A CRADLE TO GRAVE APPROACH TO LOWEST COST OF POWER GENERATION FOR IPP’S IN

SOUTHERN AFRICA

BY

MIKE BLENKINSOP

NET ENERGY (PTY) LTD

29 JULY 2014

WHY IS CRADLE TO GRAVE ANALYSIS IMPORTANT

• LANDSCAPE OF POWER GENERATION IN SOUTHERN AFRICA HAS CHANGED WHERE PARTIAL OR FULL INTEGRATION OF COAL SUPPLY AND USE IS INCORPORATED INTO ONE PROJECT

• IT IS THE ONLY WAY TO DETERMINE THE TRUE AND SUSTAINABLE COST OF FUTURE POWER AND UNDERSTAND AND MITIGATE RISKS

• THE CHEAPEST COAL DOES NOT NECCESARILY MEAN THE CHEAPEST POWER

• RELATIVE COSTS OF EACH ASPECT OF THE VALUE CHAIN NEED TO BE SEEN IN CONTEXT

• IT TENDS TO REMOVE EGOS AND PARADIGMS FROM THE PROCESS

WHERE ARE THE GAMECHANGERS

THE IPP ENVIRONMENT AND THIS: - THE AIR QUALITY ACT

EMISSIONS LIMITS

South

Africa:

mg/Nm3

@ 10 %

O2 dry

basis

mg/Nm3

@ actual

O2 dry

basis

kg/hr1 kg/GJ1 ppmvd1

SO2 500 727 416 0.33 255

NOx 750 1,091 624 0.49 533

PM 50 72 41 0.03 0.1

IT IS A LITTLE DIFFERENT IN SA THAN THE WORLD BANK GUIDELINES

WHERE ARE THE GAMECHANGERS

THE IPP ENVIRONMENT

REF:- IFC Environmental Health and Safety Guidelines, Thermal Power Plants

THERMAL COAL POWER PLANTS

ASSUMING THAT THERMAL COAL FIRED STEAM DRIVEN POWER PLANTS ARE USED, • COAL QUALITY HAS A SIGNIFICANT IMPACT ON POWER PLANT

TECHNOLOGY SELECTION

REF:- EGBUNA, 2013

THERMAL COAL POWER PLANTS

ASSUMING THAT THERMAL COAL FIRED STEAM DRIVEN POWER PLANTS ARE USED, • BOILER TECHNOLOGY CHOICE WILL DRIVE MUCH OF WHAT SHOULD

HAPPEN ON THE MINE

• MINE SIDE CAN DO LITTLE ABOUT NOx ABATEMENT, BOILER TECHNOLOGY CAN

• MINE SIDE CAN SIGNIFICANTLY INFLUENCE SOx MITIGATION TECHNOLOGY CHOICE AND COSTS

• FOR IPP INDUSTRY, AS OF RECENTLY COAL PROCESSING IS NOW ALMOST SOLELY FOCUSSED UPON SULPHUR REDUCTION NOT GRADE CONTROL – THE MINING INDUSTRY NEEDS TO WAKE UP TO THIS

• GRADE IMPROVEMENT IS AN ADDED BONUS

EMISSION CONTROL - NOx

MINE SIDE CAN DO LITTLE ABOUT NOx ABATEMENT, BOILER TECHNOLOGY CAN

• PC TECHNOLOGY – NOx EMISSIONS CAN BE RELATIVELY COST EFFECTIVELY BE MANAGED ON NEW PLANT TO A CERTAIN LEVEL THEREAFTER EXPENSIVE TECHNOLOGIES ARE REQUIRED, (SNCR, SCR)

• PRIMARY NOx ABATEMENT TECHNOLOGIES ARE REGARDED AS STANDARD IN NEW PLANT AND CAN MITIGATE BETWEEN 45% AND 70% OF NOx COMPARED WITH OLDER TECHNOLOGY . THIS IS SUFFICIENT TO MEET NEW SA REGULATIONS

