AGAMA Financial Modelling SWH For N2 Gateway

Modelling and Analysis of Financial Structuring
for SWH Projects
2nd April 2007
Prepared for: DANIDA
Prepared by: Greg Austin, Glynn Morris and Freek

van Rijn
AGAMA Energy (Pty) Ltd
Tel: +27 21 701 3364
Fax: +27 21 701 3365
Email: glynn@agama.co.za
Web: www.agama.co.za
David Nicol
Lereko Sustainability (Pty) Ltd
Tel: +27 21 419 1881
Mobile: +27 83 642 6616
Email: david@lereko.co.za
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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.
Lereko Sustainability (Pty) Ltd, AGAMA Energy (Pty) Ltd 2 April 2007
Modelling and Analysis of Financial Structuring for SWH Projects Page ii
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ESCO mode Ownership mode

N2 Gateway Metro-wide target Short-term finance Home loan
of 10%
Customer
segmentation
Low-income 22 000 32 000 n/a n/a
Mid-income 36 000 n/a n/a
Higher-income 12 000 n/a n/a
Total 22 000 80 000 n/a n/a
CAPEX R50 million R150 million n/a n/a
DSM funding R2000 R2000 n/a n/a
CDM funding €8/tonne CO2 €8/tonne CO2 n/a n/a
IRR 15.4% 15.0% n/a n/a
SWH installed
costs
Low-income R2900 R2900 R3500 R3500
Mid-income R9668 R9668 R11710 R11710
Higher-income R13480 R13480 R16350 R16350
Service costs
Low-income 2.7 99 1.3 31 2.2 53 2.4 59
c/litre R/month c/litre R/month c/litre R/month c/litre R/month
Mid-income n/a n/a 3.1 114 3.8 140 4.7 170
c/litre R/month c/litre R/month c/litre R/month
Higher-income n/a n/a 3.5 171 3.8 185 4.7 227
c/litre R/month c/litre R/month c/litre R/month
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.
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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.
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Acknowledgements
This study was funded by DANIDA.

Ossie Asmal, Shirene Rosenberg and Wouter Roggen provided the incentive to develop financing
models for solar water heating in the metropolitan area of the City of Cape Town to assist with the
implementation of a large-scale SWH roll-out to meet the targets set by the City in 2003/4.
The authors gratefully acknowledge the contributions of Pieter Wesselink, Export Capital, in
developing a financial model for a fee-for-service delivery mechanism for solar water heaters. In
addition the financial model developed as part of the UNDP/GEF funded SWH project in Namibia is
acknowledged.
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Project Development and Report Structure
Since inception in March 2006, the project developed in two distinct stages:
Stage 1 – The N2 Gateway
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.
Stage 2 – The City of Cape Town
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
3. Review of existing projects and financing mechanisms 2

3.1 Existing domestic SWH systems in the metro 2
3.2 Lwandle 2
3.2.1 Overall description of the project 2
3.2.2 Implementation mode and financing 3
3.3 Durban / eThekwini Solar project 3
3.3.1 Overall description off the project. 3
3.3.2 Implementation mode and financing 3
3.4 Kuyasa low-cost urban housing energy upgrade project 3
3.4.1 Overall description and status of the project 4
3.5 Lynedoch Energy Services 4
3.6 Solar 500 project 4
3.7 International experience 4
4. Modes of implementation and support mechanisms 5

4.1 Modes of implemention 5
4.2 Financing mechanisms 5
4.3 Financial support mechanisms 5
4.3.1 Capital subsidies 5
4.3.2 Interest subsidies 6
4.3.3 Interest holidays 6
4.3.4 National tax and / or municipal rates rebates 6
4.3.5 Basic energy grants 6
4.3.6 Carbon finance 6
4.3.7 Tradable Renewable Energy Certificates (TRECs) 6
4.4 Legislative support mechanisms 7
4.4.1 SWH bylaw 7
4.4.2 Replacement of geysers by the insurance industry 7
5. Financial model development 7

5.1 Technology and market segmentation 8
5.2 Models and modes of implementation 8
5.2.1 Basic assumptions 8
5.2.2 Ownership 8
5.2.3 Energy Services 8
5.3 Limitations of the models 9
5.4 Details of input variables 9
5.4.1 Demographics of the customer portfolio 9
5.4.2 Hot water consumption patterns 9
5.4.3 Financial 10
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5.4.4 Costs 10
6. Scenarios and results 11

6.1 Baseline scenarios 11
6.1.1 N2 Gateway housing development project 11
6.1.2 Metro-wide 11
6.1.3 Personal loans 12
6.2 Legislative support mechanisms 12
6.2.1 SWH bylaw 12
6.2.2 Household insurance 12
6.3 Results 12
6.3.1 Baselines 12
6.3.2 Sensitivities 13
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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Acronyms and abbreviations
CCT City of Cape Town, http://www.capetown.gov.za

CEF Central Energy Fund, http://www.cef.org.za/
CO2 carbon dioxide
DBSA Development Bank of Southern Africa, http://www.dbsa.org/
DEAT Department of Environment Affairs and Tourism, http://www.deat.gov.za/
DFI Development finance institution
DSM Demand-side management
EDC Energy Development Corporation,
ESCO Energy service company
IDC Industrial Development Corporation, http://www.idc.co.za/
kWh kilowatt-hour
RDP Reconstruction and Development Programme
RE renewable energy
SABS South Africa Bureau of Standards, http://www.sabs.co.za/
SWH solar water heater
TREC tradable renewable energy certificate
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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. Review of existing projects and financing

mechanisms
There is significant experience of financing solar water heating systems within a number of SWH
initiatives in the metro area of the Cape of Cape Town and in South Africa as a whole. Variations on
the financing options for the two basic implementation models have been applied in each case. It is
useful to have a brief overview of the experience in these projects and summaries are presented below.
3.1 Existing domestic SWH systems in the metro

