popua solar farm presentation to hon. prime minister and cabinet of government of tonga 4 may 2011...

Popua Solar Farm Presentation to Hon. Prime Minister and Cabinet of Government of Tonga 4 May 2011 2011 Meridian Energy Limited and Tonga Power Limited

Introduction Popua Solar Farm is a key first step on Tongas roadmap to reduce its dependence on diesel for power generation Partnership between Tonga Power and Meridian Energy and involves concessional aid funding from NZ Aid and European Development Fund The project is fully scoped and ready for commitment to construction subject to final approvals from funders Open book due diligence has been undertaken by TPL, TERM, NZ Aid and European Investment Bank Seeking Government Guarantee to back Tonga Powers commitments under concessional loan and power purchase agreement Opportunity for Government of Tonga to champion the project

Why Solar? Solar photovoltaics is the only renewable energy source that is technically and commercially feasible for Tonga at this time It will become increasingly the renewable of choice around the world as costs and efficiency continue to improve Has no moving parts so ongoing maintenance costs are low In the longer term, support from biomass and/or biodiesel would be ideal and provide firm generation capacity Wind generation could be a longer term option but challenging due to resource quality, technology options and cost - requires long term monitoring of wind before deploying As a pilot, a solar facility is the most appropriate technology to implement

Meridian Energy NZs largest electricity generator and is owned by NZ Government Vertically integrated generator, retailer and developer of electricity using only renewable resources Owns 2885 MW of hydro, wind and solar power generation in NZ, Australia and USA, with over 2000MW under development or construction 6 subsidiaries in related technologies - including smart metering, industrial cogeneration, energy efficiency Meridians vision is to be the Global Reference Company in Renewable Energy Strategy was to offer real renewable projects in the Pacific Islands utilising development assistance as subsidy mechanism to accelerate their development Popua project provides Meridian an early opportunity to develop and operate solar assets in its home region

Brief History of the Project Late 2008 Meridian discussions to validate Pacific Island renewables business model and subsidy mechanism (EIB, World Bank, ADB) Feb 2009 Initial discussions between Meridian solar team & Tonga Power Mid 2009 NZ Government / trade delegation to Pacific Islands - facilitated initial discussions between Meridian CEO and Tonga Government Aug 2009 Tonga Solar Proposal presented to NZ Government Nov 2009 Meridian Corporate Ventures Manager attended TERM meeting Jun 2010 Final TERM report released Jul 2010 Non-binding MOU between Meridian and TPL signed, commitment from NZAid for geotechnical survey Aug - Dec 2010 Geotechnical survey, detailed design, full open tender process for solar vendor / turnkey contractor, commercial discussions with TPL and EIB, Tonga legislation for IPPs Jan - Mar 2011 Project structure finalised, commercial negotiations on key documents, supplier selected, project cost and production finalised, Environmental approval, EIB / MFAT due diligence Apr 2011 Project ready for construction - seeking approvals from company Boards, EIB, MFAT and Government of Tonga

Popua Solar Farm - Parties Role of Party Provide transmission connection and sub-lease at Popua site Purchase power from solar farm under 20 year power purchase agreement On lend ~$US3.5m to Meridian on same terms and conditions as EIB May undertake some of the operations and maintenance Provide 20 year concessional loan of $US3.5m to Tonga Power at ~2.4% fixed interest rate Developer and owner of solar farm as independent power producer Responsible for managing operations and maintenance Takes on all construction, operational and solar production risks $NZ2.5m grant to the project This results in a reduction in PPA price of ~US7c/kWh Guarantor to EIB loan and PPA Agreement Key role in championing the project and benefits Timely support from departments in final regulatory approvals

