Critical Electricity Pricing Issues
DME Portfolio Committee
23 May 2007
1
THE BRIEF
To address the committee on the
following:
• Affordability, reliability and accesibility to
electricity for all South Africans;
• The Eskom price increase of 18% - what
informed this significant increase;
• The Eskom view on the pricing
methodology developed by NERSA
2
Peak demand (MW)
Reserve
margin
= 20%
42000
38000
Reserve
margin
= 25%
36000
34000
32000
30000
28000
26000
24000
22000
Year
Peak Demand
Installed Capacity (MW Sent-out)
Expected Peak Demand
Operational Capacity (MW Sent-out)
3
Reserve margin aspiration = 15%
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
20000
1988
Peak Demand and Capacity (MW)
40000
Reserve
margin
= 810%
Reserve
margin
= 16%
Capacity expansion - driven by long term demand
forecast
Long term forecasts - national + foreign
90000
80000
Position
Moderate
Eskom position based on
4% growth electricity
growth supporting 6%
economic growth
77960 MW
MW
70000
56710 MW
60000
50000
Eskom moderate
position 2.3% electricity
growth based
economic growth of 4%
40000
30000
2005
2010
2015
4
2020
2025
Capital Expenditure - R150bn
72%
14%
 Lines and cables
 Network improvements
 Refurbishment
12%
 Network strengthening
 Cater for growth
 Refurbishment
2%
Generation
Transmission
Distribution
Corporate
5
 Mothballed stations
 2 Coal base load stations
 Hydro and gas options
 Nuclear plant
 Refurbishment
Capacity projects funnel
Research
Opportunity
Identification
165
PBMR
4500
3500
New Coal Supply
350
UCG
1600
Oscar
1200
Discard Coal
100
Concentrating
Solar
Hydro
Gas 2
1200
November
Victor
6000
500
500
Coal 1
2000
Coal
1500
1600
100
600
Lima
Tango
900
2400
Coal 2
1000
Mike
4500
Co-Gen 1
Papa
400
Foxtrot
1520
3000
CBM
350
Non Eskom
Generation 1
Hydro 2
600
1300
2400
Delta
4500
Nuclear n
500
1000
300
Medupi
Echo
Golf
1128
4500
Quebec
10000
961
Camden Grootvlei
1050
HVDC 1
0
Hydro 1
Nuclear 1
1000
0
Hwange
1332
RenewableIngula Komati
1
Sierra India
100
Nuclear
Gas
1150
Yankee
1775
Zulu
Cogeneration
Build
Feasibility, Business
Case, Contract
Concluding
Pre-feasibility
Juliett
4500
Bravo
Arnot
P1&P2
1050
1050
Gas 1
OCGT
Kilo
Whiskey
400kV
765kV
Solar
Transmission
Renewables
26 125 MW
* Red outer circle indicates – out of Borders project
22 650 MW
6
18 350 MW
11 941 MW
Generation Major Projects
Major Generation Projects
Project
Type
Project
Approval
R billion
MW
Approval Date
1st Unit
Project
Completion
Camden
Coal
5.2
1 600
Dec-03
Jul-05
Mar-08
Grootvlei
Coal
4.8
1 200
Dec-03
Sep-07
Oct-09
Komati
Coal
6.1
1 000
Dec-04
Sep-08
Oct-11
Medupi
Coal
78.6
4 500
Dec-05
Apr-11
Jan-15
Arnot
Coal
1.0
300
Jun-05
Apr-06
Nov-10
Commercial wind
Wind
1.1
100
Dec-06
Dec-09
Dec-10
Angerlik & Gourikwa
(OCGT)
Gas
3.5
1 050
Jun-05
Jan-07
May-07
GAS 1
Gas
4.3
1 050
Aug-06
May-08
Sep-08
Ingula
Pump storage
8.9
1 332
Mar-06
Mar-12
Dec-12
Kriel refurbishment
Coal
1.6
-
Dec-04
Nov-06
Nov-11
Matla refurbishment
Coal
1.9
-
Dec-06
Apr-09
Apr-14
Railway
1.9
-
Dec-04
N/A
Dec-09
Coal
84.8
5160
Mar-07
Mar-12
Dec-15
Majuba Rail
Bravo *
Total
203.6
* Awaiting PFMA
approval
7
Transmission projects
2009/10 for integration of
project Alpha
Matimba
Botswana
Mozambique
Dinaledi
2009
Namibia
Marang
2009
Mercury
Swaziland
2010
Kudu
Perseus
2009
2007
2009
2009
Eros
Hydra
Gamma
400 kV
2010
Omega
765 kV
Delphi
Juno
Neptune
Grassridge
8
Transmission Major Projects
Major Transmission Projects
Project
Type
Project Approval R million
Approval Date
Project Completion
Cape Strengthening WG
400kV line & substations
1100
Mar-04
Jun-07
Line reinsulation (Western & Southern Grid)
Lines
192
Mar-06
Mar-08
Substation reinsulation (Western & Southern Grid)
Substation
212
Apr-06
Apr-10
Camden HV Yard
Substation
70
Apr-04
Sep-07
Komati HV Yard
Substation
145
May-06
Apr-09
Gourikwa HV Yard
400kV line & substation
166
Jul-05
May-07
Ankerlig HV Yard
400kV line & Substations
170
Jul-05
May-07
Grootvlei HV Yard
Substation
123
Oct-05
Apr-08
Eros
Substation
81
Sep-05
Dec-07
Majuba Umfolozi
765kV line & substations
775
Jan-07
Dec-09
Tabor Spencer 275kV line
400kV line & substations
463
Jul-05
Jun-07
Apollo Refurbishment
HVDC substation
440
Jul-05
May-08
Shunt Caps (Beta, Hydra & Perseus)
Substations
99
Jan-06
Dec-07
Duvha Leseding 400kV Line
400kV line & substations
289
Aug-06
Nov-08
Platinum Basin
400kV line & substations
1300
Jun-03
Jun-06
Lowveld Transformation Capacity
400kV line & substations
150
Jul-06
Jul-08
Witkop 3rd Trf
Substation
82
Sep-04
Mar-08
Tabor Spencer 275kV line
275kV line & substations
182
Jun-06
Oct-08
Medupi HV Yard Integration
765kV & 400kV lines & substations
2000
Oct-06
Dec-09
Zeus Hydra