Although there is limited documented data on the existing installed capacity of SWH systems in the
metro, there are a significant number of SWH systems in the City of Cape Town (estimated at
between 10,000 – 15,000) which have been installed over the past 40 years. All of these systems are
owned by the homeowner as fixtures of the associated house or guesthouse – until recently no energy
services options have been available for domestic SWH systems. A significant proportion of these
installations –estimated at approximately 15% - were bought prior to the late 1980s on the basis of
short-term asset-based (and specific) loans called home improvement loans. The balance of these
systems has been bought on the basis of cash or funds re-advanced from home loans.
In most of these cases, the primary reason for buying a SWH system is thought to be the long-term
financial benefits of a more predictable and cheaper hot water energy service.
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.
3.2.1 Overall description of the project

The project is located in the Lwandle Township in the Western Cape Province and was implemented
between 1998 and 2000 as an integral part of a Hostels-to-Homes upgrade project.
The project has provided hot water for 300 community showers. It is the largest single SWH project
in Southern Africa with a total collector area of 884 m2 and storage volume of 59 250 litres.
The key stakeholders – and their roles in the project - included:
• Lwandle community, Brett Myrdal and Steve Thorne - concept
• HEAT / Urban SEED – capacity building of energy advisors
• City of Cape Town (formerly Helderberg Sub-structure) – local authority
• Development Bank of SA – project co-financier with community contributions from the
housing subsidy
• Liebenberg & Stander / Safconsult / Glynn Morris – project management / facilitation /
technical design
• Smyth & Andersen – contractor
• Solardome / Tecron– suppliers of collectors and storage cylinders
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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.
3.2.2 Implementation mode and financing

The SWH systems are mounted on the roofs and are considered fixtures on the buildings.
Consequently, these assets are owned by the City of Cape Town.
The project finance for the implementation was raised as a combination of capital derived from an
allocation by the Lwandle community from their housing subsidy and a loan from the Development
Bank of Southern Africa (DBSA). The community contribution amounted to approximately
R1 million of the R4 million total project cost. The loan funding of approximately R2.8 million was
sourced from the Development Bank of South Africa (DBSA) and was secured by the (then)
Helderberg Sub-structure of the City of Cape Town. The loan repayments have been serviced from a
contribution from rent payments amounting to approximately R27/month (escalated from
R17.50/month in 1999) [10] by the residents to the City of Cape Town.
3.3 Durban / eThekwini Solar project

3.3.1 Overall description off the project.
In June 2002, a pilot project for SWH systems was initiated in eThekwini under the auspices of
USAID’s Climate Technology Partnership in liaison with Durban (now eThekwini) Metro Housing
Authority (DMH) [11]. The project aimed to increase community awareness, and to sell and install
approximately 100 appropriately sized SWH systems in two low-income townships selected by DMH.
The ultimate objective of the pilot was to help the housing authority determine whether to incorporate
solar water heating into its housing delivery program, in which they are building approximately
20,000 low-cost homes annually.
3.3.2 Implementation mode and financing

The project was implemented on the basis of ownership of the SWH systems by householders. The
financing model which was used relied on a capital subsidy of 50% of the initial costs for the supply
and installation of the SWH systems.
Householders were expected to raise their own funds in the form of cash or personal loans to pay for
the SWH system. Consumer acceptance of these appliances has been positive, but as with many
programs aimed at poor people in urban and rural areas, affordability has limited adoption.
3.4 Kuyasa low-cost urban housing energy upgrade project

The Kuyasa Project is an urban housing upgrade initiative for 2309 existing low-income houses in a
part of Khayelitsha called Kuyasa. It is an Energy and Climate Change Project of the City of Cape
Town which has been registered as a CDM Project on the basis of a pilot phase which was
implemented in 2002. The full-scale project is expected to be implemented in 2007. It has elicited
international interest due to its status as a Gold Standard CDM project. The CDM project registration
was facilitated by SouthSouthNorth and the technical support for the development of the project
methodology and the design and supervision of the pilot phase implementation was provided by
AGAMA Energy.
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3.4.1 Overall description and status of the project

The overall scope of the project is to upgrade the energy performance of 2309 existing RDP houses
with the supply and installation of systems for the provision of:
• improved levels of thermal comfort using insulated ceilings
• hot water on tap heated by solar water heaters
• energy efficient lighting using compact fluorescent lamps
Subsequent to the pilot phase and in an effort to provide finance to the project, the Department of
Environmental Affairs and Tourism appointed AGAMA Energy to develop a business plan for the
implementation of the full project on the basis of an Expanded Public Works Programme grant. In
this case, the institutional arrangements for implementation of the project between the City of Cape
Town criteria of the EPWP grant funding required that the mode of implementation of the project
would need to be essentially and ownership-based approach with no institutional or financial provision
for maintenance. The outcome of the business plan has highlighted the need to adopt a more
appropriate mode of implementation. An energy services mode is currently under development.
3.5 Lynedoch Energy Services

AGAMA Energy has been operating a small energy services project since December 2005 for eleven
low-income households at the Lynedoch Eco-village, near Stellenbosch. The operation has supplied
over 180 litres of hot water per day per household from 200 litre/2.8m2 close-coupled SWH systems at
a cost of approximately R166 per month over a period of nine years.
3.6 Solar 500 project

