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Eskom MYPD 3Selective Reopener
Stakeholder Consultation
June 2015
Electricity Regulation Act (ERA)
Allows for recovery of efficient cost and reasonable return
Ensures that Eskom does not discriminate between customer groupings
2
Nersa processes in terms of ERA and MYPD methodology
Allows for reopener of MYPD decision if significant changes in assumptions
(forward looking)
Requires submission of Regulatory Clearing Account (RCA) to address
variances between actuals and MYPD decision (backward looking) Requires reasonable consultation with public
Balance impact of tariff increases on consumers and sustainability of Eskom
Ensures protection of poor
Municipal Finance Management Act (MFMA)
Requires Eskom to consult with NT and SALGA prior to submission to Nersa
for tariff applications
Requires Eskom to table tariff increases applicable to Municipalities in
Parliament
MYPD 2 and MYPD 3 RCA
3
31
March
Yn+1
1 April
Yn31
March
Yn+x
MYPD RCA
applies to history
(adjustment
occurs after
event)
MYPD
applies to future
Both mechanisms
require adjustments
to tariffs
Process time lines - using current rules implies at least 2 year time lag to
liquidate variances as its based on audited financials
Context of Selective Reopener of MYPD 3 Application
4
Key Operational Challenges
Availability of coal-fired power stations has been further deteriorating
in comparison to assumptions in MYPD 3 application where assumed
average EAF of 82%
Availability further impacted with Duvha boiler and Majuba silo
incidents – which were not assumed in application
Delay in generation new build in comparison to assumptions in
MYPD 3
Requirement for space to maintain Generation units
Require increase in tariffs to costs of further supply options (high OCGTs and STPPP)
to assist in minimising the impact of further load shedding
Context of Selective Reopener of MYPD 3 Application
5
Key Financial Challenges
Funding of OCGT and STPPP – Had to borrow to run OCGTs in 2014
and 2015. This amount will be requested for recovery through the RCA
process.
Eskom’s cash-flow and liquidity situation cannot allow this to continue
Equity - Unlikely that further equity injection is forthcoming from
Government in the short term
Debt - Limits to further significant borrowings are being reached with
current credit ratings and negative outlook. Access and costs to
borrowings becoming more challenging
Financial and liquidity challenges where ROA less than cost of capital
results in deterioration of balance sheet
Expansion programme funded from debt substantially on a weakened
balance sheet
Require increase in tariffs to costs of further supply options (high OCGTs & STPPP)
to assist in minimising the impact of further load shedding
Eskom applying for in selective reopener which will add 10% to the already approved 12,69% for 2015/16
6
Price decision
MYPD3 original decision of 8% price increase
RCA for MYPD2
Price adjusted for prudent costs and revenue variances through the RCA for MYPD2 which resulted in the awarding of another 4,69%price increase on top of the 8%, equating to 12,69% which has already been approved by Nersa
Selective reopener
Eskom is applying for the recovery of efficient costs relating to OCGTs and STPPP for the next 3 years. Eskom cannot wait for an RCA process to recover these costs due to the financial challenges facing the organisation.
This expenditure will contribute towards Eskom creating space to do necessary maintenance whilst mitigating the impacts of future load shedding.
Requires an adjustment 10% linked to the extraordinary costs to limit load shedding.
