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David Nicol
Lereko Sustainability (Pty) Ltd
Tel: +27 21 419 1881
Mobile: +27 83 642 6616
Email: david@lereko.co.za
Modelling and Analysis of Financial Structuring for SWH Projects Page i
DANIDA
Executive summary
Overview
Hot water for domestic requirements in urban areas, can be supplied by solar water heating systems
(SWHs) at a service cost to customers of between 1.2 and 3.5 c/litre (for water supplied at 45oC at the
point of use, usually the tap or shower). This compares favourably with the cost of hot water supplied
by electrically operated storage water heaters, commonly called geysers, which is currently supplied at
approximately 3 c/litre (this value includes only the electricity component and no capital cost). These
costs are the direct financial costs of hot water and do not include the indirect (or external) costs of the
service. SWH systems have significant additional benefits in terms of reduced negative
environmental impacts, increased social equity and enhanced economic impacts (largely due to
economic risk mitigation).
Recognising the broader benefits of SWH and the high priority of addressing domestic energy
utilisation within the Draft Energy and Climate Change Strategy [7], the City of Cape Town has
committed to a target of installing SWH systems on 10% of the households in the city by 2010. This
study was commissioned and funded by DANIDA in support of the City of Cape Town’s target.
Initially the scope of the study was limited to the hot water requirements of the N2 Gateway Housing
Project but the scope was subsequently extended to include all houses in the Metro. The study
addresses the financial modelling for domestic-scale SWH systems of between 100 litre/1.4 m2 –
300 litre/4.2m2 of hot water storage capacity and collector area. This includes all houses and small
guesthouses.
In general, the service costs for solar heated water are primarily dependent on the mode of
implementation and financial model for service delivery. In addition, within the context of the mode
of implementation and financial modelling, these costs are dependent on the individual input variables
to the financial models.
This study developed financial models for scenarios based on the two modes of service delivery,
namely:
• Energy services or fee-for-service
• Ownership-based with short- or long-term financing
These modes of implementation are not mutually exclusive and can share common support services
such as quality assurance, repair and maintenance and awareness programmes. The support
mechanisms for both the primary modes of SWH implementation include policy/legislative support,
financial support and awareness support. This study has developed (and adapted) financial models for
the implementation of SWH systems which enable different scenarios for implementation to be
investigated.
The base case service costs for specific segments of the household hot water market for conventional
geysers and each of the two models for SWH systems is presented on the following page together with
the basic assumptions for each scenario.
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It is clear that a metro-wide energy service model can deliver hot water at the lowest cost for the three
broad income sectors in the City of Cape Town. The service costs of the ESCO mode of
implementation are lower than the ownership-based mode of implementation due, largely, to the
aggregation of costs in the service delivery which leads to economies of scale and more efficient
access to support mechanisms – especially the financial support mechanisms. The ESCO mode has a
20% materials cost reduction assumption associated with its delivery.
The service costs for the scenario of supplying the N2 Gateway Housing Project by means of an
energy service approach are higher than the equivalent costs for the low-income customer segment in
the metro-wide case due to the higher level of service offered and the smaller scale of implementation.
It is also significant that the ESCO model enables accelerated access to the service benefits of SWH
since the customers do not need to raise their own finance, by whatever means possible, as in the case
of the ownership model.
The legislative or policy support of the SWH bylaw and the replacement of damaged electrical storage
water heaters with SWH system within the insurance industry will have the effect of accelerating the
uptake of SWH systems. The combined effect of these two mechanisms would be an additional
35,000 SWH installations in the first few years subsequent to the bylaw approval and the insurance
industry promoting the concept. The limiting factor in this scenario is the capacity of the industry to
deliver these sorts of numbers.
Lereko Sustainability (Pty) Ltd, AGAMA Energy (Pty) Ltd 2 April 2007
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In addition, the study undertook basic sensitivity analyses to test the impacts of uncertainty in the
assumptions. These included the impact of capital subsidies, such as DSM funding, interest rate
subsidies and the operational efficiencies of an ESCO. Surprisingly, the ESCO mode of
implementation is relatively insensitive to operational costs and loan finance rates, due to the fixed
IRR. Subsidised interest rates make a positive impact on the ownership mode of implementation.
Clearly, increasing capital subsidies have a positive impact on the service costs to customers in both
the ESCO and ownership modes of implementation.
In summary, and supported by the experience to date, the financial modelling suggests that the most
appropriate approach to the implementation of SWH within the City of Cape Town would be a large-
scale energy services mode of implementation. However, in practice, it is likely that a blend, or
combination, of models and support mechanisms will need to be implemented to cater for the range
income groups and personal preferences within the metro.
Lereko Sustainability (Pty) Ltd, AGAMA Energy (Pty) Ltd 2 April 2007
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Acknowledgements
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Since inception in March 2006, the project developed in two distinct stages:
The original project proposed to investigate the potential benefits of incorporating energy efficiency
into the design of the N2 Gateway Project. It was proposed that a solar geyser installed in each
household would be both technically and financially feasible, and would not disrupt the existing
planning on the project or affect its timelines. Due to unforeseen complications surrounding the
development of the N2 Gateway Project, the original terms of reference (TOR) set out for the SWH
study were considered to be no longer appropriate and a new set of TOR were decided upon.
By this stage however significant resources had already been spent on initiating and developing the
N2 Gateway stage of the project. A brief overview of the work completed during this stage has been
included in Appendix A of the report. To make further use of this work, the N2 Gateway project was
also chosen as a study area in the modeling component, to investigate the energy services approach to
the provision of hot water.
Unfortunately the N2 Gateway remains a politically sensitive and high risk area on which to roll-out
SWHs. There is no clear indication of how many units will be constructed and when this will happen.
Furthermore, Thubelisha homes, the contractors assigned to the project refused to provide any
information or comment.
The new terms of reference includes two components. The first component is the financial modeling
as described in of the original TOR. Given the recent developments in the City of Cape Town,
surrounding SWH, and the need for detailed financial modeling in this area, it was decided to expand
the subject area to include the whole of the Metro. The City was seen as an ideal study area as it
covers all income groups and target markets, allowing for easy comparison of implementation modes
across the various groups.