The Solar 500 Project is a national South African SWH project which seeks to accelerate the uptake of
SWH systems by removing market barriers to SWH systems. The project is currently being
implemented by CEF in conjunction with the Department of Minerals and Energy, the Department of
Science and Technology, the United Nations Development Programme, the Global Environment
Facility and the South African Bureau of Standards (SABS).
As in the case of the eThekwini Solar project, the initiative is implemented as an ownership-based
model with a decreasing capital subsidy for the supply and installation costs of the 500 units.
Approximately 100 applications have been received to date.
3.7 International experience

International experience with domestic SWH systems has been largely focussed on combinations of
subsidised initial costs and subsidised interest rates for the supply and installation of SWH systems
which are owned by the associated householder.
Recently, there has been some increased interest in fee-for-service modes of implementation. Some of
this work has been undertaken and documented by Green Markets International (http://green-
markets.org/SWH/).
An example of a fee-for-service scheme is the one implemented by Lakeland Electric, Florida among
50 households. This is the first energy services model for SWH systems in the USA.
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4. Modes of implementation and support mechanisms

4.1 Modes of implementation
There are essentially two modes of implementation of SWH systems, namely:
• An ownership-based mode in which the householder acquires the SWH system
• An energy services mode in which the ownership of the SWH system is retained by an energy
services provider who assumes all responsibility for supply, installation, maintenance and
replacement of the equipment in return for a service fee.
4.2 Financing mechanisms

There are different financing mechanisms for SWH systems. The most appropriate financing
mechanism for a particular SWH client depends on the mode of implementation for that client.
In the case of ownership-based modes of implementation the most appropriate financing options
include:
• Cash purchase
• Credit purchase using an overdraft or a credit card
• Short- or long-term asset-based finance using a targeted SWH loan or a mortgage-based
advance
In the case of an energy services mode of implementation, the finance issue for the client is solved as
an integral part of the overall service offering. Consequently, the financing challenge is focussed at
the level of the range of enterprise funding mechanisms for a service company rather than on the
individual customer level.
4.3 Financial support mechanisms

Support mechanisms for SWH include legislative, financial and awareness programmes. These
should be complementary and ideally, they should be implemented together as a suite of support
mechanisms for increased uptake of SWH systems.
A range of financial support mechanisms are available to support either, or both, of the modes of
implementation. These are described below.
4.3.1 Capital subsidies

Financial support by means of capital subsidies includes options such as demand side management
(DSM), subsidies under the CEF Solar 500 project, supplementary grants to the housing subsidy for
low-income housing and others.
Eskom currently manages a Demand Side Management (DSM) fund. This fund is focused on
subsidising interventions that reduce the overall electrical demand in the country – and hence Eskom’s
involvement in the fund has been called into question, since it is not compatible with their core
business. The discussion as to the relocation of the National Energy Efficiency Agency (NEEA)
under the Central Energy Fund (CEF) is currently ongoing.
Regarding DSM for solar water heating, it is anticipated that the fund will provide a capital subsidy at
a minimum of R2000 per SWH system.
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4.3.2 Interest subsidies

Subsidies on the interest for loans are a useful financial support mechanism. Typical examples
include Green housing bonds (home loans) and preferential rates for lower risk customers at
commercial banks.
Although not currently an institutionally debated mechanism, there is a positive impact regarding
SWH uptake through provision of an interest rate subsidy on SWHs. This could, for example, be
offered through a revolving credit fund that would be able to accessing risk guarantee(s) for
financiers.
4.3.3 Interest holidays

The use of interest holidays is focussed on ‘back-loading’ the repayment profile for loans to make the
repayments more affordable in the short term. This does not necessarily imply a lower overall cost to
the lender (it is more likely to add to the overall cost) but the access to the loan is made easier.
4.3.4 National tax and / or municipal rates rebates

Tax or rates rebates are a very effective method of providing tax relief as a reward to liable taxpayers
who are adopting policies which need to be supported by national or local government.
4.3.5 Basic energy grants

A basic energy grant is already implemented in South Africa and is provided in terms of a small
allocation of “free electricity”. The motivation for a basic energy grant is to provide a lifeline service
to very poor households. This mechanism could be applied in the form of “free hot water” as a
supplementary grant to (or instead of) the current levels of “free electricity”.
4.3.6 Carbon finance

One of the benefits of using SWH systems for heating water is the environmental benefit of reductions
in the levels of emissions, such as CO2, associated with (predominantly) coal-fired electricity
generation in South Africa. A number of carbon finance mechanisms have been developed within the
context of the compliance-based carbon mitigation mechanisms, such as the Clean Development
Mechanism (CDM), developed multilaterally through the UNFCCC or with the context of a voluntary
market.
The Clean Development Mechanism (CDM) provides the framework for quantifying and certifying
the avoided emissions reductions for projects. Solar water heating does have a significant impact on
avoiding emissions at power stations, given that some 92% of the country’s electricity is generated
using coal-fired thermal stations with a very high emissions co-efficient. Including losses in lines
from Limpopo and Mpumalanga to Cape Town, and standing losses in electric geysers, there are 1.47
kg CO2-equivalent emissions per kWh of electricity consumed (in heating water in a household).
Avoided emissions are called a Certified Emission Reduction, or CER. The current price for CERs is
said to be €8/tonne CO2.
For the purposes of this study, the energy services model incorporates a CER revenue stream, as per
the details outlined above.
4.3.7 Tradable Renewable Energy Certificates (TRECs)

A related approach – as widely used in Australia – is to use the Tradable Renewable Energy
Certificate (TREC) system for subsidising the capital cost of SWHs over a ten-year crediting period.
The TREC system values the same avoided emissions as are calculated for the CDM approach, but
issues a certificate for avoided electricity consumption, that is redeemed when the sponsor of the
system pays the allocated value. One TREC corresponds to 1 MWh of electricity avoided.
The current approximate value of a TREC is South Africa: R200
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Average annual household energy expenditure on hot water: 2 MWh