Project Summary 1.3MW DC (~1MW AC) 1,842 MWh pa Project budget of $US6.45m Timeframe: May - Nov 2011 Aligned with cool dry season November commissioning date requires long lead items to be ordered in early May Principal: Meridian Head contractor: Reid Technology Solar Panel Provider: Solarworld Other subcontractors: Emerson, Conergy. Kordia, Fletchers (Tonga) Electrical connection: Northpower / Tonga Power Connected to TPL Popua generation 11kV switchboard

Financial Benefits Will reduce fuel consumption at Popua Diesel power station by 460,000 litres every year Will provide ~4% of Tongatapus annual generation Reduces exposure to volatile oil prices Fixed price for 20 years and transfer to TPL for another 10-15 years of low cost power

Benefits of Proposal for People of Tonga Tangible first renewable energy project on Tonga Energy Road Map - can be built and commissioned by December 2011 Hands-on opportunity for staff of Tonga Power to learn about renewable operation and integration Up to 15 Tongan jobs created during construction phase - with associated upskilling of local labour force in renewable energy project construction Design and equipment selection has been robust taking into account the specific site conditions and forces of nature in Tonga Meridian will be in it for the long term - available to share its renewable development, integration & operations expertise with TPL and TERM Provide confidence and commercial framework for other private investors to invest in renewable generation in Tonga Reduction in carbon emissions of 1100 tonnes per annum Net positive environmental and social impacts

Due Diligence of Proposal Equipment supply and construction for the project has been open tendered in accordance with EIB and MFAT requirements All of Meridians financial and technical assumptions have been subject to due diligence by MFAT, TPL, EIB and TERM in an open book process Tonga Powers due diligence of the project and commercial agreements has included TPLs legal advisor (Chapman Tripp) and commercial advisor (Nichols Consulting Ltd) TPL have received independent technical advice from Sinclair Knight Merz in relation to integration of the solar farm with diesel generation Additional legal and tax advice has been provided by local companies (Stephenson Associates and JK Chartered Accountants) Environmental due diligence has been undertaken by Ministry for Environment & Climate Change 10

Key Commercial Documents 11 DocumentDescription Power Purchase Agreement (PPA) Fixed price variable volume in USD ~US23c/kWh with 2.5% annual escalator Price adjustable until MFAT / EIB funding concluded Buy out option from Year 5 based on remaining value of PPA contract To be backed by Tongan Government Guarantee ConnectionSecures Meridians right to connect to the network Mutual performance obligations (in accordance with good electricity industry practice) EIB Loan to TPL20 year term, fixed concessional interest rate (indicatively 2.4%) for ~$US3.5m Requires backing of Government of Tonga Guarantee TPL loan to MeridianTerms back to back with EIB Loan to TPL Meridian to provide project undertakings to EIB to satisfy concession arrangements Sub Lease / LicenceSecures Meridians right to occupy & access site and mutual obligations towards each others plant To be based on terms of original MOU with TPL

Current Status Items to be completed prior to construction: Tonga Government Guarantee for EIB loan and PPA Final funding confirmation from NZ Aid Loan documentation between EIB / TPL and TPL / Meridian TPL to obtain lease on acceptable terms and conditions TPL to obtain NRBT approval to operate USD offshore account to receive and remit US funds Meridian business license, work VISAs for project team Key Milestones Achieved: Solar Vendor selection completed, project design optimised Environmental approval from Ministry of Environment & Climate Change PPA & Connection Agreement terms essentially agreed with TPL Formal request for NZ Aid donor funds submitted Meridian Board approval, subject to completion of key documentation and insurance Tonga Power Board approval, subject to completion of key documentation and insurance

Conclusions Commercially viable project that initiates Tongas transition away from oil to greater energy independence and reducing power price volatility Enables Tonga Power to form a long term relationship with an experienced renewable energy developer and operator Positive demonstration of public - private partnership with development assistance to achieve tangible benefits for electricity consumers Significant milestone for new Government that will place Tonga at forefront of strategic implementation of renewables Project is poised for implementation subject to: Confirmation of Government Guarantees to back Tonga Powers commitments under concessional loan and power purchase agreement Timely assistance / support from Government departments in approving business licenses, building permit and work visas