The second component of the new TOR examines different issues surrounding the implementation of
large scale SWH roll-outs, including; market, legal, financial and technical issues. This information
was developed to guide the inputs and assumptions in the modeling section of the report. The focus on
this section is to provide well researched, up-to-date information rather than a summary report (these
areas have been the focus of numerous reports in the recent past). Given that both components of the
TOR are so closely linked, it was decided to develop a single report that would reflect this.
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Table of Contents
1. Introduction 1
2. Methodology 1
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5.4.4 Costs 10
7. Conclusions 16
8. Recommendations 17
9. References 18
10. Annexures 19
10.1 Annexure A - An Overview of the N2 Gateway Project (Pre-TOR modification) 19
10.1.1 Introduction 19
10.1.2 Background 19
10.1.3 SWH in the N2 Gateway Project 19
10.1.4 Summary of work completed – Stage 1 20
10.2 Annexure B – The Fee for Service Model 21
10.2.1 Detailed Assumptions and Costs 21
10.2.2 Assumptions and Results 22
10.2.3 Detailed Assumptions and Revenue 23
10.2.4 Cash Flow Models 23
10.2.5 User Cash Flows 24
10.2.6 Electrical Savings 24
10.2.7 Debt Model 24
10.2.8 Income Statement 25
10.2.9 Tax Calculation 25
10.3 Annexure D – The Short Term finance Model 26
10.3.1 Financing Scenarios 26
10.3.2 Main Analysis Sheet 27
10.3.3 Global Variables 28
10.3.4 Water Heater Costing 29
10.3.5 Solar Water Heater LCC 29
10.3.6 Sensitivity Calculations 30
10.4 Annexure D – The N2 Gateway SWH Presentation 31
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1. Introduction
The provision of hot water by means of solar water heating technology is increasingly understood to
be an attractive energy service solution in South Africa. Apart from providing a necessary energy
service need in households, and hence the national economy, SWH systems offer additional
environmental and social benefits. The economic benefits of solar heated water are understood to a
high priority in support of the national energy policy of increasing the proportion of renewable energy
within the overall energy mix for the economy.
Recognising the broader benefits of SWH and the high priority of addressing domestic energy
utilisation within the City of Cape Town Energy and Climate Change Strategy [7], the City of Cape
Town has committed to a target of installing SWH systems on 10% of the households in the city by
2010. This study was commissioned and funded by DANIDA in support of the City of Cape Town’s
target.
There is good practical experience, both in South Africa and internationally, with the use of SWH
systems for the provision of hot water for domestic purposes. This experience is derived from small-
and large-scale projects over a period of over ten years in some cases. The study has been developed
to complement the existing work that has been completed in this sector. Its starting point is the
analysis of the financial mechanisms behind existing SWH projects, from which the outputs have been
developed. Given the fact that there are currently no large scale SWH projects in operation in the
country, there is a lack of knowledge and awareness around the implementation models and the
financial implication of these models. This study aims to raise awareness of these issues and provide
useful data for key stakeholders within the public and private sectors.
2. Methodology
The approach adopted in the study was to undertake a desk-based review of SWH projects and input
parameters followed by a modelling exercise for a range of implementation scenarios using
spreadsheets. The outcomes of the models were interrogated by means of sensitivity analyses.
The initial review included:
• A high-level review the experience to date with SWH projects and the financing of these
projects
• Determination of the basic modes of implementation for SWH projects
• Identification of financial support mechanisms for the different modes of implementation of
SWH projects
• Determination of the range of basic input parameters and appropriate input data such as
demographics in the metro, materials costs, financial parameters, etc.
The modelling phase of the study relied on a number of spreadsheet models which were developed or
adapted for use in different modes of implementation. These models were set up to share the basic
input parameters and provide outputs in a consistent format.
The study included consultations with key stakeholders including:
• the City of Cape Town: Shirene Rosenberg; Craig Haskins
• the Western Cape Provincial Government: Goosain Isaacs and Joos Roelofse, DEA&DP
• a number of SWH manufactures
• other relevant stakeholders, including NGOs and CEF
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The financial modelling was undertaken by means of two spreadsheet models which shared basic
input parameters. Detailed explanations of the workings of these models are not included in this
report, but the individual sheets used in each of the models have been included for reference purposes.
These can be found in Annexure B and Annexure C.
3.2 Lwandle
The solar water heating project in Lwandle, near Somerset West, is the largest residential water
heating project in South Africa to date and it forms part of the City of Cape Town’s Cape Care Route.
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The project has operated successfully despite there being no routine maintenance of the SWH systems.
Ad-hoc repairs have been undertaken by the local SWH contractor on a few occasions over the eight
year operating period.
The overall success of the project is attributable to the high level of awareness and participation by the
community in the original decisions to implement solar heated water.
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The models have been developed independently to address differing objectives over time; the inputs to
the models have been correlated to ensure that they are consistent across the models. Sections 4.3 and
4.4 describe the different financial and legislative support mechanisms that are applied across each of
the models, as appropriate, in order to assess the impacts.
5.2.2 Ownership
The ownership model assumes that homeowners purchase a SWH and take ownership of the SWH as
an asset. There are numerous financing approaches for this model but in this study it is assumed that
finance is provided by accessing a home loan or access bond. In general, this is the cheapest finance
that is available for a household for any renovations or upgrades to the home.
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The household pays a monthly service fee, either on a metered hot water consumption basis or a flat
rate basis. The model developed here assumes a flat rate fee that is equivalent to the avoided cost of
electricity that results from the installation of the SWH.
An important difference between this and any other approach to providing SWHs, not explicit in the
results, is that the energy service model provides a long term contract, 15 years in this analysis, where
the maintenance and replacement costs – and the inconvenience associated with finding and
contracting a maintenance service provider – are included in the monthly costs.
