#1ср Palladium MAKE IT POSSIBLE The Electrification of Papua New Guinea, an Investor Perspective Cassian Drew Managing Partner, Asia Pacific August 2019#2Palladium is a global impact firm, working to link social progress and commercial growth. For the past 50 years, we've been helping our clients to see the world as interconnected - by formulating strategies, building partnerships, and implementing programs that have a lasting social and financial impact. We simply call this "Positive Impact”. We work with corporations, governments, investors, communities, and civil society. With a global network operating in over 90 countries, Palladium is in the business of making the world a better place.#3Our global footprint includes deep local expertise in more than 90 countries... NEW YORK WASHINGTON 3K Employees LONDON RIYADH DUBAI ABUJA NAIROBI JAKARTA 90 96 Countries in Current Operation 75 Offices Worldwide 11 BRISBANE SYDNEY CANBERRA Hub Offices Worldwide 8 cp 3#4Our firm combines five capabilities required to address the world's most pressing challenges Strategy Developing and executing strategies that are both $ sustainable and profitable. Today's discussion Impact Investment Deploying capital to achieve social impact with a financial return. Program Management Implementing complex projects in any environment. Procurement & Logistics Providing supplies and facilities to the most extreme environments on the planet. Infrastructure Delivery Construction of utilities, marine, public facilities and specialist structures 4#5Our recent impact investments have provided financing in the off-grid electrification and agri business sectors Palladium impact investment EXAMPLES PEG AWIA KANIA POWER FOR THE PEOPLE Business model Palladium Investment Terms FFORDABLE ENERGY FOR THOSE WHO NEED IT Distributor of solar home systems (SHS) on credit to households in West Africa • Loan agreement to finance SHS' purchase to expand operations in Ghana and CDI ° 3 Year term Security on the Receivables 4.3k tons of CO2 CO2 and black carbon emissions avoided Social Impact - Baseline Data 305 full-time employees 15k Solar Home Systems Sold Jan-Dec 2017 MM 34k rural customers provided with access to energy -US$ 5M savings from customers (assuming $12 saved a month per system) Company data on job creation and gender lens 44% female full- time employees 2 women in senior management roles (18%) 20k rural customers provided with free insurance for hospitalization 2 women on the board (29%) Naasakle Business model . Woman-led business that manufactures shea butter, bridging the gap between ~5,000 rural women nut pickers in Northern Ghana and global shea butter demand Loan agreement to finance ~70% fixed assets, (to top up in follow-on funding rounds) Palladium Investment Terms • 3 years term • Floating security on assets to be purchased with funding Social Impact - Theory of Change Causal impact pathway Employees 12 ST Increased use of health services Increased income Nut pickers Company Increased household well-being More formal jobs & people accessing national benefits (i.e pension) Processors can afford health related costs Processors produce more quality Shea butter, with potential to receive bonuses. Nut pickers sell more nuts at a higher price without prejudice to the environment Women use group for education and health) relate costs Company increases profit and reinvests it Processors register their dependants Processors increase productivity and quality of nuts processed Nut pickers increase quality of nuts collected Women organise themselves in a Susu group Company can sell more quality products Employees are aware of the opportunity to insure themselves and 5 dependants Processors increase practical knowledge & financial literacy Company provides health Company provides training insurance to employees Nut pickers reduce risks of spoilage & waste of quality nuts Company provides warehousing & free transportation, and training on how to collect quality nuts Nut pickers increase practical knowledge on BD/cooperative development Company provides training to nut pickers Company receives quality supplies and staff can process it efficiently Company 5#6Impact investment seeks to address financing needs as distinct from project funding; it does not create "new" money Project selection approach