If National Treasury gazettes increase in environmental levy by 2c/kWh,
would need to be recovered by Eskom through a further price increase of 2,5%
5 year period
2014 – 2018
1 year period
2016 3 year period
2016 – 2018
Unpacking the price drivers in 2015/16
2015/16 Comments
Rest of normal costs and returns 6.8%
OCGTs 0.1% Allowed R1,5bn
Other IPPs (Renewables and DOE Peaker) 0.7% Allowed R14.4bn
STPPP 0% Allowed R0bn
Environmental levy 0.4% Allowed R9.3bn
MYPD3 Original price decision 8.0%
MYPD2 RCA clawback decision by Nersa 4.7%
Revised price already granted by Nersa 12.7% Nersa decision awarded after
RCA
Selective Reopener 9.5% Required to reduce load
shedding
- OCGTs 6.4% Applied for R10.9bn
- STPPP 3.1% Applied for R5.3bn
Environmental levy increase if gazetted 2.5% Pass through of levy costs
Overall price to consumer (1+2+ 3) 24.7%
7
1
2
3
Challenge with sufficient capacity : Eskom’s Gx New Build Assumptions in MYPD application did not materialise
Medupi Kusile Ingula Sere
2012/13 0 0 0 0
2013/14 722 0 333 100
2014/15 1 444 723 999 0
2015/16 722 723 0 0
2016/17 722 723 0 0
2017/18 722 1 446 0 0
2018/19 0 723 0 0
8
Energy assumed to be delivered by each coal unit (assume at 75% EAF)
is approximately 4500GWhr per unit per year
This energy had to be replaced by other supply sources
Challenge with sufficient capacity : Status of Eskom’s existing generation fleet
• The underlying cause of the deterioration in the fleet’s performance is the lack of sufficient capacity,
aggravated by the onset of age and usage related equipment failures.
• About 80% of the existing fleet’s capacity is now in that period where they require major
equipment replacements in order to restore the plants’ economic life.
• Deferring this work in the recent past is a major cause of the escalation in plant breakdowns.
• The first contributor to the capacity shortage is the delay of new capacity.
• Decision to build Medupi (and other stations) was needed by, not later than, 1999 to meet
increasing demand by 2007.
• Decision only made in late 2004; approval for 1st new base load station made in December 2005
(revised in December 2006 to become ‘Medupi’) => needed capacity not available in time.
• This was exacerbated by delays in the commissioning of both Medupi and Kusile.
• The second contributor is the deteriorating plant performance of existing plant.
• Over the past 10 years, but particularly since the 2010 World Cup, necessary philosophy
maintenance was delayed in the interests of “keeping the lights on”.
• The above led to the very high load factors and limited the time available for maintenance outages.
• This high utilisation of deteriorated plant created the cycle of deteriorating availability.
• Despite some improvements due to efficiency and effectiveness of operations and maintenance,
this cycle can only be broken once there are adequate funds and space in which to perform the
required maintenance
Challenge with sufficient capacity : Creating space for maintenance for sustainability
• High and increasing reactive maintenance, and the resultant decreasing amount of proactive
maintenance, are the direct result of the constrained system, aggravated by the reduced plant
reliability and also by capital expenditure constraints.
• Eskom is convinced that the only way to restore plant reliability is to put emphasis on proactive
maintenance, which includes refurbishment. If this is done, availability should improve, but if outages
continue to be deferred in order to keep the lights on, availability can be expected to deteriorate
further.
• It is thus prudent that the OCGTs were, as was expected when they were commissioned, utilised
beyond their normal peaking function, during the 2015 financial year, “to improve the supply / demand
balance … during the period of plant shortage” as NERSA said in December 2007. This contributed to
creating space for maintenance and limiting load shedding, once all other demand and supply side
options had been fully utilised.
Benefits derived from use of OCGT and STPPP during April 2015 Illustration at daily peak for April 2015
11
KM03 RTS 06/06
HD04 RTS 24/06
AN05 RTS 22/06
HD10 RTS 18/06
12
Maintenance Schedule & Capacity Outlookfor June 2015 (illustrates benefit of OCGTs)
KD03 RTS 27/06
MJ01 RTS 12/06
MJ05 Turbine 4 Cylinder
Overhaul for 71 days 13/06
AN06 MGO for 66d 23/06
GA02 RTS 28/06
KM02 RTS 19/06
KD05 Gen H2 Cooler repairs
for 7 days 12/06
KD05 RTS 19/06
DV04 RTS 08/06
AL42 RTS 09/06
AL42 Minor Inspection for
6.75 days 02/06
CD06 RTS 21/06
HD05 RTS 04/06
Increase in Environmental levy
In Minister Nene’s Budget speech(Feb 2015) increased electricity levy from
3.5c/kWh to 5.5c/kWh, to assist in demand management
When the selective reopener application was made, it was assumed that
required legislation will be effective in 2015/16 year – however did not occur
Eskom can recover the environmental levy costs from its customers to
remain revenue neutral and is treated as pass through item
If tariffs are not adjusted then Eskom can include as variance in RCA – will
be a time lag in recovery. This would further impact liquidity- thus included in
selective reopener.