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5.4.3 Financial
All rates are per annum:
Cost analysis period 15 years 1
Nominal inflation rate 5.5%
Nominal discount rate 15.0%
Nominal loan interest rate 12.5%
Home loan interest rate 10.5%
Nominal escalation rate: tariff 6.0%
Nominal escalation rate: general 5.5%
Real discount rate 9.5%
Real loan rate 7.0%
Real tariff escalation rate 0.5%
Real general escalation rate 0.0%
In addition, the energy services model assumes that the energy business needs to be attractive enough
to raise the investments required. An IRR hurdle rate of 15% is assumed to be the minimum that
might attract state-supported or DFI finance, for example through CEF, IDC or the DBSA. The actual
details of the financing arrangements for this model are described in Section 6.
5.4.4 Costs
5.4.4.1 Materials
The costs of materials for the three systems, complete, as described in Section 5.1 are:
• Low-income: R3,000
• Middle-income: R10,210
• High-income: R14,350
5.4.4.2 Installation
The average costs of installation for the three systems are:
• Low-income: R500
• Middle-income: R1,500
• High-income: R2,000
5.4.4.3 Maintenance
Maintenance costs are based on replacement of pressure valves every five (5) years, electrical heating
elements every five (5) years, anode every three (3) years and average per year. Consequently, the
estimated annual maintenance cost for the three systems is:
• Low-income: R156/annum
• Middle-income: R192/annum
• High-income: R192/annum
1
Except for the homeloan analysis where the term is assumed to be 20 years i.e. the period of a new bond
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6.1.2 Metro-wide
Given that this would be a large rollout it has also been assumed that there would be a 20% discount
on the system materials costs, with the total number of systems equalling 80,000. This represents the
10% SWH targeted by CCT. An energy services model is again assumed, where the implementation
is in proportion to the number of households as described in Section 5.4.1 viz. in the proportion of
40%, 45% and 15% in the high-, middle- and low-income sectors respectively. These are equivalent
to 32,000, 36,000 and 12,000 households respectively.
Further assumptions are that there is DSM funding in the amount of R2,000; R5 million setup costs;
R500,000 legal fees; R1 million marketing costs; a gearing ratio of 50%; and that the project is
developed as a CDM project with associated CERs.
The costs to administer the energy business are assumed to be 1.0% of the total capex amount of R150
million i.e. R1,500,000 per annum. The (low, middle and upper-income) households monthly
payment grows with a nominal energy cost escalation of 6% per annum, or 0.5% real (noting that the
real electricity tariff increase will be in the order of 3% per annum).
Further assumptions are that the initial installation rate is 100 SWHs per month, increasing at 5% per
month and with maximum monthly installments of 750 SWHs per month.
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6.3 Results
Results are presented using a net present value (NPV) for the household for the different scenarios and
sensitivities modelled. The results are also presented in terms of Rands per litre of hot water for
completeness.
6.3.1 Baselines
6.3.1.1 N2 Gateway
The scenario described results in an IRR (15 years) for the equity investor of 15.4% i.e. above the
assumed hurdle rate (see Section 5.4.3). To achieve this, each household pays a cost of R99/month.
The annualised net present cost to the owner, with escalations, is R1,197. On the hot water
consumption assumption of 30 litres per person per day, the system will deliver 43,800 litres of hot
water per annum, at a cost of 2.7 c/litre.
(If one were to replace the 200L high pressure system with a 100L low pressure system, each
household would only be required to pay R37/month. If a portion of the basic electricity grant were
used to subsidise 50% of this payment, the household would only be required to pay an amount of
R18/month.)
6.3.1.2 Metro-wide
The scenario described results in an IRR (15 years) for the equity investor of 15.0% i.e. above the
assumed equity investor required hurdle rate (see Section 5.4.3).
The annualised net present cost to the owners, with escalations, are R410, R1,368 and R2,051 for the
low-, middle- and high-income groups respectively. On the hot water consumption assumptions, the
systems will deliver hot water per annum, at an annualised net present cost of 1.4 c/litre, 3.1 c/litre
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and 3.5 c/litre for the three income groups respectively. The monthly payments for each income
segment are R34, R114 and R171 respectively
It is important to note that this and the N2 Gateway baselines are offering very different costs of hot
water to the low-income group, on the assumption that in the former scenario the middle-income
technology (200 litre/2.9m2 high-pressure systems) are used compared with the latter where the
100 litre/1.4 m2 low pressure systems are used.
6.3.2 Sensitivities
6.3.2.1 ESCO model
The N2 Gateway implementation using the baseline approach viz. using 200-litre HP systems in low-
income households has been shown not to be the most cost effective way to deliver hot water to this
market segment. Sensitivities around this have therefore not been analysed further. The generalised
ESCO model is more appropriate for a metro-wide implementation consequently a sensitivity analysis
is undertaken for the metro scenario where 10% of households have a SWH. The N2 Gateway
scenario is a specific case targeting one income group which misses the opportunity of a diversified
customer base.
The Metro scenario was tested for sensitivities around the
• Capital subsidy, in the form of DSM
• ESCO operational overheads
• Loan finance interest rate
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In all cases where the change in the parameter being tested resulted in an equity IRR > 15%, these
savings were passed on to the end-user by way of reduced monthly service charges. The change in
cost per litre of hot water in these sensitivities is presented in the tables below.
Table 1: Impact of DSM subsidy levels via ESCO Metro-wide model on end-user costs
Table 3: Impact of ESCO Metro-wide model loan finance charges on end-user costs
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Table 4: Impact of DSM subsidy levels for SWHs purchased on home loans
Table 5: Impact of DSM subsidy levels for SWHs purchased on 5-year personal loans
The loan interest rate levels were decreased from the baseline level of 10.5% down to 7.5%, as
reflected in Table 6 and Table 7 for the home-loan and short-term loan scenarios respectively.
Table 6: Impact of interest rate subsidy levels for SWHs purchased on home loans
Table 7: Impact of interest rate subsidy levels for SWHs purchased on 5-year personal loans
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7. Conclusions
The two primary modes of implementation explored in this report are not mutually exclusive and can
share common support services such as quality assurance, repair and maintenance and awareness
programmes. The support mechanisms for both modes of SWH implementation include
policy/legislative support, financial support and awareness support. This study has developed (and
adapted) financial models for the implementation of SWH systems which enable different scenarios
for implementation to be investigated.