Appendices

Project Structure

A Parallel Development Process Commercial Tonga Power discussions, Non-binding Heads of Agreement signed - Jun 2010; Worked with TPL and their legal advisors to progress necessary legislation amendments for an Independent Power Producer to operate in Tonga (Electricity Act., Renewable Energy Act.). Amendments enacted - Sept 2010; Tax advice from Tonga based accountant and PwC (NZ); Commenced procurement process to firm cost estimates. Released EOI/RFI to international market - Aug 2010; Released RFP to 5 selected vendors - Nov 2010; Released initial financial model to TPL, EIB, NZ Aid Dec 2010; Project due diligence EIB & NZ Aid Dec 2010 Tonga visit with EIB for due diligence Dec 2010 Selected preferred vendor - Jan 2011; Finalised viable financing structure Jan 2011; Submission of EIA report to MoECC Feb 2011 PPA/Connection Agreement terms essentially agreed Mar 2011; TPL/MEL completed review of EIB term sheet Mar 2011. Technical Confirmation of Project Envelope, Site Survey; Pyranometers installed at site to monitor solar radiation Apr 2010; Solar integration study by Meridian and Imperial College of London Jun 2010; Site visit to assess site conditions and solar connection options Aug 2010; Interconnection Options study completed by Sinclair Knight Mertz (SKM). Northpower Ltd selected to execute interconnection works Dec 2010; Geotechnical Investigation of site - Nov 2010; Metering equipment installed at Popua Power Station to monitor existing power system Dec 2010; Solar generation modeling completed Feb 2010; Value Engineering and project optimisation undertaken with selected vendors Feb 2010; Phase I design of interconnection assets by SKM Mar 2011; Tender for new switchgear closed Apr 2011.

Procurement Process

Power Purchase Agreement Key Terms 20 year fixed price (in USD) variable volume with fixed escalator Base Case: US 23.0c/kWh escalating at 2.5% pa (based on EIB rate of 2.4% and MFAT funding of $NZ2.5m) Price adjustable until point of commitment if change in EIB rate or MFAT funding Price review if first 5 year average generation > 5% higher than 1842 MWh Option to purchase from year 5 based on remaining value of PPA Any carbon credits accrue to Tonga Power Dispute resolutions by written notice, followed by CEOs and ultimately arbitration Early termination on change of law, insolvency, failure to pay, buy-out of assets Requires Government of Tonga Guarantee as backing

Loan Agreements Key Terms Lender: European Investment Bank, Borrower: Tonga Power Base Case: $US3.5m, 20 year term at 2.4% fixed interest rate Any EIB interest rate changes prior to commitment will flow through to a revised PPA price (rate to be fixed on signing) Any changes to MFAT contribution will change debt funding requirement (e.g. contribution of $NZ2.0m would require ~$US3.8m debt) Requires Government of Tonga Guarantee as backing Lender: Tonga Power, Borrower: Meridian Energy (Tonga Branch) Amount, terms and rate back to back with EIB loan agreement to TPL Meridian to meet project undertakings to satisfy EIB requirements under head loan (procurement approach, reporting)

Connection Agreement Key Terms TPL to connect Meridians assets to Transmission network and maintain fit for purpose assets and network services according to good electricity industry practice Both parties are responsible for providing electrical protection of their own assets TPL must maintain sufficient spinning reserve to meet Concession requirements (0.75Hz, 10% maximum transient voltage variation) MEL must comply with technical requirements of connection Variable output will not cause system frequency to deviate more than 0.75Hz (worst case modeling shows 0.12Hz) TPL to pay damages for disconnection due to deliberate acts / omissions from TPL (not maintenance or network outages) MEL can be disconnected if fails to comply with technical requirements until such time as it remedies Dispute resolution and termination provisions mirror PPA