocation and purchase of the equity shall be negotiated in a

separate protocol.

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Tariff Setting Principles

Tariff setting shall be subject to negotiation and based on the

following principles:-

– Covers the cost, the return and fees imposed by the DRC

– Takes into account the price of energy that could be supplied by

alternative projects

In the RSA case the alternative price is the cost of the generation

from coal.

A tariff setting protocol will be negotiated.

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Challenges: time sensitivity of the project

• The ADEPI Agency will take time to be established and it has been

proposed that an interim structure needs to be created and mandated

to execute the responsibilities of ADEPI

• The Treaty might also take long to ratify by respective Parliaments

and it has been proposed that an Electricity Agreement be developed

and within it provide for the operation of working groups that will

advance the project.

• Transmission line “transit countries”- The feasibility study did not

scope the transmission line from the delivery point to RSA. There is

urgent need for engagement of Zambia, Zimbabwe to initiate the

negotiation on the transmission lines.

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Challenges Continued Designated delivery point- at Kolwezi which is about 150 km from the

DRC/Zambia border. RSA will be responsible for the 150 km line

– DRC to either grant a concession to enable RSA to construct and operate that

protion of the line to the Zambian border, or

– To commit to develop it themselves.

Any investment in a foreign country poses political and security risks

Political risk- the DRC has not experienced political stability for years.

– RSA and other international partners have been assisting to stabilise the country

Security risk- DRC has been unstable for years especially in the North

Eastern Region which is more than 2000km from the Inga site.

– Notwithstanding, the DRC has been trading with SADC countries for years

especially during civil war without interruption of transmission.

SECRET 17

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Sign Grand Inga Treaty

Complete Tx Integration Concept – Eskom and utilities

Engage DRC and lenders on the bankability of concept based on Tx proposal: World Bank, EIB, AfDB, etc

Negotiate Tx scheme with Zim, Zam –elevate from utilities to political (Treaties)

Start offtake negotiations with preferred consortium identified by DRC/ alternatively provide offtake conditions (secure PFMA and political mandate)

Enter into supporting agreements with Zim, Zam on Tx and offtake

Conclude offtake to reach financial close

August 2014 Nov 2014 Jan 2015 Mar 2015 Oct 2016

Next Steps

Way forward

• Treaty to be introduced to Parliament for ratification.

• Negotiations on the outstanding protocols on tariff setting,

management and operationalization of the Right of First Refusal,

terms of management of the escrow account.

• The negotiating with potential transit countries and the

commissioning of a feasibility study on transmission lines on critical

path