It is clear that a metro-wide energy service model can deliver hot water at the lowest cost for the three
broad income sectors in the City of Cape Town. The service costs of the ESCO mode of
implementation are lower than the ownership-based mode of implementation due, largely, to the
aggregation of costs in the service delivery which leads to economies of scale and more efficient
access to support mechanisms – especially the financial support mechanisms. The ESCO mode has a
20% materials cost reduction assumption associated with its delivery.
The service costs for the scenario of supplying the N2 Gateway Housing Project by means of an
energy service approach are higher than the equivalent costs for the low-income customer segment in
the metro-wide case due to the higher level of service offered and the smaller scale of implementation.
It is also significant that the ESCO model enables accelerated access to service benefits of SWH since
the customers do not need to raise their own finance, by whatever means possible, as in the case of the
ownership model.
The legislative or policy support of the SWH bylaw and the replacement of damaged electrical storage
water heaters with SWH system within the insurance industry will have the effect of accelerating the
uptake of SWH systems. The combined effect of these two mechanisms would be an additional
35,000 SWH installations in the first few years subsequent to the bylaw approval and the insurance
industry promoting the concept. The limiting factor in this scenario is the capacity of the industry to
deliver these sorts of numbers.
Lereko Sustainability (Pty) Ltd, AGAMA Energy (Pty) Ltd 2 April 2007
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8. Recommendations
In summary, and supported by the experience to date, the financial modelling suggests that the most
appropriate approach to the implementation of SWH within the City of Cape Town would be a large-
scale energy services mode of implementation. However, in practice, it is likely that a blend, or
combination, of models and support mechanisms will need to be implemented to cater for individual
preferences and market segments within the Metro.
Lereko Sustainability (Pty) Ltd, AGAMA Energy (Pty) Ltd 2 April 2007
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9. References
[1] Mahomed, L (2006). SWH initiatives in Cape Town. Presentation to the Domestic Use of Energy conference, 5
April 2006.
[2] This arises from research undertaken for this study. David will you please elaborate this?
[3] The City of Cape Town data (http://www.capetown.gov.za/censusInfo/Census2001-
new/Cape%20Town/Cape%20Town.htm) indicates an average number of people per household as being 3.7.
Unfortunately, this is not disaggregated into the different income sectors.
[4] From http://www.busrep.co.za/index.php?fSectionId=563&fArticleId=3731608.
[5] The Argus, January 2006. National statistics from South African Insurance Association
[6] The Argus, January 2006. National statistics from South African Insurance Association, & InWeNT SWH Market
Study, 2006
[7] Borchers M et al (2005), City of Cape Town Energy and Climate Change Strategy, Environmental Planning
Department, City of Cape Town.
[8] Cawood W and Morris GJ (2002). Baseline study - Solar Energy in South Africa, Department of Minerals and
Energy, Pretoria
[9] Whitehead M (2005). N2 Gateway Project: SWH Business Plan 2005, Urban Energy Conservation and
Transportation, compiled for Lereko Energy.
[10] J.M. Lukamba–Muhiya• and O.R. Davidson (2003). Dissemination of Solar Water Heaters in South Africa: Policy
Perspectives. Journal of Energy in Southern Africa
[11] Austin GA and Morris GJ (2005). The status of solar water heating for domestic hot water supply in the low-
income sector in South Africa, report for WINROCK International
[12] http://cdm.unfccc.int/Projects/DB/DNV-CUK1121165382.34/view.html
[13] EMCON Consulting Group (2006). Assessment of Feasibility for the Replacement of Electrical Water Heaters
with Solar Water Heaters, Barrier Removal to Namibian Renewable Energy Programme (NAMREP), Ministry of
Mines and Energy, Namibia
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10. Annexures
10.1 Annexure A - An Overview of the N2 Gateway Project (Pre-TOR
modification)
10.1.1 Introduction
The N2 Gateway project was envisioned as South Africa’s flagship low income housing delivery
programme, and formed part of the new Comprehensive Housing Plan for South Africa that was
adopted by National Cabinet on the 2nd September 2004. The project was unique in that it combined
resources from National, Provincial and Local Government to develop and implement the concept of
an integrated and sustainable human settlement. The projects focus was on the provision of housing
for the inhabitants of informal settlements along the highly visible section of the N2 between Cape
Town and Cape Town International Airport.
The original project aimed at the delivery of 22000 housing units at a cost of R2.3bn, to be completed
by December 2006. Delivery was planned to take place in several phases. To date only the first phase
involving the development of 700 units in the Joe Slovo settlement in Langa has been completed.
10.1.2 Background
The original project design did not include the option of installing SWH systems. Lereko Energy
identified the opportunity to develop a SWH project alongside developments in the N2 Gateway
Project. DANIDA was approached to provide support to the detailed financial modelling and
development of an implementation approach based on the financial analysis for the City of Cape
Town. The financial modelling was aimed at enabling the initiative to secure necessary funds from
banks, and build the financial case that will enable the City of Cape Town to obtain the DME Demand
Side Management (DSM) subsidy in order to make the installation of SWH a viable and sustainable
option.
Lereko Energy subsequently approached Agama Energy to form a partnership, with Agama to play the
role as project implementers, based on their vast experience in the field of SWH. As a joint team,
Lereko Energy and Agama then initiated the project through various meetings with key players
involved in the N2 Gateway Project and a workshop in SWH. The efforts were however disrupted as
the N2 Gateway Project collapsed due to allegations of corruption and subsequent financial problems.
The team then waited for the dust to settle before continuing with the project. By this stage however, it
became clear that the development of a SWH project on the N2 Gateway Project would not become a
reality, as the project had been handed over to a group of external consultants, Thubelisha Homes,
who were now responsible for delivery. The original terms of reference for the project were modified
to reflect these changes.
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Solar Workshop
A workshop was presented to key stakeholders involved with the N2 Gateway project. The workshop
aimed at building capacity in the sector and facilitating communication on SWH between the various
role players. The presentation given at this workshop is given in Appendix B.