Total energy displacement by the unit over a 10 year period: 20MWh
Total up-front capex subsidy available from TREC: R4000
Thus there is potentially a sizable contribution available from this approach. However, given the
current local TREC framework and market conditions, the model does not include TRECs as a
realistic source of revenue in the short term.
4.4 Legislative support mechanisms

In this study two legislative support mechanisms are contemplated: the current SWH bylaw being
developed for the CCT, and replacement of electric geysers within the insurance industry context
4.4.1 SWH bylaw

An exciting example of a legislative support mechanism is the SWH bylaw which is currently being
developed by CCT to accelerate the uptake of SWHs within the City. This bylaw is in its 9th draft and
is expected to come into effect during the course of 2007.
The impact the bylaw will have is to increase the speed of installation. These increases are expected
to be in the order of 9,000 SWHs per year in the middle- and high-income sectors, and 4,000 SWHs
per year in the low-income market [1].
4.4.2 Replacement of geysers by the insurance industry

This mechanism involves the replacement of failed conventional electric geysers with appropriately
sized SWH systems. The effective cost of the SWH in any replacement analysis would then be that of
the SWH system less the cost of a new electric geyser, in other words, it is effectively a form of
capital subsidy.
The assumption in this support mechanism is that the insurance industry provides the same level of
coverage for the SWH as for the conventional system, but at reduced monthly premiums to reflect the
reduced risk of internal damage to ceilings and household goods. This reduced risk is only relevant
with an externally-mounted close-coupled SWH system.
The number of geyser installations in South Africa is reported to be approximately 40,000 per month
[4]. It is estimated that the proportion of these in the metro area of the City of Cape Town is 7.5%,
corresponding to 3,000 geysers monthly. The number of insurance claims relating to geyser
dysfunction in CCT equals 1,800 monthly based on the assumption that 60% of all geyser installations
are undertaken as a result of insurance claims [6].
5. Financial model development

Three financial models were developed separately to analyse three primary approaches to the financial
structuring of SWH projects. These models were derived from models which have been developed
over the past three years. The models used in this study include:
• an energy services or fee-for-service approach
• a short-term finance approach, and;
• an insurance industry driven approach.
On reflection, the insurance model did not add particular value when assessing the financial aspects,
but did have an impact in terms of the uptake of SWHs. This information is reflected in Section 4.4.2.
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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.
5.1 Technology and market segmentation

The domestic market has been broadly categorised into three segments: high-, middle- and low-
income. For the City of Cape Town, the proportions of households in these sectors are 40%, 45% and
15% respectively, for the existing scenario where there is a suppressed demand for energy [2]. The
alternate model, assuming a future unsuppressed demand for energy, has the proportions at 30%, 34%
and 36% respectively. Where appropriate, the models assume a rollout as per the suppressed (current)
demand situation.
Extensive research was conducted into the technology options and corresponding costs for currently
available SWH. The following 3 SWH models have been selected for the three segments:
• Low-income: 100 litre/1.4 m2, low pressure, direct close-coupled evacuated tube system, no
electrical backup
• Middle-income: 200 litre/2.9 m2, high pressure, direct close-coupled evacuated tube system,
2 kW electrical backup
• High-income: 300 litre/4.2 m2, high pressure, direct close-coupled evacuated tube system,
3 kW electrical backup
All the systems are externally mounted on the roof.
5.2 Models and modes of implementation

Two basic modes of implementation, as described in Section 4.1, are considered here. These are:
• an ownership mode
• an energy services mode
In addition, some basic assumptions have been made which are applied to both models.
5.2.1 Basic assumptions

Certain basic assumptions have been made to establish a reasonable basis for the models.
• Hot water is assumed to be at 60oC, with a final mixed temperature of 45oC.
• An annual average cold water inlet temperature of 16.2oC is used throughout.
• An average daily solar radiation of 6.1 kWh/m2 is used throughout.
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.
5.2.3 Energy Services

The energy services model is predicated on a large-scale rollout of SWHs within a dedicated area,
such as perhaps a concession area, by an energy services company. The energy services company
would capitalize the business which would involve raising the funds to both cover hardware and
installation costs, operating and maintenance costs, and general overheads.
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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.
5.3 Limitations of the models

The major limitation is the assumption around an annual, linear increase in electricity tariffs. Given
that there are higher than inflation price increases ahead, these impact on the value ascribed to backup
electrical heating, most notably in the winter months. Eskom currently has an average selling price of
a unit of electricity at 18c/kWh to the municipalities, while a new coal-fired station will have an
average sale price of 33c/kWh [4]. Eskom intends to invest R150 billion into 9000 MW of new
generation capacity between April 2007 and April 2012, over and above the existing ~ 39000 MW
capacity. This will result in an average electricity cost in 2012 expressed in today’s Rand of 21c/kWh
which is equivalent to a 16% increase in electricity costs before factoring inflation. These increases
will come in steps and not linearly; the linear function over five years is an approximate 3% above
inflation per annum increase.
The models are structured to achieve the high-level comparisons between different financing
approaches, and as such have certain (technical) limitations. A full economic analysis of the
performance of a SWH should include dynamic hot water usage profiles, dynamic cold water inlet
temperatures and dynamic variable solar insolation. The models developed do not include these
dynamic components, but rather use average daily hot water consumption, solar insolation and cold
water figures to reduce the models’ complexity. Details regarding these inputs are described in
Section 5.4.
5.4 Details of input variables

5.4.1 Demographics of the customer portfolio
This is applicable only in the energy services model (see Section 5.2.3). The domestic market is in the
proportion of 40%, 45% and 15% in the high-, middle- and low-income sectors respectively (see
Section 5.1).
5.4.2 Hot water consumption patterns