• CFBC TECHNOLOGY GENERATES VERY LITTLE NOx ANYWAY, APPROX 40% OF PC MITIGATED VALUES

REF:- IEA, 2009

EMISSION CONTROL - SOx

BOILER TECHNOLOGY SELECTION

• PC TECHNOLOGY – SOx EMISSIONS CAN ONLY BE CONTROLLED BY POST PROCESS FGD WHICH CAN MITIGATE IN EXCESS OF 95% OF SOx

• THIS ADDS 10% - 15% TO THE CAPITAL COST OF A POWER PLANT

• FGD PLANT ALSO USES A SIGNIFICANT AMOUNT OF WATER AND USES APPROX 1% - 1.5% AUXILLIARY POWER

• THE Ca:S RATIO IS APPROX 1.05 TIMES STOCHIOMETRIC VALUE

IN A TYPICAL IPP SCALE PROJECT FGD CAPITAL COST IS GREATER THAN THE ENTIRE MINE AND ASSOCIATED INFRASTRUCTURE, WATER CONSUMPTION IS APPROX FOUR TIMES THAT OF A MATCHED WASHPLANT AND AUXILLIARY POWER CONSUMPTION IS FOUR TIMES THAT OF A COAL PROCESSING PLANT

EMISSION CONTROL - SOx

BOILER TECHNOLOGY SELECTION

• CFBC TECHNOLOGY – SOx EMISSIONS CAN BE CONTROLLED BY IN PROCESS SORBENT INJECTION, WHICH CAN MITIGATE IN EXCESS OF 85% OF SOx

• THERE IS NO ADDITIONAL CAPITAL COST FOR THIS, BUT THE BOILER IS TYPICALLY 15% MORE EXPENSIVE THAN A PC BOILER WITHOUT MITIGATION TECHNOLOGY, (BOILER NOT POWER PLANT)

• THE Ca:S RATIO IS APPROX 2 - 3 TIMES STOCHIOMETRIC VALUE DEPENDING ON REQUIREMENT

IN A TYPICAL IPP SCALE PROJECT NO ADDITIONAL FGD IS REQUIRED TO MEET EMISSION STANDARDS

COAL QUALITY

REF:- EGBUNA, 2013

ECONOMIES OF SCALE

REF:- EPRI, 2008

COST COMPARISONS

THIS STUDY REFERRED TO LARGE UNITS, (300mwE AND ABOVE) AND A MIXTURE OF OVERNIGHT AND TOTAL CAPITAL COSTS

IN THE SOUTHERN AFRICAN CONTEXT, EPC ONLY CAPITAL COSTS FOR 15OMWe CFBC PLANT IN THE LAST 5 YEARS HAVE RANGED FROM $1,500/kWe – $2,300KWe INSTALLED FOR EASTERN AND WESTERN SOURCED PLANT. THE SAME SIZE PC PLANT HAS A HIGHER CAPITAL COST

REF:- IEA, 2013

SO WHY IS THE MINE IMPORTANT

• COAL QUALITY AFFECTS PERFORMANCE

• COAL PROCESSING OFFERS OPTIONS TO REDUCE PYRITIC SULPHUR

• WHERE ORGANIC SULPHUR IS PRESENT THE REVERSE OCCURS BECAUSE IT IS ASSOCIATED WITH THE ORGANIC MATRIX

• SEVERAL IMPROVEMENTS CAN BE MADE TO COAL QUALITY BUT AT A COST IS IT JUSTIFIED?

• PROCESSING COAL INCREASES MINING COSTS

• THE INFLUENCE OF THE MINE SIDE OPERATIONS GOES FAR BEYOND THE COST OF COAL, IT AFFECTS CAPEX, OPEX AND OTHER MATERIALS COSTS ON THE POWER PLANT AS WELL AS POWER PLANT EFFICIENCY