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Cost of Unit
Solar Collector 1 1,000
Storage Tank 1 1,400
Piping 1 600
Heat Exchanger 1 -
Volume Discount 1 (600)
2,400
Maintenance Cost
Contingency
Administration Costs
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amount
Assumptions DSM? (Y/N) y 2,000 Results
Carbon Credits
Carbon credit contribution per installation 117.60 117.60 235.20 352.80
Weighted carbon credit contribution - - 235.20 - 235.20
General
Escalation - energy cost per annum 6.00%
Escalation - swh price per annum 5.50%
Escalation - electricity grant per annum 3.00%
Escalation - other costs per annum 5.50%
Financial
Gearing ratio 50%
Exchange rate R/€ 10.00
Debt repayment period years 10
Useful life of unit (depreciation period) years 15
Wear & tear allowance period years 5
Corporate tax rate 29%
Lereko Sustainability (Pty) Ltd, AGAMA Energy (Pty) Ltd 2 April 2007
Modelling and Analysis of Financial Structuring for SWH Projects Page 23
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Cost/kWh -0.03
CEF DSM 51,347,403
Additional GWh 0.00 0.00 -101.48 0.00 -101.48
additional energy to HHs (kWh) per month
86 42 (32) (49)
188% 122% 95% 95%
equivalent litres per day domestic sales 1,099 GWh
120 120 240 360 840 domestic users 260,443
equivalent litres per month 218,772,120 average use 4,220 kWh/year
3,650 3,650 7,300 10,950 352 kWh/month
AVOIDED kWh consumption per month
44 88 292 438 913 GWh avoided total
Detailed Assumptions - Revenue TOTAL kWh consumption per month 83.10%
97 195 649 974
R 20.44 R 40.89 R 136.30 R 204.44
R 0.21 R 0.21 R 0.21 R 0.21
Indigent Low Medium High Total R
HHs - - 260,443 - 260,443
0% 0% 100% 0%
Weighted HH elec consumption per month kWh - - 649 - 649 Income from consumer
Weighted avoided elec consumption per month kWh - - 292 - 292
Weighted hot water provided per month - litres - - 240 - 240
Current elec cost 44 88 292 438
Avoided electricity cost 20 39 132 197
Carbon Credits
Litres per installation 100 100 200 300
T/100l 1.470 1.470 2.940 4.410
T/installation 1.47 1.47 2.94 4.41
Contribution per tonne € 8.00
Contribuition per installation 117.60 117.60 235.20 352.80
If yes, input"1" 1 117.60 117.60 235.20 352.80
- - 2.94 - 2.94
11.76 11.76 23.52 35.28
Corporate Social Responsibility
Number of companies targeted -
Success rate - annual 0%
Succes rate - once off 0%
Annual contribution (payble monthly) - -
Once off contribution (payble mnth 1) - -
Cashflow Model
Years 0 1 2 3 4 5 6 7 8 9 10
Number of units
Cumulative units 1,592 4,443 8,043 11,643 15,243 18,843 22,143 22,143 22,143 22,143
Revenue 1,519,760 5,684,704 12,366,100 20,093,421 28,608,706 37,981,740 48,165,577 48,165,577 56,670,770 59,758,533
Customer Contribution 1,145,389 4,639,699 10,474,375 17,354,976 25,023,541 33,549,856 42,957,532 42,957,532 51,462,725 54,550,489
Government Contribution - - - - - - - - - -
Social Responsibility Contribution - - - - - - - - - -
Carbon Credits 374,371 1,045,005 1,891,725 2,738,445 3,585,165 4,431,885 5,208,045 5,208,045 5,208,045 5,208,045
Costs 19,351,715 24,157,044 32,551,599 35,102,647 37,837,354 40,768,205 40,730,187 40,730,187 6,836,346 7,184,845
Installation 12,205,253 23,066,558 30,724,833 32,414,698 34,197,507 36,078,370 34,890,790 34,890,790 - -
Maintenance 146,462 590,486 1,326,767 2,187,949 3,139,847 4,189,835 5,339,397 5,339,397 6,336,346 6,684,845
Administration Overheads 500,000 500,000 500,000 500,000 500,000 500,000 500,000 500,000 500,000 500,000
Other Costs 5,000,000 - - - - - - - - -
Marketing 1,000,000 - - - - - - - - -
Other (once-off) 500,000 - - - - - - - - -
Cashflow before interest and tax (17,831,955) (18,472,340) (20,185,499) (15,009,226) (9,228,648) (2,786,465) 7,435,390 7,435,390 49,834,424 52,573,689
Interest 812,514 1,192,995 1,963,929 2,550,069 2,853,347 2,835,151 2,456,708 1,854,333 1,236,222 618,111
Cashflow before tax (18,644,469) (19,665,335) (22,149,428) (17,559,296) (12,081,996) (5,621,616) 4,978,683 5,581,057 48,598,202 51,955,578
Tax - - - - - - 3,883,167 5,465,945 9,423,667 11,998,384
Net cashflow (18,644,469) (19,665,335) (22,149,428) (17,559,296) (12,081,996) (5,621,616) 1,095,516 115,112 39,174,536 39,957,194
Cumulative cash balance - (18,644,469) (38,309,805) (60,459,233) (78,018,529) (90,100,524) (95,722,140) (94,626,624) (94,511,512) (55,336,977) (15,379,783)
Debt advances / repayment (4,895,708) (4,938,805) (5,374,730) (3,371,508) (1,089,310) 1,498,301 4,167,922 4,667,946 4,667,946 4,667,946
Net Equity Investor cash flow (13,748,762) (14,726,530) (16,774,699) (14,187,788) (10,992,686) (7,119,916) (3,072,406) (4,552,834) 34,506,590 35,289,248
Cumulative cash after debt (13,748,762) (28,475,292) (45,249,991) (59,437,778) (70,430,464) (77,550,381) (80,622,787) (85,175,621) (50,669,031) (15,379,783)
Project cash flow before interest after tax (17,831,955) (18,472,340) (20,185,499) (15,009,226) (9,228,648) (2,786,465) 3,552,223 1,969,445 40,410,757 40,575,305
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200 litre hP
Payments 1,338 -1,412 -1,489 -1,571 -1,658 -1,749 -1,845 -1,947 -2,054 -2,167 -2,286
Present value 1,338 -1,319 -1,301 -1,283 -1,265 -1,247 -1,229 -1,212 -1,195 -1,179 -1,162
