Presentation to NERSARevised Eskom MYPD2

application

28 January 2010

Idasa• Idasa is an independent South African public interest

organisation committed to promoting sustainable democracy based on active citizenship, democratic institutions, and social justice

• Idasa’s Economic Governance Programme –– Aims to promote democratic decision-making processes and

resource management through citizen engagement to achieve sustainable socio-economic justice in Africa

– Coordinator of the Electricity Governance Initiative of South Africa

• We are grateful for the advice and assistance of Smita Nakhooda (WRI), Gareth Walsh, Jesse Burton (UCT) and Adv Dave Borgstrom in the preparation of our written and oral submissions

Appreciation for NERSA’s role• Idasa recognises that NERSA is in a uniquely difficult

position - required to act “independently” in the long term “public interest”, in a complex economic context

• Many actors, including many new actors• New and evolving processes, requiring clarification• Parallel decisions taken over which NERSA has little

control, for example, Gazetting of IRP 1• NERSA’s role includes reconciling the differences

between IRP 1 and Eskom’s MYPD 2 application• NERSA should be commended for making a special

effort to accommodate public input on this important and controversial issue, for example, by extending public hearings

• Idasa appreciates the opportunity to make this presentation

Eskom’s Revised MYPD 2• Idasa notes the changes in Eskom’s revised MYPD 2

application following stakeholder feedback, in particular:– Greater transparency around projected demand, particularly

the reduction as a result of projected savings attributed to DSM; and notes expansion of the SWH programme which is in line with the Gazetted IRP 1

– The acknowledgement that an enabling environment is required to attract new entrants to the market

• Eskom acknowledges that “there is still a need for further clarity on a long-term energy future, and more effective integration at Government level”

• Idasa believes that such “country choices” should be defined by broadly-consulted IRP and IEP that are reflective of a degree of national consensus, and believes that Eskom’s MYPD2 application should follow and be consistent with such a plan

Introduction

• Idasa does not at this stage express a firm view as to:– the necessary extent of infrastructural

development required to meet future demand; – by whom such development should be

undertaken; and – the appropriate mixture of available technologies

that should be adopted to generate additional electricity supplies

• Decisions clearly need to be taken, and cannot be avoided given the severe projected gap between energy supply and demand

Summary of process concerns

Two primary areas of concern:

1. We are concerned that the current process may be neither fair nor lawful, particularly with respect to IRP 1. (Section 195(1)(e) of the Constitution: People's needs must be responded to, and the public must be encouraged to participate in policy-making)

2. Insufficient information in the public domain to enable meaningful representations (2002 Regulations ito Section 4 of PAJA: Information must be detailed enough to enable people to make meaningful representations)

MYPD 2 is premature

We submit that a multi-year decision by NERSA on Eskom’s MYPD 2 application in its present form is premature, as it:

– risks locking in the need, scale and form of additional electricity production, and regarding the most appropriate technology choices, without necessary deliberation of tradeoffs and long term implications

– would not be transparent or clearly in the public interest– would not be reasonable – may be unlawful in view of the lack of public consultation

before Gazetting IRP 1

IRP 1 (1)

• The IRP (and IEP), as the necessary framework for MYPD2, should be open to prior public consultation – as recognised in Eskom’s revised application

• This entails transparency regarding: – planning assumptions– results of modelling and scenario building– derivation of the base plan for least cost generation

investment requirement– criteria for risk adjustment of the base plan

Section 3 of the Regulations on New Generation Capacity (5 August 2009), in terms of the Electricity Regulation Act, 2006

IRP 1 (2)• IRP 1 Gazetted on 31 December 2009, and public consultation promised in January 2010• This consultation should have preceded a multi-year decision by NERSA on Eskom’s application, otherwise this would indicate a worrying assumption that IRP 2 could not reflect meaningful amendments in light of contributions during the public participation process, as it would be constrained by a multi-year determination by NERSA• There are inconsistencies between IRP 1 and MYPD 2, for example, savings assigned to DSM in Eskom’s MYPD 2 application are significantly less than those contained within IRP 1 *• NERSA should consider making a further interim tariff decision applicable while IRP 2 is publicly consulted

* Total DSM figures gazetted IRP 1 = 11876 MWh rather than the 3330 MWh in Eskom’s MYPD2 application (pure DSM), or 7070 MWh (DSM & SWH)

An Interim Price Determination for 2010/11 would allow time for adequate public consultation

Jan Feb March April Dec?

Draft Interim Price Determination for

period 2010/11

Coordinate thorough IRP 2 consultation process

Eskom

NERSA

DoEDraft and

publish IRP 2Gazette

Final IRP 2

Coordinate MYPD 2 review process

Coordinate Interim Price Application review

process

Receive Interim

Decision

Draft MYPD 2

(2011 – 2014)

Receive Final

Decision

2010

Additional risk• Idasa concedes there is a risk that decisions on future build that need to be made urgently will be delayed, increasing the likelihood of a future supply shortfall. This could be mitigated as follows:

– A timeline should be defined for the finalisation of IRP 2 and the subsequent MYPD 2 (2011/2014) that ensures country decisions are delayed as little as possible whilst still allowing for adequate consultation– In light of these timeframes, NERSA, Eskom, DoE and other stakeholders should agree as part of the Interim Price Determination process (2010/11) on decisions that cannot await the conclusion of IRP 2 and MYPD 2

• The risks associated with making decisions about the country’s energy future without adequate consultation would appear to be far greater

Eskom’s revised MYPD 2 application

Notwithstanding these concerns over the process being followed, we have specific questions about the content of the revised MYPD 2 application, particularly with respect to:

– DSM programme & PCP – Energy mix – Role envisioned for IPPs– Financing, costs and revenue – Coal Costs– Subsidies and Free Basic Electricity

DSM Programme (1)

• The inclusion in Eskom’s revised application of additional details of costs and savings to be achieved through DSM is a positive step• However, there is insufficient information to enable detailed analysis, specifically:

– What DSM measures will available funds will be spent on?– Are there clear targets to be achieved?– What is the methodology by which these measures will be

rolled out and monitored?– What are the indicators against which performance will be

measured?– Who is providing independent oversight and what rewards /

penalties exist for over / under performance?