These are estimated per income group, as follows:
• Low-income = 20 litres of hot water per person per day
• Middle-income = 30 litres of hot water per person per day
• High-income = 40 litres of hot water per person per day
For the baseline case it has been assumed that there four people in the household [3].
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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. Scenarios and results

6.1 Baseline scenarios
Three scenarios are developed based on the inputs set out above. These include:
• An energy services approach to the provision of hot water to the home owners in the N2
Gateway project
• An energy services approach for a metro-wide programme for SWH in terms of the CCT target
of 10% of households with SWH
• Personal loans
6.1.1 N2 Gateway housing development project

It has been assumed that the rollout in the N2 gateway will take place through an energy services
approach, and that all the houses (apartments) are low-income households utilising a 200-litre high
pressure system. This particular unit was chosen as it offers a comparable level of service to the units
that have already been constructed as part of the N2 Gateway Project. Given that this would be a
large-scale dedicated project, with the total number of systems equalling 22,000, it has also been
assumed that there would be a 20% discount on the system materials costs.
Further assumptions are that there is a capital subsidy in the form of DSM funding in the amount of
R2000. Overall, it is assumed that there will be setup costs of R5 million; legal costs of R500,000;
marketing costs of R1 million; a gearing ratio of 50%; and that the project is developed as a CDM
project with associated CERs valued at €8/tonne CO2.
The costs to administer the energy business are assumed to be 1% of the total capex amount of
R50 million, i.e. R500,000 per annum. The (low-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 300 SWHs per month.
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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6.1.3 Personal loans

The three household segments were analysed in two different ways:
• loans raised on the household bond, and
• short-term (5-year) loans
All the financial and other parameters are assumed to be as described in Section 5.4.
The other baseline assumption is that there is no DSM or CDM funding, as it is unlikely that
individually financed models would be eligible for these support mechanisms.
6.2 Legislative support mechanisms

6.2.1 SWH bylaw
No specific modelling was performed around the impact of the bylaw as it is motivating factor that
will push demand rather than a financial mechanism in its own right. What we can surmise from the
data presented in [1] is that the effect of the bylaw will lead to an additional 13,000 SWHs installed in
CCT per year (see Section 4.4.1).
6.2.2 Household insurance

In Section 4.4.2 the insurance industry support via replacement of failed electric geysers is estimated
to be in the order of 21,600 per annum (1,800 per month).
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.
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.
6.3.1.3 Personal loans

Using a personal home loan
This scenario assumes that the SWH is purchased by means of a home loan. The assumption is that
the SWH is installed with a new house i.e. the loan repayment takes place over the term of the home
loan, which is here assumed to be 20 years. This is an appropriate assumption for SWH systems
installed within the legal framework of a SWH bylaw.
• For the high-income, 300 litre/4.2m2 system, the annualised NPV is R2,729 over 20 years,
corresponding to R227/month. This is equivalent to 4.7 c/litre of hot water.
• For the middle-income, 200 litre/2.9m2 system, the annualised NPV is R2,045 over 20 years,
• For the low-income, 100 litre/1.4 m2 system, the annualised NPV is R708 over 20 years,
Using a short-term (5 year) loan

This scenario assumes that the SWH is purchased by means of a personal loan with payment term of 5
years.
• For the high-income, 300 litre/4.2m2 system, the annualised NPV is R1,919 over 15 years,
• For the middle-income, 200 litre/2.9m2 system, the annualised NPV is R1,456 over 15 years,
• For the low-income, 100 litre/1.4 m2 system, the annualised NPV is R569 over 15 years,
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
SWH market DSM subsidy level

R0 R 1,000 R 2,000 (baseline) R 3,000
Low-income 1.6 39 1.5 35 1.3 31 1.1 27
Middle-income 3.9 144 3.5 129 3.1 114 2.7 99
High-income 4.4 215 4.0 193 3.5 171 3.1 149
Table 2: Impact of ESCO Metro-wide model operational overheads on end-user costs
SWH market ESCO overheads (as % of capex)

0.5% 1% (baseline) 1.5% 2.0%
Low-income 1.4 34 1.4 34 1.4 35 1.4 35
Middle-income 3.1 113 3.1 114 3.2 116 3.2 117
High-income 3.5 169 3.5 171 3.6 174 3.6 175
Table 3: Impact of ESCO Metro-wide model loan finance charges on end-user costs
SWH market Nominal loan finance rate

11.5% 12.5% (baseline) 13.5% 14.5%
Low-income 1.4 34 1.4 34 1.4 34 1.4 35
Middle-income 3.1 113 3.1 114 3.1 115 3.2 115
High-income 3.5 170 3.5 171 3.5 172 3.5 173
6.3.2.2 Ownership mode

The ownership mode was tested for sensitivities around the
• Capital subsidy, in the form of DSM
• Loan finance interest rate
The capital subsidy, in the form of DSM, was varied from the baseline (zero) upwards in increments
of R1,000 up to a maximum of R3,000. The variations in cost/litre of hot water for an assumed
household occupancy of 4 people are summarised in Table 4 and Table 5 for the home-loan and short-
term loan scenarios respectively.
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Table 4: Impact of DSM subsidy levels for SWHs purchased on home loans

R 0 (baseline) R 1,000 R 2,000 R 3,000
Low-income 2.4 59 1.8 44 1.4 33 0.8 19
Middle-income 4.7 170 4.1 151 4.0 144 3.4 125
High-income 4.7 227 4.4 214 4.1 201 3.9 188
Table 5: Impact of DSM subsidy levels for SWHs purchased on 5-year personal loans