AN INTEGRATED CRADLE TO GRAVE ANALYSIS NEEDS TO BE DONE WITH BOTH PARTIES TO UNLOCK THE SYNERGIES BETWEEN OPERATIONS

HYPOTHETICAL BUT REALISTIC SCENARIO SITUATION – OPENCAST TIED MINE FOR AN IPP OF 300MWe

STRIP RATIO = 2,

RAW CV = 15.5MJ/KG

RAW SULPHUR CONTENT 1.9%

PROCESS OPTIONS

Raw Coal Air Plant PARTIAL DMS WASH FULL DMS WASH

Mine Capex R 245 050 000 R 320 450 000 R 320 450 000 R 377 000 000

Plant Capex R 40 000 000 R 72 000 000 R 130 000 000 R 195 000 000

R/Rom Ton (Opex) R 89.11 R 89.11 R 89.11 R 89.11

Yield 100.0% 78.0% 73.0% 55.0%

R/Product Ton R 103.06 R 154.81 R 188.98 R 264.66

Product CV 15.50 17.20 18.80 20.50

Product S 1.90% 1.00% 0.89% 0.70%

R/GJ R 6.65 R 9.00 R 10.05 R 12.91

HYPOTHETICAL BUT REALISTIC SCENARIO

POWER PLANT ECONOMIC ASSUMPTIONS

CFBC BASE EPC CAPEX - $1,870/KW PC BASE EPC CAPEX (FGD) - $2,037/KW

LIMESTONE COST – R450/TON

FIXED OPEX :

CFBC – R76.53/MWHR PC – R77.79

VARIABLE OPEX (EXCL FUEL, OIL, SORBENT AND WATER)

CFBC AND PC – 3.6% OF CAPITAL

INTEREST RATE ON DEBT 8%

DEBT PERIOD 20 YEARS

EPC CAPEX AS A FRACTION OF PROJECT CAPEX

CFBC – 65% PC – 66%

BOTH ARE DRY COOLED

HYPOTHETICAL BUT REALISTIC SCENARIO

POWER PLANT ECONOMIC MODEL OUTPUTS

INDICATIVE COST OF GENERATION, (PRE TAX, 80% DEBT, NO INVESTOR IRR OF 11%)

THIS IS JUST FOR A HIGH LEVEL REVIEW OF TECHNOLOGY CHOICE

Raw Coal CFBC

Air Plant CFBC

PARTIAL DMS CFBC

FULL DMS CFBC

PARTIAL DMS PC

FULL DMS PC

COE (R/MWHR) R 1 062.24 R 936.88 R 903.39 R 904.61 R 946.89 R 948.98

PP CAPITAL 62.23% 59.95% 59.57% 57.76% 61.27% 59.06%

MINE CAPITAL 2.93% 3.68% 4.31% 4.98% 4.01% 4.66%

FUEL 7.32% 11.09% 12.64% 16.41% 11.96% 15.45%

SORBENT 5.43% 3.62% 2.26% 0.83% 1.02% 0.37%

NEEDS PPFGD NEEDS PPFGD NEEDS PPFGD

HYPOTHETICAL BUT REALISTIC SCENARIO

POWER PLANT ECONOMIC MODEL OUTPUTS

THE PREVIOUS OUTPUTS WERE BASED UPON A SIMPLE HIGH LEVEL ASSESMENT USED FOR EMISSION MODELLING AND COMPARATIVE PURPOSES ONLY

IF THESE FIGURES ARE PUT INTO A FULL REAL TERM DCF MODEL, WHERE ENTERPRISE IRR IS SET AT 11%, IT IS UNLIKELY THAT AN IPP CAN GENERATE POWER AT UNDER R1.05/KWHR ON AN LCOE BASIS WITH THESE ASSUMPTIONS

IN A NOMINAL TERM DCF MODEL, BASED UPON THESE ASSUMPTIONS, THE FIRST DAY COST, (REQUIRED IN THE DOE COAL BASED POWER GENERATING MODEL ) IS NOT LIKELY TO BE UNDER R0.88C/KWHR

THEREFORE EITHER LOWER CAPITAL PLANT, LOWER IRR, LOWER INTEREST RATES ARE REQUIRED TO ACHIEVE DOE GOAL OF AROUND R0.82/KWHR

IS THIS REALISTIC FOR INVESTORS? – TIME WILL TELL!!!

THANK YOU FOR YOUR ATTENTION IF I HAD IT