ILLUSTRATIVE -- No one-size-fits-all ii = Evaluated on funding === ii Financing arrangements Each project is unique and needs to be evaluated in the context of the local political, economic, social, technological, geographic, and environmental factors Funding refers to how the project is paid for over time; project funding needs to be evaluated to identify the cost and benefits, as well as sources of revenue Financing refers to the timing mis-match between upfront costs and future revenues; financing needs to be repaid. Procurement options evaluated to obtain value for money. What conditions will need to exist to ensure the project will be successful within the local context? Does the opportunity stand on it's own merits and deliver an economic and social impact? Is debt or a PPP the most appropriate instrument? How will the capital stack be structured? CO 6#7ср Palladium MAKE IT POSSIBLE Funding PNG's Electrification: Vanimo case study O Palladium 2015 7#8Outside of the Port Moresby, Ramu and Gazelle electricity grids, PNG's power is primarily provided through isolated systems Substantial power generation and population centres Lae NOT EXHAUSTIVE PNG's topography poses challenges for national grids Port Moresby Source: PNG Power Fifteen-Year Power Development Plan 2014-2028, The World Bank 2014; Google Earth; Palladium analysis Power station Sub station Connection Populated area 8#9There are significant challenges to be considered for investment in electricity infrastructure Indicative constraints for PNG electrification 1 Population Distribution 2 Geography 3 4 High cost of grid extension Low tariffs NOT EXHAUSTIVE 80% of the population of Papua New Guinea live in rural areas, often in small and remote villages of less than 2,000 people that are unserved by city or provincial grids The mountainous terrain of PNG poses particular difficulties for infrastructure projects, with transmission line costs substantially higher than in flat regions; a problem further compounded by the limited road network High cost structure for PPL to maintain and extend grid networks In an effort to increase affordability for end-users PNG Power has not raised tariffs from the 2013 rates 5 60 Uneconomical regional generation Low consumption Provincial generation operates on diesel at a unit cost of $0.41 / kWh which retails at $0.15 kWh; cities are subsidising towns Low power LED and efficient appliances keep peri-urban consumption low (e.g. led lights, low power fridge, fans and mobile chargers consume 500 kWh pa / household) Source: Palladium 9#10Electrification solutions can be fit to population density and consumption rates Local Populations by Town (2019 est) Port Moresby 413,428 300kWh/annum / person Grid Lae 169,100 Wewak 42,947 130kWh/annum / person Madang 40,842 Mount Hagen 33,795 Kimbe 26,027 Consumption Goroka 25,921 Population Appliances kWh Rural Daru 17,192 6,602,590 LED lights, mobile phone 65 Vanimo 16,300 Peri-urban Urban Mini-grid 1,068,119 LED lights, small fridge, fan, mobile phon 582,528 LED lights, TV, fridge, fans, phone 130 300 Popondetta 14,306 Weighted avg 90 Alotau 13,462 Kiunga 12,468 Kundiawa 12,300 Tabubil 11,661 Mendi 11,339 Kavieng 11,289 Lorengau 10,085 Off-grid Bulolo 8,050 +56 villages Sogeri 494 Source: PNG Census 2011; Citypopulation.de; Palladium analysis Minimum viable scale 6,400 65kWh/annum / person 10#11Vanimo is located on the northern coast of New Guinea with an estimated population of 16,300 2019 Google Source: Google; Oil Search; Palladium analysis 2015 GORE ~16,300 residents ~3,500 households Vanimo Google 11#12500 out of 3,500 households are connected to the local grid with industry and public service buildings among these 00 00.00 RAMS METE 80 Source: Oil Search 8 80 988 00 00 000 REWI SETTLEMENT 00 888 00 8 12#13Vanimo is well situated for harnessing solar power, receiving strong solar irradiation with little season variance Solar: Vanimo's solar irradiation for electricity generation Annual solar irradiation for Papua New Guinea Vanimo 14 INDICATIVE Monthly variance in sunshine hours Port Moresby 12 10 8 6 4 2 ■ Solar irradiation is the amount of power that the Earth receives from the sun ☐ ■ Vanimo receives a moderate to high level of solar irradiation receiving 1,800kWhm-2/ per annum Source: The World Bank ESMAP Solar Resource