R 0 (baseline) R 1,000 R 2,000 R 3,000
Low-income 2.2 53 1.8 39 1.4 30 1.1 20
Middle-income 3.8 140 3.6 112 3.3 104 3.1 95
High-income 3.8 185 3.6 151 3.4 142 2.9 133
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
SWH market Interest rate subsidy level

10.5 % (baseline) 9.5% 8.5% 7.5%
Low-income 2.4 59 2.3 57 2.3 55 2.2 52
Middle-income 4.7 170 4.5 163 4.3 156 4.2 149
High-income 4.7 227 4.5 217 4.3 208 4.1 198
Table 7: Impact of interest rate subsidy levels for SWHs purchased on 5-year personal loans
SWH market Interest rate subsidy level

10.5 % (baseline) 9.5% 8.5% 7.5%
Low-income 2.2 53 2.2 52 2.1 51 2.1 50
Middle-income 3.8 140 3.8 138 3.7 137 3.7 135
High-income 3.8 185 3.8 183 3.7 180 3.7 178
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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.
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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.
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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.
10.1.3 SWH in the N2 Gateway Project

The controversy surrounding the N2 Gateway project continues and there is no clear indication of
when the project will be completed, if at all. An unfortunate outcome of this controversy is that issues
such as Solar Water Heating have been forced to take a backseat. With budgets already strained it is
unlikely that such projects will receive much support going forward. Several attempts were made to
contact Thubelisha homes to establish their SWH strategy, but they refused to give comment.
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10.1.4 Summary of work completed – Stage 1

Partnership between Agama Energy and Lereko Energy
Significant time and effort was spent on formalising a partnership between Lereko Energy and Agama
Energy. This relationship is still in existence, with Lereko and Agama working closely together on the
delivery of this report and as partners in other SWH projects.
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.
Meetings with the City of Cape Town and Key Stakeholders

A number of productive meetings took place with the City and other stakeholders, before the project
was handed to Thubelisha Homes. Lereko Energy planned to raise finances through donor funding,
DSM and other sources and manage the installation and then the ongoing operation of the project.
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10.2 Annexure B – The Fee for Service Model

10.2.1 Detailed Assumptions and Costs
Solar Water Heating Module VOLUME DISCOUNTS? (Y/N) y
Detailed Assumptions - Costs LP HP

100-litre 100-litre 200-litre 300-litre
Number Indigent Low Medium High Total
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

Piping 1 600
Heat Exchanger 1
Volume Discount 1 (600)
2,400

Piping 1 600
Heat Exchanger 1
Volume Discount 1 (2,042)
8,168

Piping 1 750
Heat Exchanger 1 -
Volume Discount 1 (2,870)
11,480
Labour / Installation Cost 500 500 1,500 2,000

Installed Cost per Unit 2,900 2,900 9,668 13,480
Maintenance Cost
Annual 50 50 100 100

5 Yearly 250 250 500 500
Total amortised cost per month 13 13 16 16
Contingency
Administration Costs
Capex Value 50,000,000

% per annum 1.00%
Annual fee - payable monthly in advance 500,000
Central Administaion Costs (overheads not covered by FAC)
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10.2.2 Assumptions and Results
amount
Assumptions DSM? (Y/N) y 2,000 Results
Number Indigent Low Medium High Total Project
Combination (monthly installations) % 0% 0% 100% 0% 100% must NPV @ 25%

Number of Units per month 21 45 24 10 100 15%
Increase in monthly installations 5% 10%
Maximum cumulative installations 22,000 IRR (before tax) 15 years
Maximum monthly installation 300 IRR (after tax) 15 years
Costs Indigent Low Medium High Total Equity Investor
Installation
Installed Cost per Household 900 900 7,668 11,480 NPV @ 25%
Weighted installed cost per unit - - 7,668 - 7,668 15%
10%
Maintenance Geared IRR 15 years
Amortised maintenance cost per unit per month 13 13 16 16
Weighted maintenance cost per unit per month - - 16 - 15.54
Fund Administration monthly
Marketing monthly
once-off 1,000,000
Other
Consulting development cost recovery once off - payable month 1 5,000,000
Structuring fee (financier and other) once off - payable month 1
Legal once off - payable month 1 500,000
Revenue Indigent Low Medium High Total
Consumer contribution
Consumer contribution per unit per month 17 33 122 182
Weighted consumer contribution - - 122 - 121.51
Government contribution
Basic elecricity grant per consumer per month - - - -
Weighted electricity grant - - - - -
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%
real discount rate = investment rate 7.00%
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%
DANIDA
10.2.3 Detailed Assumptions and Revenue
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
Income from Consumer

Cost of electricity Year 2007 R 0.38
Expected energy saving 45% per month 17 33 112 167 Consumer usage fee per month
Basic electricicty grant per month - - - -
Total saving per month 17 33 112 167
Solar water heater charge % of saving 100% 100% 100% 100% Government Grants
Solar water heater charge R per month 17 33 112 167 Usage fee (basic grant) per month -
Installation Subsidy per installation -
Government Grants -
Basic electricity grant 811,380,115
If yes, input "1" - - - - - 811,380,115 Carbon Credits
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) - -
10.2.4 Cash Flow Models
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
DANIDA
10.2.5 User Cash Flows
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
10.2.6 Electrical Savings
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
10.2.7 Debt Model
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
DANIDA
10.2.8 Income Statement
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
Calculation of depreciation and wear and tear allowance
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
10.2.9 Tax Calculation
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
Tax - - - - - - 3,883,167 5,465,945 9,423,667 11,998,384
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
DANIDA
10.3 Annexure D – The Short Term finance Model
10.3.1 Financing Scenarios
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
INPUTS TO FINANCING SCENARIOS

