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Cost of ServiceA Tariff Overview

A presentation by EskomApril 2010

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Purpose of the presentation

Provide a background on the Eskom standard tariffs

Background and context of industry

Strategic pricing direction & tariff design principles

Steps to determine tariffs

Cross-subsidies in the Eskom tariffs

Eskom standard tariff options

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Background and Context

Electricity GenerationElectricity Generation

Transmission Transmission Lines Lines

(400/275 kV)

Distribution LinesDistribution Lines

ResidentialResidential

Reticulation HV LineReticulation HV Line(11 & 22kV)(11 & 22kV)

ReticulationReticulationLV LineLV Line

(380/220V)(380/220V)

Distribution SubstationDistribution Substation

Transmission SubstationTransmission Substation

The Electricity Supply Chain

POWER STATIONSPOWER STATIONS

Industry, Mining & Large Metros

Commercial/Small industry/Farming/Small Munics

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The cost of electricity

R. Electricity generation Assets, auxiliary consumption, returns, opex and technical losses +R. Transmission at high voltages Assets, ancillary services, lines, returns, opex and technical losses+R. Distribution to supplies at medium to lower voltages Assets, lines, returns, opex and technical losses +R. Administration and billing (service)R. NERSA approved revenue for recovery from tariffs

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The NERSA allowed average electricity costs 2009/10 break-down

24.3c/kWh Generation

Transmission networks0.7c/kWh

Distribution networks5.3c/kWh

Environmental levy1.8c/kWh

Service0.4c/kWh

0.1c/kWhConnection charges

33c/kWh Total average

Notes: • Update to 2010/11 once the NERSA allowed revenue splits by division are

obtained.• Levy at 1.8c/kWh as this is annual average. Levy only effective as of 1 July

i.e. 9 months of financial year.

Total41.6c/kWh in

2010/11

75%

6%

2%

16%

1%

0.3%

100%

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Electricity consumption Percentage of sales in kilowatt-hours by consumers

served

Of the total Eskom electricity sales, Residential

consumers represent 5%.

Commercial4%

Agriculture3%

Traction2%

Residential5%

Mining17%

Industrial24%

Public Lighting0.1%

Directly supplied by

Eskom55%

To Municipalities

45%

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Strategic Pricing Direction &

Tariff Design Principles

Objectives of pricing

Cost reflectiveness vs Affordability Subsidies

Appropriate Structure vs Simplicity Metering costs Customer Comprehension

Cost based signal vs. Elasticity of Demand

These objectives are in conflict and it requires an optimisation process to balance the objectives

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Strategic pricing direction for tariff structures

OBJECTIVES Economic efficiency and sustainability: tariffs will contain cost-reflective signals that promote

economic efficiency and sustainability.

Revenue recovery: tariff structures will not expose Eskom to unacceptable revenue risk and provide the means for adequate revenue recovery to ensure reliability of supply.

Fairness and equity: tariffs will be designed to be as non-discriminatory as possible by taking into account the needs of all customers on a fair and equitable basis.

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How does Eskom design tariffs?

Based on the cost of supply

Design the structures to reflect cost drivers

Includes approved cross-subsidies

Has to submit changes to NERSA for approval

Has to comply with the requirements of the MFMA to make changes to municipal tariffs

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Electricity pricing Electricity pricing

Structures of individual tariffs

Tariff levels relative to each other

Standard tariffs

Standard tariffs framework

Revenue Requirement

Corporate FinanceCorporate Finance Multi-year Price Determination (MYPD)

Average price levels

Local NPAs

Cross-Subsidies Simplicity

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Cost of supply studyMethodology

Methodology that allocates the approved revenue requirement (costs) into different and unbundled cost categories.

Use of the most appropriate cost driver for a particular cost i.e. R/customer/month or R/customer/day charge - typically for customer service and administration costs; R/kVA - typically for network costs; R/kW - typically for network or some energy related costs; Energy loss factors for energy loss costs.

Costs segmented into appropriate categories and allocated to customers in that category.

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Cost of supply

Costs below derived from the NERSA approved revenue requirement including allowed return on assets (may not therefore reflect true cost)

Cost of supply impacted by ……..

Load profile and voltage

Transmission zoneand capacity

Voltage and capacity

Size of the customer

• Energy cost

• Cost of generating electricity, including the costs of the power station, the fuel and water

• This will include Eskom generation and any energy purchased by Eskom

• Transmission costs• Cost of Eskom Transmission Division, including costs of

network > 132 kV including the costs of capital, operations, maintenance, refurbishment and ancillary services

• Distribution costs• Cost of Eskom Distribution division split between

network and retail (customer service and administration) costs.

• The network costs include capital, operations, maintenance and refurbishment.

• Retail costs cover the cost of metering, billing, administration and customer services.

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What is cost reflective tariffs?

Each customer class pays a tariff that is closely aligned with the cost of providing supply to that particular customer class.

(network capital & support)

• Generation• Transmission• Distribution• Losses

Tariff structure

Ran

dsp

er

mo

nth

Consumption kWh per month

Supply costsSupply costs

Fixed costs

Variable costs

In the ideal tariff the tariff structure should follow the cost curvecost curve closely.

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Designing tariffs

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Tariff structures in electricityA cost reflective tariff structure to recover electricity costs will typically contain:

A signal to reflect time and seasonal variance of the cost of energy.