Map; Honsberg & Bowden J F M A M J J A S O N D 0 degrees 15 degrees 30 degrees 60 degrees Being less than 3 south of the equator, Vanimo experiences little seasonal variation in annual sunshine ▪ This allows for greater efficiency and reduced costs when balancing seasonal supply with demand 13#14However we have explored a range of generation solutions for Vanimo including use of timber off-cuts for biomass Relative comparison of generation options SS +$ $ X = Biomass Solar Batteries INDICATIVE Hydroelectricity Dam Mid-high construction costs Mid-high construction costs Moderate construction costs High maintenance costs Moderate maintenance costs Low maintenance costs High maintenance Low maintenance Low maintenance Many local ongoing jobs Few local ongoing jobs Few local ongoing jobs Operates at 90% capacity Operates at 20% capacity Operates at 65% capacity Short construction time Moderate construction time Mid-Long construction time Source: Powering PNG into the Asian Century, ANZ Insight, 2015; Renewable Energy Opportunities and Challenges in the Pacific Islands Region - PNG, IRENA, 2013 14#15600 MWh 400 MWh 200 MWh Year 1 Year 3 Year 5 Productive consumption forms the basis of the Vanimo investment case with consistent demand and growth potential An indicative profile of non-residential energy demand over time Year 7 New local industries include palm oil site as well as the planned coconut site Year 9 Year 11 Year 13 Economic growth for local businesses; for example trade, timber, tourism, oil palm The forestry operation has a 35 year life span with strong and stable demand for exports Year 15 ■Forestry operations ■Palm oil operations ■Local businesses Source: The World Bank Development Indicators, 2015; Papua New Guinea Strategic Plan, 2010-2030; local knowledge; Papua New Guinea Vision 2050; Palladium analysis Year 17 Year 19 Year 21 Year 23 Year 25 15 EXAMPLE#16Residential revenues are driven by consumption and tariff rates; PNG operates a uniform national tariff which is relatively low Benchmark consumption and average energy tariffs, 2018 INDICATIVE Avg Consumption (kWh/annum / person) 11,000 10,071 10,000 9,026 9,000 8,000 7,000 6,000 5,000 99 99 Tariff (US Cents/kWh) 100 60 4,000 3,000 25 25 22 2 19 2,000 15 15 962 1,000 696 60 - 50 40 30 10 51 20 10 90 80 76 70 200 147 90 0 Australia New Zealand Fiji Philippines Vanuatu Solomon Islands Papua New Guinea Source: Worldbank; UNSD; ADB; EC; Palladium analysis 16#17$4.0 We developed a best case scenario as a wholesale supplier to local grid with hydro providing the best levelized cost of energy Comparison of returns on renewable generation options Hydroelectricity 12.0% internal rate of return LCOE (USD/KW) (L 0.05) 0.07 (H 0.10) Biomass 9.7% internal rate of return LCOE (USD/kW) (L 0.08) 0.08 (H 0.15) INDICATIVE Solar with Battery Storage <0% internal rate of return LCOE (USD/KW) (L 0.20+) 0.20 $2.0 $.0 -$2.0 Annual cumulative cashflow (millions) (USD) -$4.0 -$6.0 -$8.0 Year 1 Year 2 Year 3 Source: Palladium Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Solar with Battery Storage Year 10 Year 11 Year 12 Year 13 Year 14 Year 15 Year 16 Year 17 Year 18 ■ Hydro ■Biomass Year 19 Year 20 Year 21 Year 22 Year 23 Year 24 Year 25 17#18Annual cumulative cashflow (millions) (USD) Under the same parameters, taking on grid connection costs and operating as a retail supplier impacts the business case Comparison of returns on renewable generation options $.0 Hydroelectricity <0% internal rate of return LCOE (USD/KW) 0.21 Biomass <0% internal rate of return ■ LCOE (USD/kW) 0.19 INDICATIVE Solar with Battery Storage <0% internal rate of return LCOE (USD/kW) 0.35 -$2.0 -$4.0 -$6.0 -$8.0 -$10.0 -$12.0 Year 1 Source: Palladium Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Solar with Battery Storage Year 10 Year 11 Year 12 Year 13 Year 14 Year 15 Year 16 Year 17 Hydro ■Biomass Year 18 Year 19 Year 20 Year 21 Year 22 Year 23 Year 24 Year 25 18#19As a retail supplier the viability gap for hydro and biomass was US$2.6m and US$2.9m respectively $12.0 $10.0 $8.0 $6.0 NPV NPV Costs Revenue $4.0 $2.0 USD2.6m NPV Costs NPV Revenue USD2.9m NPV Costs NPV Revenue $.0 Hydro Biomass Solar Source: Palladium USD 7.9m 19#20Annual cumulative cashflow (millions) (USD) LCOE (USD/kW) (L 0.05) 0.08 (H 0.10) $3.0 $2.0 Taking a more