Solar Revolving Fund (SRF) inputs Home Loan (HL) inputs
SRF loan rate srf_rate 5% HL rate hl_rate 10.5%
SRF deposit srf_deposit 5% HL deposit hl_deposit 0%
SRF repayment period srf_period 5 years HL repayment period hl_period 20 years
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)
SOLAR WATER HEATER CASH FLOW Year: 0 1 2 3 4 5 6 7 8 9 10

Loan repayments: Revolving fund: 5 years 525 2,194 2,194 2,194 2,194 2,194 - - - - -
Operating cost with escalation: SWH 534 590 652 721 789 856 920 989 1,064 1,143
RC1: with general escalation - - - - - - - - - -
RC2: Replacement of system - - - - - - - - - 17,934
RC3: Recurring cost: Anode - - 587 - - 689 - - 810 -
RC4: Recurring cost: Element - - - - 653 - - - - 854
RC5: Recurring cost: Pressure valve - - - - 980 - - - - 1,281
SWH: Annual cash flow 525 2,728 2,784 3,433 2,915 4,617 1,546 920 989 1,873 21,213
SWH: Cumulative cash flow 525 3,253 6,038 9,471 12,386 17,003 18,548 19,469 20,458 22,331 43,545
ELECTRIC WATER HEATER CASH FLOW

Existing EWH - no capital cost - -
Operating cost with escalation: EWH 1,752 1,936 2,140 2,364 2,589 2,809 3,020 3,246 3,490 3,751
RC2: Replacement of system - - - - 4,538 - - - - 5,931
RC4: Recurring cost: Element - - - 619 - - - 767 - -
RC5: Recurring cost: Pressure valve - - - 929 - - - 1,151 - -
EWH: Annual cash flow - 1,752 1,936 2,727 3,913 7,127 3,498 3,020 5,165 4,299 9,682
EWH: Cumulative cash flow - 1,752 3,689 6,415 10,328 17,455 20,953 23,973 29,138 33,437 43,119
Year: 0 1 2 3 4 5 6 7 8 9 10
SWH Loan part 525 2,194 2,194 2,194 2,194 2,194 - - - - -

SWH Cash part - 534 590 1,239 721 2,423 1,546 920 989 1,873 21,213
SWH: Annual cash flow 525 2,728 2,784 3,433 2,915 4,617 1,546 920 989 1,873 21,213
SWH: Cumulative cash flow 525 3,253 6,038 9,471 12,386 17,003 18,548 19,469 20,458 22,331 43,545
EWH Loan part - - - - - - - - - - -

EWH Cash part - 1,752 1,936 2,727 3,913 7,127 3,498 3,020 5,165 4,299 9,682
EWH: Annual cash flow - 1,752 1,936 2,727 3,913 7,127 3,498 3,020 5,165 4,299 9,682
EWH: Cumulative cash flow - 1,752 3,689 6,415 10,328 17,455 20,953 23,973 29,138 33,437 43,119
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
Cash flow Cash flow Cum ulative savings betw een

SWH: Solar Revolving Fund SWH: Solar Revolving Fund SWH: Solar Revolving Fund &
EWH: Existing EWH: Existing EWH: Existing
25,000 100,000 25,000
Cumulative cash
SWH EWH SWH EWH

Annual cash flow
20,000 80,000 20,000

flow [N$]
[N$/annum]
Savings: EWH -
15,000 60,000 15,000

SWH [N$]
10,000 40,000 10,000
5,000 20,000 5,000
- - -
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
DANIDA
10.3.2 Main Analysis Sheet
Main Analysis Sheet SELECT / ENTER

Town Cape Town
Tariff type Pre-payment
Hot water per person per day [60°C] 30 litres
Number of persons 6 persons
SWH system 200 litre HP direct
EWH system EWH, 150l, 3kW
Irradiance zone 6.1 kWh/m²/day
Daily hot water consumption 180 litres/day
DSM funding? (Y/N) Y 3000
Electrical consumption
SWH: Average daily consumption 3.54 kWh/day
EWH: Average daily consumption 11.60 kWh/day
Tariff 38.50 c/kWh
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
Residual value of project = zero 0
EWH capex 3,472 Interval [Years]

Operating cost with escalation: EWH 1,630 every 1
Recurring costs (click '+' for details)
RC1: with general escalation 0 R every 1
RC2: Replacement of system 3,472 R every 5
RC3: Recurring cost: Anode 500 R every 3
RC4: Recurring cost: Element 500 R every 4
RC5: Recurring cost: Pressure valve 750 R every 4
Residual value of project = zero 0
DANIDA
10.3.3 Global Variables
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%
VAT vat 14%

Climate zones for irradiance & inlet water temperatures (click '+' to view)
Average
daily Inlet water
Climate zone Name of zone irradiance temperature
[kWh/m²/day] [°C]
Zone 1: Inland 6.5 22
Zone 2: Zone 2 6.0 20
Zone 3: Zone 3 6.0 20
Zone 4: Coast 5.5 16.2
Empirical values (click '+' to view)

Solar collector efficiency solar_efficiency 65%
Electrical heating efficiency heating_efficiency 95%
SWH heat losses 60 W/hour at 150 lit
EWH heat losses 80 W/hour at 150 lit
Hot water temperature hot_water_temp 60 °C
Oversized SWH storage tank oversize_tank 30%
Table for non-linear real tariff escalation per annum (click '+' to view)
Carbon credits (click '+' to view) None

Activate after carbon_go 1 years
Carbon per kWh of coal fired power generated 1.47 tons/MWh
Eskom energy mix: Coal vs Total 92%
Carbon per MWh carbon_per_MWh 1.352 tons/MWh
Carbon credits carbon_rate 80 R/ton
Translate carbon_go - ignore carbon_on 0
DANIDA
10.3.4 Water Heater Costing
Costing for hot water systems
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
Name of range: ewh_range