NT in its comments still considering implementation
Impact is as follows, if were implemented from 1 July 2015
13
Price element Price impact in 2015/16
Standard tariff after MYPD2 RCA decision 79,73 c/kWh
Impact of change in environmental levy by 2c/kWh 2c/kWh / 79.73c/kWh = 2,51%
Summary of selective reopener revenue application and price impact
14
Selective Reopener for OCGTs and STPPP (R'm) 2015/16 2016/17 2017/18 Total
OCGTs total costs 12 458 12 458 12 458 37 375
Less OCGTs included MYPD3 decision -1 508 -1 599 -1 724 -4 831
OCGTs - costs to be recovered 10 950 10 859 10 734 32 544
STPPP - IPPs costs to be recovered 5 357 5 879 6 279 17 515
Less STPPP costs included in MYPD3 decision - - - -
STPPP - IPPs costs to be recovered 5 357 5 879 6 279 17 515
Total Revenue requirement adjustment (R'm) 16 307 16 739 17 013 50 059
Price increase required (%) 9.58% 3.24% 7.26%
NOTE
* The price increase in 2015/16 is above the 12,69% already announced, thus the absolute increase is 22,27% excluding change in enironmental levy
** The price increases of 3,24% in 2016/17 and 7,26% in 2017/18 are absolute increases in those years
***The price drop to 3,24% in 2016/17 is due to the adjustment in 2015/16 which increases the base and thus to achieve the original
allowed revenue in 2016/17 requires a lower price increase. The 3,24% and 7.26% assumes a no RCA adjustment which would need to be
included following regulatory processes. `
Summary of price impact of selective reopener based on Nersa methodology
15
Revenue Requirement and Price Increases 2015/16 2016/17 2017/18
Revenue standard tariffs allowed - R862bn (R'm) 163 179 180 070 198 954
Sales per MYPD3 (GWh) 213 545 218 194 223 219
Price c/kWh 76.41 82.53 89.13
Plus MYPD2 RCA (R'm) 7 085
Adjusted revenue after RCA decision (R'm) 170 264 180 070 198 954
Price c/kWh after MYPD2 RCA (c/kWh) 79.73
Selective Re-opener for OCGTs and STPPP (2015/16~2017/18) (R'm) 16 307 16 739 17 013
Adjusted revenue requirements after MYPD2 RCA and Re-opener (R'm) 186 571 196 809 215 967
Price c/kWh after MYPD2 RCA and Re-opener 87.37 90.20 96.75
Price increase required (%) 9.58% 3.24% 7.26%
Price increase required (%) - OCGTs 6.43% 3.12% 7.35%
Price increase required (%) - STPPP 3.15% 0.12% -0.09%
* The price increase in 2015/16 is above the 12,69% already announced, thus the absolute increase is 22,27% excluding change in enironmental levy
** The price increases of 3,24% in 2016/17 and 7,26% in 2017/18 are absolute increases in those years
Key comments from SALGA and NT
SALGA
Will result in further increasing non-payment and electricity theft thus less steep path of price increases
Committed to financial viability and long term sustainability of Eskom
Require time to rework budget and ensure approval process
Unclear of what cost of unserved energy required to assess impact
Further equity should be provided by National Treasury though constraints in national funding
National Treasury
Eskom’s weak financial position and resulting downgrade of Eskom’s credit rating is recognised
Only option for healthy financial position and minimise load shedding is increasing tariffs
Need immediate adjustments to assist with current liquidity challenges, and begin strengthening towards a
financial sustainability.
Cost of load-shedding is R9 to 15 per kWh.
Only increases for 2015/16 year supported. Further tariff increases once substantial information towards
‘cost-reflective’ or long-run marginal cost tariff level is.
