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

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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