765kV line & substations
3000
Aug-06
Jun-09
Hydra Omega
765kV line & substations
3300
Aug-06
Jun-09
Dedisa
400kV line & substations
427
Jan-07
Dec-09
GAS 1 HV Yard
Substations
335
Oct-06
Dec-08
JBH North Upgrade
Substations
408
Dec-06
Dec-08
Total
9
15509
Funding strategy
 50% from retained earnings
 50% from debt of which
At least 25% from the domestic market
 Long tenors (matches our assets), best value,
no currency risk
Up to 25% from international markets
 Various instruments - Export Credit Agency,
Bonds, Private placements
10
Eskom’s credit rating
Rating Status
Moody’s
S&P
Fitch
Foreign Currency
A2
BBB+
-
Local Currency
A1
A-
A
Domestic Long-term
-
AA+
AAA
Domestic Short-term
-
A1
A1+
Outlook
Stable
Stable
Stable
11
Investment Grade
• Investors require (per Rating Agencies):
1. Predictable regulatory framework with tariffs for
efficient cost recovery
2. Asset security for loans:
3. Control over cash flows from an effective customer
base
4. Confidence in the sustainability of critical
capabilities:
•
Methods to protect all national capabilities – capital build,
electrification, demand side management
5. Continuity of successful management:
•
Assurance of business continuity through competence &
planned succession
12
Demand-side management
 Targets:
 8 000 MW by 2025
 Investment of R10 billion planned by 2012, 3000MW
 Focus areas
 Installation of an energy saving culture
 Adoption of energy efficient technologies e.g.. lighting
 Tariff reform, particularly for households
 Dynamic market pricing for industrial customers (DMP)
 Use of renewable energy with households – Solar Water
Heating
 Approach to be followed
 Aggressive roll-out planned nationally, with emphasis on
areas with network constraints
 Partnership between government, local authorities and
Eskom
13
Our competitive advantage will continue
into the future
16
US cents per kWh
14
12
South Africa
30% cheaper
than Australia
10
8
6
4
South Africa
Australia
Canada
Sweden
Finland
USA
Spain
Germany
Belgium
France
Netherlands
UK
Denmark
0
Italy
2
Source NUS April 2006
14
Restricted and Confidential
Mining cost: Unpredictable cost inflation…
30.00%
25.7%
Most recent data from
Stats SA
25.00%
18.2%
20.00%
15.00%
10.00%
5.00%
0.00%
PPI Mining &
Quarrying*
PPI Coal only
 SA mining costs have
increased by 25,7% since
Oct. 2005.
 SA coal costs (for SA
consumption) have
increased by 18,2% since
Oct. 2005.
* Includes coal, metal ores, and other minerals
Stats SA’s coal cost index was increasing at only 3,3% (year on year)
at the time Eskom lodged its revenue application to the NER in 2005.
15
Price of Electricity in real c/kWh new
35
cents/kWh
25
20
31
28
30
24
23
18
24
20
18
21
19
15
18
18
10
5
0
'2006/7
'2007/8
'2008/9
'2009/10
'2010/11
'2011/12
New Entrance Gx
New Entrance Total GTD
NERSA (no change)
MYPD Rule Change
16
Restricted and Confidential
Real price increases are not uncommon Benchmarking
Some recent price increases seen globally
• Brazil – The Brazilian regulator Aneel has allowed a increase of domestic tariffs by 13%,
and industrial tariffs by 18% primarily due to rising fuel costs.
• Chile – The Chilean regulator INE has increased prices paid to generators by 11% in the
central grid and 14% in the northern grid which will be passed through to customers.
• Ireland – the Irish regulator CER has allowed for an increase in ESB’s end use prices by
almost 20% in the New Year primarily driven by high fuel costs.
• Portugal – The Portuguese regulator ERSE has provided an initial proposal to allow for
a 15.7% increase to average tariff levels.
• China - East China's Shandong Province, Huaneng Power recently raised tariffs by 7.3
per cent to 381.4 Yuan (US$47.03) per megawatt-hour (MWh), while in South China's
Guangdong Province, the company raised prices by 6.2 per cent to 497.71 Yuan
(US$61.37) per MWh.
• Austria – The Austrian regulator E-Control has allowed price increases of about 5%,
driven by an increase in the energy component of some 10%.
• Ontario – where since cost reflective prices have been established starting in 2003,
tariffs have increased by roughly 100%.
17
Restricted and Confidential
Key Strategic Issues
• Affordability
• Industry viability
• Internationally competitive
prices
18
Conclusion
 Achievement of the capacity expansion
programme objectives is non negotiable
 Eskom plan cater for higher economic growth
 Eskom always ensure a long term view of the
industry
 Maintain our position of being the world’s
lowest cost producer
 South Africa to remain an attractive
investment destination for energy intensive
industry
19
Thank You
20
Restricted and Confidential