Net present value -17,962
Annual NPV -1,197
Hot water deliver/annum 43,800
NPV/litre hot water -2.7 cents
Years 0 1 2 3 4 5 6 7 8 9 10
Cumulative Num of units 3,958 24,593 48,593 72,593 96,593 100,593 100,593 100,593 100,593 100,593
Avoided elec consumption GWh 13.9 86.2 170.4 254.6 338.7 352.8 352.8 352.8 352.8 352.8
% of national target % 0.1% 0.9% 1.7% 2.5% 3.4% 3.5% 3.5% 3.5% 3.5% 3.5%
Emissions reductions tonnes CO2 ##### ###### 250,493 374,210 497,928 518,548 518,548 518,548 518,548 518,548
Value of CERs / VERs 10 Euro/tonne Rmil 1.84 11.41 22.54 33.68 44.81 46.67 46.67 46.67 46.67 46.67
51,347,403
Total 46,679,457 46,679,457 46,679,457 18,373,379 18,373,379 18,373,379 -
Annual Cumulative Capital Interest Monthly Cumulative
Month Interest Rate Capital Annual Interest Balance
Advances Advances Repayment repayment Interest Interest
10
0 12.50% 3,648,935 3,648,935 3,648,935
1 12.50% 412,541 4,061,475 - 38,010 38,010 4,099,485
2 12.50% 426,827 4,488,303 - 42,703 80,713 4,569,015
3 12.50% 441,828 4,930,131 - 47,594 128,307 5,058,438
4 12.50% 457,579 5,387,710 - 52,692 180,999 5,568,709
5 12.50% 474,118 5,861,828 - 58,007 239,006 6,100,834
6 12.50% 491,483 6,353,311 - 63,550 302,556 6,655,867
7 12.50% 509,717 6,863,028 - 69,332 371,888 7,234,916
8 12.50% 528,862 7,391,890 - 75,364 447,252 7,839,142
9 12.50% 548,965 7,940,855 - 81,658 528,910 8,469,764
10 12.50% 570,073 8,510,927 - 88,227 617,137 9,128,064
11 12.50% 405,050 8,915,978 - 95,084 712,221 9,628,198
12 12.50% 647,676 9,563,654 9,563,654 4,667,946 812,514 100,294 812,514 812,514 4,895,708
13 12.50% 673,398 673,398 - 50,997 50,997 5,620,102
14 12.50% 700,405 1,373,803 - 58,543 109,540 6,379,050
15 12.50% 728,763 2,102,566 - 66,448 175,988 7,174,262
16 12.50% 758,539 2,861,105 - 74,732 250,720 8,007,533
17 12.50% 789,804 3,650,908 - 83,412 334,132 8,880,748
18 12.50% 822,632 4,473,540 - 92,508 426,640 9,795,887
19 12.50% 857,101 5,330,641 - 102,040 528,680 10,755,029
20 12.50% 893,294 6,223,934 - 112,032 640,712 11,760,354
21 12.50% 931,296 7,155,230 - 122,504 763,215 12,814,153
22 12.50% 971,198 8,126,429 - 133,481 896,696 13,918,833
23 12.50% 462,065 8,588,494 - 144,988 1,041,684 14,525,886
24 12.50% 1,018,257 9,606,751 9,606,751 4,667,946 1,192,995 151,311 1,192,995 1,192,995 9,834,513
25 12.50% 1,000,371 1,000,371 - 102,443 102,443 10,937,326
26 12.50% 982,485 1,982,856 - 113,930 216,373 12,033,741
27 12.50% 964,599 2,947,454 - 125,351 341,725 13,123,692
28 12.50% 946,713 3,894,168 - 136,705 478,430 14,207,110
29 12.50% 928,827 4,822,995 - 147,991 626,421 15,283,928
30 12.50% 910,941 5,733,936 - 159,208 785,628 16,354,077
31 12.50% 893,056 6,626,992 - 170,355 955,983 17,417,488
32 12.50% 875,170 7,502,162 - 181,432 1,137,415 18,474,090
33 12.50% 857,284 8,359,445 - 192,438 1,329,854 19,523,812
34 12.50% 839,398 9,198,843 - 203,373 1,533,227 20,566,583
35 12.50% - 9,198,843 - 214,235 1,747,462 20,780,818
36 12.50% 843,832 10,042,676 10,042,676 4,667,946 1,963,929 216,467 1,963,929 1,963,929 15,209,242
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Modelling and Analysis of Financial Structuring for SWH Projects Page 25
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Income Statement
Years 0 1 2 3 4 5 6 7 8 9 10
Revenue 1,519,760 5,684,704 12,366,100 20,093,421 28,608,706 37,981,740 48,165,577 48,165,577 56,670,770 59,758,533
Operating lease income 1,145,389 4,639,699 10,474,375 17,354,976 25,023,541 33,549,856 42,957,532 42,957,532 51,462,725 54,550,489
Government Contribution - - - - - - - - - -
Social Responsibility Contribution - - - - - - - - - -
Carbon Credits 374,371 1,045,005 1,891,725 2,738,445 3,585,165 4,431,885 5,208,045 5,208,045 5,208,045 5,208,045
Operating Expenditure 7,553,304 2,632,971 5,018,213 7,719,715 10,511,933 13,402,241 16,315,443 17,158,923 18,155,872 18,504,371
Maintenance 146,462 590,486 1,326,767 2,187,949 3,139,847 4,189,835 5,339,397 5,339,397 6,336,346 6,684,845
Administration and Overheads 500,000 500,000 500,000 500,000 500,000 500,000 500,000 500,000 500,000 500,000
Other Costs 5,000,000 - - - - - - - - -
Marketing 1,000,000 - - - - - - - - -
Other (once-off) 500,000 - - - - - - - - -
Depreciation 406,842 1,542,485 3,191,446 5,031,766 6,872,086 8,712,406 10,476,046 11,319,526 11,319,526 11,319,526
Operating profit / (loss) (6,033,544) 3,051,733 7,347,887 12,373,706 18,096,773 24,579,499 31,850,134 31,006,654 38,514,898 41,254,163
Finance costs 812,514 1,192,995 1,963,929 2,550,069 2,853,347 2,835,151 2,456,708 1,854,333 1,236,222 618,111
Profit / (loss) before taxation 30,451,020 (6,846,058) 1,858,738 5,383,958 9,823,637 15,243,425 21,744,348 29,393,427 29,152,321 37,278,676 40,636,052
Taxation (1,985,357) 539,034 1,561,348 2,848,855 4,420,593 6,305,861 8,524,094 8,454,173 10,810,816 11,784,455
Net profit / (loss) after tax (4,860,702) 1,319,704 3,822,610 6,974,782 10,822,832 15,438,487 20,869,333 20,698,148 26,467,860 28,851,597
Years 0 1 2 3 4 5 6 7 8 9 10
Cumulative units - 1,592 4,443 8,043 11,643 15,243 18,843 22,143 22,143 22,143 22,143
Additional units for the year 1,592 2,851 3,600 3,600 3,600 3,600 3,300 - - -