The network costs.

Differentiation to take into account: The voltage of the supply.

The electrical (technical) losses.

Reactive energy support.

The density of the network to which customers are connected.

The load factor/profile.

Retail charges that reflect the size of the supply and the services being provided to the customer.

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Cross-subsidies in the Eskom tariffs

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Not all tariffs can be cost reflective!

Once a cost reflective tariff is calculated, tariff simplicity and affordability considerations are to be taken into account for the design of the final tariff to be applied

Subsidies in electricity tariffs affect the tariff applied.

Have inter-tariff subsidies where one tariff subsidises another tariff

Based on socio-economic considerations driven by Government

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Tariffs should recover Total Cost to Supply including Regulated Return

To

tal

Esk

om

Tar

iff

Inco

me

Rev

enu

e

Rev

enu

e

Rev

enu

e

Rev

enu

e

Rev

enu

e

Rev

enu

e

To

tal

Esk

om

Co

st t

o S

up

ply

(All

ow

ed R

even

ue)

Tariff 1 Tariff 2 Tariff 3 Tariff 4 Tariff 5 Tariff x

Co

st

Co

st

Co

st

Co

st Co

st

Co

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Su

bsi

dy

Lev

y

Lev

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Su

bs

Total Eskom Tariff Income = Total Eskom Cost to Supply

Individual Tariff Income ≠ Individual Tariff Costbut

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2009/10 Electricity price subsidies Per sector averages (irrespective of tariff used)

-40

-20

-

20

40

60

80

100

Cost c/kWh 84 28 38 26 27 82 35 63 33

Price c/kWh 63 31 39 29 30 61 38 42 33

Subsidy received c/kWh -21 -21 -22

Subsidy contribution c/kWh 2 0 3 3 3

Agriculture Municipalities Commercial Industrial Mining Residential TractionPublic

LightingGrand Total

1. Industrial and Mining supplies contribute 3c/kWh subsidy to residential

consumers.

2. Residential, Agricultural consumers directly supplied by Eskom receive

21c/kWh discount in the tariffs i.e. R3billion for 2009/10 mainly paid for by

industrial and mining consumers.

3. Larger Municipalities contribute 2c/kWh to smaller and rural municipalities

through their Eskom tariffs.

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Cross-subsidies in the Non-Local Authority tariffs, 2010/11.

Two types of NERSA approved subsidies i.e. network subsidy and price increase subsidy:

• Network subsidies paid for by the local authority and non-local authority tariffs.

• Price increase subsidy i.e. past lower increases residential tariffs and from implementing the inclining block rates.

26.141.3

28.3

-40

-30

-20

-10

0

10

20

30

40

50

Price increase subsidy 1.4 0 -15.4

Network subsidy 3.1 -15.6 -15

Tariff charges 26.1 41.3 28.3

Urban tariffs Rural Tariffs Residential tariffs

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Eskom Standard tariff options

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Eskom tariffs

• The Eskom tariffs are cost reflective; the tariff charges are calculated to demonstrate the level and how costs are incurred in delivering electricity to end-customers.

• The level of the tariff charges are determined by the NERSA as they only recover the NERSA approved costs.

• The price paid by consumers is determined by:– the amount of electricity consumed (per kilowatt-hour);– the cost of transporting it (network lines and transformation assets); and – services to avail the electricity to the consumer (customer services). – Therefore, the sector in which a consumer belongs is not used to determine the

price paid for electricity.

• The NERSA can determine a lower price for tariffs used by particular sectors e.g. lower increase to Homelight tariffs (residential) in 2008/9 and 2009/10.

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Urban tariff Urban tariff categories:categories:

Eskom’s standard tariffs

Rural tariff Rural tariff categories:categories:

Residential tariff categories: Residential tariff categories:

Urban

Rural

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NERSA determined inclining block rate tariff

Meet diverse customer needs.

Cost-Reflectiveness

Complexity vs. Metering costs

Different objectives for different customer groups

Pricing signal to change behaviour.

Allowing for certain customer categories to be subsidised

Optimisation/ Balance

Why so many tariffs?

What balance do we try to achieve ? International precedents Cost reflectiveness Fairness to customers Implementable and sustainable

Complexity Administrative burden

Pricing signal for efficiency Customer response

Affordability Stimulate growth Competitiveness with other energies

Revenue impact to utility Consistency across tariffs/customers

Selection of Tariffs

No option is right or wrong Each has its own implications, advantages & disadvantages

Final selection Judgement Best compromise

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Tariff options structures

RuraflexTOU1.3%

Minif lexTOU1.4%

Transflex 2TOU0.3%

Transflex 1TOU1.2%

NightsaveOff-peak rates

8.1%Nightsave RuralOff-peak rates

2%

Inclining block tarif fsSingle energy rate

4.5%

PublicliteSingle energy rate

0.1%

LandrateSingle energyrate

2.3%

BusinessrateSingle energy rate

0.5%

MegaflexTOU78%

Most of the electricity sales

from tariffs on the Time-of-use (TOU)

structures

International Price Comparison of Industrial Tariffs (Indicative)

Source : Recent NUS Survey Analysis assumes R/$ exchange rate remains constant and electricity prices of other countries do not increase in real terms Despite the steep tariff adjustments South Africa will remain competitive.

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The End