DSM Programme (2)

Limited analysis has been possible due to the scarcity of information provided. However, based on initial analysis:

• The programme costs appear high– The deduced costs based on Eskom’s revised application are approximately R14m/MW1 saved, compared to the NER’s proposal to reward Eskom R4.3m/MW2 saved through DSM in the 2006/09 MYPD 1 decision

• The programme appears moderately ambitious– Projected savings are significantly below those a NERT (National Electricity Response Team) report in 20083 suggested could be achieved. Eskom now projects savings of 2.1TWh / Annum within 2 years, whereas NERT’s sectoral assessment indicates that savings of up to 9.6TWh / Annum could be possible within 18 months– Projected DSM savings are significantly less than those contained within IRP 1 Gazetted 31/12/09 – 7.5TWh to 2014 as compared to 10.6TWh in the IRP 1

1 Based on assumption that DSM measures are equally distributed across the day (and 2009’s 76.5% load factor extends throughout the MYPD period)

2 CPI adjusted from R3.5m (2006) - NER MYPD 1 – 1/4/06 – 31/3/093 The Impact of Electricity Price Increases and Rationing on the South African Economy – Altman et al 2008

Power Conservation Programme

• Idasa acknowledges the consultations undertaken by NERSA last year on the proposed PCP scheme• We note, however:

– Eskom’s projected demand has not been explicitly reduced to account for the proposed Power Conservation Programme (PCP). This is significant, particularly in light of it’s ability to achieve demand reductions of 10-15% 1

• Idasa believes the proposed PCP is a vital tool to complement DSM, in order to temper consumption and facilitate the transition to a more energy efficient economy. Consequently, we suggest that:

– The final PCP rules be published as soon as possible – a task entrusted to NERSA in IRP 1. We understand that some funding is available in principle from the World Bank’s Clean Technology Fund.

• NERSA should consider ring-fencing additional funding

– Savings targets from the programme are determined as part of the DoE’s

IRP 2 process and explicitly accounted for in Eskom’s postponed MYPD2 application

- Subject to independent oversight

1 Interventions to address electricity shortages, NERT ’08

Energy Mix

• We suggest NERSA should clarify and disclose:– The tariff implications of the 4% renewable energy

(RE) policy target (in IRP1 and accepted in Eskom’s application), including a cost/benefit analysis of this target (and alternatives)

– Whether it accepts the tariff consequences of Eskom’s proposal to postpone the Sere wind farm while IRP 1 requires it, or if NERSA envisages any alternatives

IPPs (1)

• Eskom: % of IPP generation plateaus and declines by 2014/15 – is this reasonable and adequate in the circumstances?

• Targets should be the subject of broad public consultation, eg in IRP and IEP

• Potential Eskom conflicts of interest associated with:– Requirement that Eskom undertake the feasibility

study for IPP participation (Sec. 4 of the New Generation Capacity Regulations, 2009)

– Eskom’s role in contracting with IPPs and administering the REFIT programme (Sec. 5, 6 & 7 of the New Generation Capacity Regulations, 2009)

IPPs (2)

• Idasa suggests NERSA should mitigate these risks arising from the IPP programme by:– Ensuring transparent systems and criteria for

tracking expressions of interest and contracting– Monitoring Eskom’s responses, including

timeframes and provision of reasons for accepting or declining proposals

– Considering convening a multi-stakeholder forum to exercise oversight over the conduct of the IPP feasibility study and the conclusion of PPAs

Access to Electricity: Price, Subsidies and Free Basic Electricity

Especially in regard to poorer (potential) users: • NERSA should determine the fairness, and disclose

the details, of any cross-subsidies by residential consumers of large electricity consumers

• NERSA should ensure comprehensive and transparent data collection and provision by all licencees in order to determine the effectiveness of the free basic electricity allowance, as well as of all DSM measures

Comparative costs of coal

• Eskom’s revised application recognises escalating and volatile costs of coal

• But contains little evident consideration of implications of sustained price volatility and unreliable coal supply for the costs of “low cost” coal for Medupi, Kusile and a recommissioned Komati

• There is a need to ensure closer consideration of coal procurement practices, and enhanced transparency of contractual terms

Financing, Costs and Revenue (1)

• NERSA should require a degree of prior certainty and transparency regarding funding (and associated funding costs) available to Eskom, including whether any funding will be ‘tied’ to particular activities, before determining tariffs for the next three years

• We are advised that a time horizon of 5 years is inadequate to assess the soundness and risk of investment decisions. Most capital projects envisaged in the application will have a lifespan of about 20+ years, whereas projected costs and revenues span only a period of 5 years

– Does (missing) s.34 of Electricity Regulation Act (re IRP) envisage such a longer time horizon?

- Integrated Energy Plan ito Energy Act envisages 20 years

Financing, Costs and Revenue (2)

• NERSA should reserve the right to actively monitor Eskom’s costs and revenue, in order to:– ensure adherence to tariff conditions– ensure potential savings and efficiency gains are

realised– revisit any tariff components where, for example,

the IRP 2 review process leads to changed assumptions

Conclusion: MYPD 2 is premature

• We submit that a multi-year decision by NERSA on Eskom’s MYPD 2 application in its present form is premature

•NERSA should consider making a further interim tariff decision for 2010/2011, applicable while IRP 2 is publicly consulted

Thank you