Average number of new units 796 1,426 1,800 1,800 1,800 1,800 1,650 - - -
Number of units for depreciattion 796 3,017 6,243 9,843 13,443 17,043 20,493 22,143 22,143 22,143
Number of units for wear & tear 796 3,017 6,243 9,843 13,443 15,451 16,050 14,100 10,500 6,900
Cost of units for depreciation 6,102,626 23,137,270 47,871,688 75,476,488 103,081,288 130,686,088 157,140,688 169,792,888 169,792,888 169,792,888
Cost of units for wear & tear 6,102,626 23,137,270 47,871,688 75,476,488 103,081,288 118,480,836 123,071,400 108,118,800 80,514,000 52,909,200
Annual depreciation 126,789,283 406,842 1,542,485 3,191,446 5,031,766 6,872,086 8,712,406 10,476,046 11,319,526 11,319,526 11,319,526
Annual wear & tear allowance 152,813,599 1,220,525 4,627,454 9,574,338 15,095,298 20,616,258 23,696,167 24,614,280 21,623,760 16,102,800 10,581,840
Cashflow Model
Years 0 1 2 3 4 5 6 7 8 9 10
Operating profit / (loss) (6,846,058) 1,858,738 5,383,958 9,823,637 15,243,425 21,744,348 29,393,427 29,152,321 37,278,676 40,636,052
Add back
Depreciaton 406,842 1,542,485 3,191,446 5,031,766 6,872,086 8,712,406 10,476,046 11,319,526 11,319,526 11,319,526
Less
Wear & tear allowance 1,220,525 4,627,454 9,574,338 15,095,298 20,616,258 23,696,167 24,614,280 21,623,760 16,102,800 10,581,840
Taxable income / (loss) (7,659,742) (1,226,232) (998,934) (239,895) 1,499,254 6,760,587 15,255,192 18,848,087 32,495,402 41,373,738
Accumulated tax loss - (7,659,742) (8,885,974) (9,884,907) (10,124,802) (8,625,549) (1,864,962) 13,390,230 18,848,087 32,495,402 41,373,738
Net Equity Investor cash flow (7,659,742) (1,226,232) (998,934) (239,895) 1,499,254 6,760,587 11,372,026 13,382,142 23,071,736 29,375,354
Cumulative cash after debt (7,659,742) (8,885,974) (9,884,907) (10,124,802) (8,625,549) (1,864,962) 9,507,064 22,889,206 45,960,941 75,336,295
Lereko Sustainability (Pty) Ltd, AGAMA Energy (Pty) Ltd 2 April 2007
Modelling and Analysis of Financial Structuring for SWH Projects Page 26
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Financing scenarios
INPUT MONITOR
Town Cape Town SWH selected 200 litre HP direct
Tariff type Pre-payment SWH capital cost R 10,499
Tariff rate 38.50 c/kWh EWH selected EWH, 150l, 3kW
Hot water consumption per day 180 lit/day EWH capital cost R 3,472
Scenario 1: Capital cost of SWH financed thru SRF; EWH installation in existence
Application: Household to convert exisiting EWH (no capital cost) to SWH
(Click '+' to view Scenario 1 details)
(Click '+' to view calculation details)
Year: 0 1 2 3 4 5 6 7 8 9 10
Net cash flow between SWH & EWH Annual -525 -1,501 -2,349 -3,056 -2,057 452 2,405 4,504 8,679 11,105 -426
Monthly -44 -125 -196 -255 -171 38 200 375 723 925 -35
Savings: EWH -
- - -
0 2 4 6 8 10 12 14 0 2 4 6 8 10 12 14 0 2 4 6 8 10 12 14
Year -5,000
Year Year
Lereko Sustainability (Pty) Ltd, AGAMA Energy (Pty) Ltd 2 April 2007
Modelling and Analysis of Financial Structuring for SWH Projects Page 27
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Cost inputs
SWH capex 10,499 R Interval [Years]
Operating cost with escalation: SWH 497 R every 1
Recurring costs (click '+' for details)
RC1: with general escalation 0 R every 1
RC2: Replacement of system 10,499 R every 10
RC3: Recurring cost: Anode 500 R every 3
RC4: Recurring cost: Element 500 R every 5
RC5: Recurring cost: Pressure valve 750 R every 5
RC6: Recurring cost x 0 R every 1
RC7: Recurring cost x 0 R every 1
Residual value of project = zero 0
Lereko Sustainability (Pty) Ltd, AGAMA Energy (Pty) Ltd 2 April 2007
Modelling and Analysis of Financial Structuring for SWH Projects Page 28
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Global variables
Project life project_life 15 years
Rates
nominal discount rate = investment rate nominal_discount_rate 15.0%
nominal loan rate nominal_loan_rate 12.5%
inflation rate inflation_rate 5.5%
nominal escalation rate: tariff nominal_esc_tariff 6.0%
Escalation trend: SELECT Non-linear
nominal escalation rate: general nominal_esc_general 5.5%
real discount rate = investment rate real_discount_rate 9.5%
real loan rate real_loan_rate 7.0%
real escalation rate: tariff real_esc_tariff 0.5%
real escalation rate: general real_esc_general 0.0%
Table for non-linear real tariff escalation per annum (click '+' to view)
Lereko Sustainability (Pty) Ltd, AGAMA Energy (Pty) Ltd 2 April 2007
Modelling and Analysis of Financial Structuring for SWH Projects Page 29
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High
Generic systems Storage efficiency
Glassed collector System Accessories Installation Capex Weight volume collector Element
excl VAT excl VAT excl VAT incl VAT
Name of range: swh_range [R] [R] [R] [R] [kg] [litres] [sqm] [kW]
SWH, 100l, 1.5m², indirect 7,230 - 1,500 9,952 90 100 1.5 2
SWH, 150l, 2.1m², indirect 10,380 - 1,500 13,543 100 150 2.1 3
SWH, 180l, 2m², indirect 11,500 - 1,500 14,820 106 180 2.0 1.8
SWH, 200l, 2.8m², indirect 12,260 - 1,800 16,028 115 200 2.87 3
SWH, 250l, 3.5m², indirect 13,200 - 1,800 17,100 137 250 3.47 4
SWH, 300l, 4m², indirect 16,350 - 2,000 20,919 164 300 4.0 2.4
SWH, 300l, 4.5m², indirect 14,700 - 2,000 19,038 155 300 4.5 4
SWH, 450l, 6.3m², indirect 21,100 - 2,300 26,676 228 450 6.3 ?