Support NERSA in-principle approval of STPPP costs for 2015/16
In-principle support by Government for OCGT’s to prevent load-shedding. Must motivate for exact levels
16
Conclusion
Due to operational and financial challenges facing Eskom, allowance by Nersa
for recovery of higher OCGT and STPPP costs is essential to allow Eskom to
continue to utilise these supply options to help mitigate the impact of load
shedding and contributes to space for Generation maintenance
Under the circumstances, still viable to use expensive OCGT (approximately
R2.75 to R3.00/kWhr depending on fuel price) when compared to cost of
unserved energy estimated by National Treasury to be between R9 to
R15/kWhr
Contributes to improvement of industry towards sustainability
17
18
Tariff category increases
• There are four types of tariff categories:
1. Municipal tariffs
These are all the tariffs in the tariff book available to Municipal customers’ bulkand other small supply points.
2. Urban tariffs (directly supplied by Eskom)
These tariffs are Businessrate, Megaflex, Miniflex, Nightsave Urban (Large andSmall), Transflex and Public lighting tariffs. The sales on these tariffs are mainlyfor Mining, Industrial, Traction and Commercial customers.
3. Rural tariffs (directly supplied by Eskom)
These tariffs are Ruraflex, Nightsave rural and Landrate. The sales on thesetariffs are mainly for customers taking supplies in rural areas and are mainly foragricultural customers.
4. Residential IBT tariffs (directly supplied by Eskom)
These tariffs are Homelight and Homepower on the NERSA IBT rates. Thesales on these tariffs are for residential customers.
Detailed 2015/16 price impact of selective reopener based on Nersa methodology
19
NERSA
existing
decision
Reopen
er
increas
Total
9 months
NERSA
existing
decision
Reopener
increases
Total
12
months
Municipal 14.24% 1 Jul n/a 14.24% plus 12.80% =27.04% 12.69% plus 9.74% =22.43%
Key industrial and urban 12.69% 1 Apr 12.69% 12.69% plus 12.80% =25.49% 12.69% plus 9.50% =22.19%
Rural 12.69% 1 Apr 12.69% 12.69% plus 12.80% =25.49% 12.69% plus 9.68% =22.37%
Homelight 20A Block 1 0-350kWh 10.29% 1 Apr 10.29% 10.29% plus 10.40% =20.69% 10.29% plus 8.04% =18.33%
Homelight 20A Block 2 >350kWh 12.29% 1 Apr 12.29% 12.29% plus 12.40% =24.69% 12.29% plus 9.68% =21.97%
Homelight 60A 12.69% 1 Apr 12.69% 12.69% plus 12.80% =25.49% 12.69% plus 9.68% =22.37%
Homepower 12.69% 1 Apr 12.69% 12.69% plus 12.80% =25.49% 12.69% plus 9.77% =22.46%
NERSA
decision
27 November
2014
Effective
on 1 April
2015
To be implemented
1 July 2015
Annual average
increase
9-month increase 12-month increase
Note: Excluding the increase in the environmental levy
Assume the application is approved in entirety
2015/16 Retail tariff structural adjustments
Eskom proposed retail structural adjustments plan 2015/16 and beyond
1. TOU morning and evening winter peak
shift
2. Some name changes to rate
components
3. New tariffs
• Net-metering tariffs – tariff for
customers with own generation)
• Prepaid tariff for small agriculture
(Landlight 60A)
• Review of the Transmission use of
system charges for generators
based on NERSA approved revenue
• Updating NMD Rules- rules for
notification of demand and export
capacity
20
1. Update tariffs structures based on cost drivers
2. TOU structure review
• Understand the country profile to determine
the alternative TOU tariff design required
based on the load profiles
• Determine whether TOU periods can be
allocated regionally
• Determine whether the peak, standard. off-
peak and seasonal tariff signals are still
appropriate
3. New tariffs
• Simplification of the Municipality tariffs
through rationalising and redesigning the
Municipality tariffs
• Voluntary critical peak day tariff
• TOU for residential and small commercial
2015/16 2016/17 2017/18
1. Update tariffs structures based on
cost drivers
2. Combine Nightsave large and small
3. Revising the voltage categories
4. Revising the low voltage subsidies
5. Review of Homepower bulk structure
6. New tariffs
• Green tariff
• Homepower bulk tariff structure
• New public lighting tariff
For Approval
To be submitted separately
Thank you
Questions