EWH, 100l, 2kW 1,565 350 1,000 3,323 40 100 2
EWH, 150l, 3kW 1,696 350 1,000 3,472 50 150 3
EWH, 200l, 4kW 2,696 350 1,000 4,612 60 200 4
EWH, 250l, 4kW 4,522 350 1,000 6,694 70 250 4
EWH 1 - undefined - - - - - -
10.3.5 Solar Water Heater LCC
Solar Water Heater LCC calculations NB set project_life = 20
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
RC2: Replacement of system - - - - - - - - - 4,237
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
DANIDA
10.3.6 Sensitivity Calculations
homeloan - 20 years repayment, annualised over 20

DSM DSM
no CDM with CDM R1k R2k R3k no CDM with CDM R1k R2k R3k
people R/annum litres c/litre
1 2,045 1,913 1,806 1,729 1,505 10,950 18.68 17.47 16.49 15.79 13.74
2 2,045 1,853 1,806 1,729 1,505 21,900 9.34 8.46 8.25 7.89 6.87
3 2,045 1,793 1,806 1,729 1,505 32,850 6.23 5.46 5.50 5.26 4.58
4 2,045 1,729 1,806 1,729 1,505 43,800 4.67 3.95 4.12 3.95 3.44
5 2,045 1,669 1,806 1,729 1,505 54,750 3.74 3.05 3.30 3.16 2.75
6 2,325 2,023 2,087 2,010 1,786 65,700 3.54 3.08 3.18 3.06 2.72
shortterm - 5 years - annualised over 15

DSM DSM
no CDM with CDM R1k R2k R3k no CDM with CDM R1k R2k R3k
1 1,456 1,327 1,349 1,243 1,136 10,950 13.30 12.12 12.32 11.35 10.37
2 1,456 1,268 1,349 1,243 1,136 21,900 6.65 5.79 6.16 5.68 5.19
3 1,456 1,209 1,349 1,243 1,136 32,850 4.43 3.68 4.11 3.78 3.46
4 1,456 1,146 1,349 1,243 1,136 43,800 3.32 2.62 3.08 2.84 2.59
5 1,456 1,087 1,349 1,243 1,136 54,750 2.66 1.99 2.46 2.27 2.07
6 1,778 1,481 1,671 1,565 1,458 65,700 2.71 2.25 2.54 2.38 2.22
upfront - annualised over 15 (SAME AS SHORTTERM)

no CDM with CDM with DSM @ R2k, no CDM no CDM with CDM with DSM @ R2k, no CDM
1 1,243 10,950 0.00 0.00 11.35
2 1,243 21,900 0.00 0.00 5.68
3 1,243 32,850 0.00 0.00 3.78
4 1,243 43,800 0.00 0.00 2.84
5 1,243 54,750 0.00 0.00 2.27
6 1,565 65,700 0.00 0.00 2.38
DANIDA
10.4 Annexure D – The N2 Gateway SWH Presentation
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
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
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
Tel: +27 21 881 3282

Email: greg@agama.co.za

AGAMA Financial Modelling SWH For N2 Gateway

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AGAMA Financial Modelling SWH For N2 Gateway

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Modelling and Analysis of Financial Structuring

for SWH Projects

2nd April 2007

Prepared for: DANIDA

Prepared by: Greg Austin, Glynn Morris and Freek

ESCO mode Ownership mode

This study was funded by DANIDA.

Project Development and Report Structure

Stage 1 – The N2 Gateway

Stage 2 – The City of Cape Town

3. Review of existing projects and financing mechanisms 2

4. Modes of implementation and support mechanisms 5

5. Financial model development 7

6. Scenarios and results 11

Acronyms and abbreviations

CCT City of Cape Town, http://www.capetown.gov.za

3. Review of existing projects and financing

3.1 Existing domestic SWH systems in the metro

3.2.1 Overall description of the project

3.2.2 Implementation mode and financing

3.3 Durban / eThekwini Solar project

3.3.2 Implementation mode and financing

3.4 Kuyasa low-cost urban housing energy upgrade project

3.4.1 Overall description and status of the project

3.5 Lynedoch Energy Services

3.6 Solar 500 project

3.7 International experience

4. Modes of implementation and support mechanisms

4.2 Financing mechanisms

4.3 Financial support mechanisms

4.3.1 Capital subsidies

4.3.2 Interest subsidies

4.3.3 Interest holidays

4.3.4 National tax and / or municipal rates rebates

4.3.5 Basic energy grants

4.3.6 Carbon finance

4.3.7 Tradable Renewable Energy Certificates (TRECs)

Average annual household energy expenditure on hot water: 2 MWh

4.4 Legislative support mechanisms

4.4.1 SWH bylaw

4.4.2 Replacement of geysers by the insurance industry

5. Financial model development

5.1 Technology and market segmentation

5.2 Models and modes of implementation

5.2.1 Basic assumptions

5.2.3 Energy Services

5.3 Limitations of the models

5.4 Details of input variables

5.4.2 Hot water consumption patterns

6. Scenarios and results

6.1.1 N2 Gateway housing development project

6.1.3 Personal loans

6.2 Legislative support mechanisms

6.2.2 Household insurance

6.3.1.3 Personal loans

Using a short-term (5 year) loan

SWH market DSM subsidy level

Table 2: Impact of ESCO Metro-wide model operational overheads on end-user costs

SWH market ESCO overheads (as % of capex)

SWH market Nominal loan finance rate

6.3.2.2 Ownership mode

SWH market DSM subsidy level

SWH market DSM subsidy level