100 litre LP - - 500 570 - 100 1 ?
200 litre HP direct 7,210 - 2,000 10,499 - 200 2.8 2
300 litre HP direct 11,350 - 2,200 15,447 - 300 4.2 2
Year: 0 1 2 3 4 5 6 7 8 9 10
Initial Cost - 1,154 1,154 1,154 1,154 1,154 1,154 1,154 1,154 1,154 1,154
Operating cost with escalation: SWH 463 444 426 408 388 365 340 316 295 274
RC1: with general escalation - - - - - - - - - -
RC2: Replacement of system - - - - - - - - - 4,237
RC3: Recurring cost: Anode - - 381 - - 290 - - 221 -
RC4: Recurring cost: Element - - - - 318 - - - - 202
RC5: Recurring cost: Pressure valve - - - - 476 - - - - 303
RC6: Recurring cost x - - - - - - - - - -
RC7: Recurring cost x - - - - - - - - - -
Residual value - - - - - - - - - -
Carbon credits - - - - - - - - - -
Present Value of Annual Cost - 1,617 1,598 1,961 1,562 2,336 1,809 1,494 1,471 1,670 5,666
Present Value of Cumulative Cost - 1,617 3,215 5,176 6,739 9,075 10,884 12,378 13,848 15,518 21,184
Lereko Sustainability (Pty) Ltd, AGAMA Energy (Pty) Ltd 2 April 2007
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Lereko Sustainability (Pty) Ltd, AGAMA Energy (Pty) Ltd 2 April 2007
Modelling and Analysis of Financial Structuring for SWH Projects Page 31
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Slide 1
Hot water on tap for the City of Cape
Town: the N2 Gateway kickstart
Preparatory Workshop
20th June 2006
Glynn Morris and Saliem Fakir, Lereko/AGAMA Energy
Service Co.
Slide 2
The opportunity
• Lereko/AGAMA Energy will deliver hot water on tap
to 33000 households in Cape Town by 2014 using
solar water heaters at a financial cost which is lower
than the current (and future) costs (to households) of
hot water using current supply systems, i.e. less than
4c/litre @ 45oC
• This infrastructure investment will be achieved
through a concession approach which will offset
50MW of maximum demand and 80GWh of electricity
consumption per annum at no cost to the City of
Cape Town
Lereko Sustainability (Pty) Ltd, AGAMA Energy (Pty) Ltd 2 April 2007
Modelling and Analysis of Financial Structuring for SWH Projects Page 32
DANIDA
Slide 3
The benefits to households
• Social
ß Improved hygiene and health
ß Greater comfort and amenity
ß Reduced risks of blackouts
• Environmental
ß Reduced CO2 emissions 80 000 tonnes/annum
ß Reduced water consumption: 100 000 tonnes/annum
• Financial
ß Lower costs to households
ß More predictable costs to households
ß Improved value of houses
Slide 4
The benefits to the City of Cape Town
• The initiative will address:
ß Visions 1 – 3 and 4 in the Draft Energy
Strategy
ß 1% of the City’s target for renewable
energy
ß 35% of the City’s target for solar water
heating
• It will stimulate the local economy and
create XXX jobs
Slide 5
The approach
• Concessions awarded within the RED/City for
15 years for the supply of domestic hot water
on a fee-for-service basis
• Concessionnaires will fund and finance the
hot water systems and recover the costs from
the households
• This approach is similar to the one
implemented by Dept. Minerals and Energy
and National Energy Regulator of SA for off-
grid electrification in six concessions in rural
areas
Lereko Sustainability (Pty) Ltd, AGAMA Energy (Pty) Ltd 2 April 2007
Modelling and Analysis of Financial Structuring for SWH Projects Page 33
DANIDA
Slide 6
An immediate start
• Lereko/AGAMA Energy will kickstart the
process by retro-fitting solar water heaters to
the 700 housed already built before May
2007 – in time for next winter’s power crunch
• This will:
ß offset approximately 1MW of peak demand
ß provide a visible example of the City’s
commitment to more sustainable housing
ß test the process
Slide 7
Thank you !
Lereko / AGAMA Energy
Tel: +27 11 215 2364
Email: linda@lerekoenergy.co.za
Lereko Sustainability (Pty) Ltd, AGAMA Energy (Pty) Ltd 2 April 2007