conservative view of project risk our investment case would be evaluated against a project IRR of 4.6% ... Comparison of returns on renewable generation options Hydroelectricity 4.6% internal rate of return Biomass 4.6% internal rate of return LCOE (USD/kW) (L 0.08) 0.09 (H 0.15) INDICATIVE Solar with Battery Storage <0% internal rate of return LCOE (USD/kW) (L 0.20+) 0.23 $1.0 $.0 -$1.0 -$2.0 -$3.0 -$4.0 -$5.0 -$6.0 -$7.0 -$8.0 Source: Palladium Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 Year 12 Solar with Battery Storage ■ Hydro ■Biomass Year 13 Year 14 Year 15 Year 16 Year 17 Year 18 Year 19 Year 20 Year 21 Year 22 Year 23 Year 24 Year 25 20 20#21at this rate of return the investment would require US$1.3m in external grant funding to be viable for most investors $8.0 $7.0 $6.0 $5.0 $4.0 $3.0 $2.0 $1.0 $.0 Hydro Source: Palladium USD1.3m Biomass USD1.4m Solar USD 6.1 m 21#22To leave you with something to think about: Is impact investing a realistic solution to address the SDG financing gap? $ $502Bn impact investing assets under management across 1,340 organisations $ Average deal size in EM Impact Investing $3.2M ILLUSTRATIVE ONLY EHH|| 156,875 deals (177 per impact investor) are required each year to deploy allocations Funding sac of $2.5 Trillion The investment gap in developing countries is $2.5 trillion per year Con 781,250 deals per year are needed at current deal sizes At a pipeline to deal ratio of 200 to 1, we need to see 2,400 deals per week to fund the SDGs Source: www.giin.org; www.undp.org/content/undp/en/home/blog/2017/7/13/What-kind-of-blender-do-we-need-to-finance-the-SDGs-.html 22 22#23THANK YOU Cassian Drew Managing Partner, Asia Pacific E [email protected] O Palladium 2015#24ср Palladium MAKE IT POSSIBLE Key assumptions O Palladium 2015 24 24#25Assumptions behind our wholesaler model without network connection costs Hydro assumptions • 500kW generation capacity • • 10km transmission line required from river to township at cost of USD240,000 Construction costs of USD2.95 per Watt Ongoing O&M costs of 6% • Township population of 16,300 • Population growth of 3% CAAGR . • • Biomass • • 500kW generation capacity • Construction costs of USD3.95 per Watt • Ongoing O&M costs of 8% Core assumptions Energy ladder climb growth of 2.6% Wholesale rate negotiated in PPA discounted below the $0.15 retail tariff Per capita energy consumption of 130kWh No township grid connection costs required Full town electrification and utilisation with no defaults in payments • Overnight construction 50% equity contribution to project finance Solar (battery storage) assumptions • 1.7MW generation capacity Construction costs of USD3.96 per Watt • O&M costs of 1% • Battery cost reduction of 50% over 10 years and 75% of 20 years 25#26Assumptions behind our retail supplier with network connection costs Hydro assumptions • 500kW generation capacity • • 10km transmission line required from river to township at cost of USD240,000 Construction costs of USD2.95 per Watt Ongoing O&M costs of 6% • Township population of 16,300 • Population growth of 3% CAAGR • Biomass • 500kW generation capacity • Construction costs of USD3.95 per Watt • Ongoing O&M costs of 8% Core assumptions Energy ladder climb growth of 2.6% • Revenue of 0.15USD per kWh . • Per capita energy consumption of 130kWh Connection costs of USD1,800 per household to establish local township grid Full town electrification and utilisation with no defaults in payments • Overnight construction 50% equity contribution to project finance Solar (battery storage) assumptions • 1.7MW generation capacity Construction costs of USD3.96 per Watt • O&M costs of 1% • Battery cost reduction of 50% over 10 years and 75% of 20 years 26#27Assumptions in likely scenario for wholesale supplier, listed where diverging from the best case wholesaler scenario Hydro assumptions . Asset degradation factor increased by 1% • Lead time of four years Biomass Asset degradation factor increased by 1% Solar (battery storage) assumptions Asset degradation factor increased by 1% Lead time of two years Core assumptions • Number of households connected and paying for electricity discounted by 20% • Tariff rate discounted by 20% • A time of two years to build a central grid in the township, with funding provided externally • Lead time of two years 27