Eskom MYPD3 Selective Re-opener

Public Hearings

23 June 2015

Agenda

1

• Introduction

• Breakdown of the selective reopener

• Operational and financial challenges

• Benefit of OCGT and STPPP usage

• Conclusion

Regulatory rules allow application to reopen tariffs if circumstances significantly change from the decision

2

Eskom has implemented initiatives to operate within the 8% tariff increase

The original decision is removed from current realities

Eskom, therefore, needs a selective reopener to address immediate

operational and financial challenges

The selective reopener (9.58%) will fund higher OCGT usage and cover the

cost of STPPP capacity which requires

R32.5bn for OCGTs over MYPD3 (6.43%)

R17.5bn for STPPP over MYPD3 (3.15%)

Alternatively, costs would be recovered through the RCA process

retrospectively if necessary, once deemed prudent by Nersa

OCGTs and STPPP will be purely used to reduce intensity of load shedding

and cost to the economy

The selective reopener application will add 9.58% to the already approved 12.69% for 2015/16

3

2015/16 Comments

Rest of normal costs and returns 6.8%

Open cycle gas turbines (OCGTs) 0.1% Allowed R1,5bn

Other IPPs (Renewables and DOE Peaker) 0.7% Allowed R14.4bn

Short term power procurement programme (STPPP) 0% Allowed R0bn

Environmental levy 0.4% Allowed R9.3bn

MYPD3 Original price decision 8.0%

MYPD2 RCA clawback decision by Nersa 4.69%

Revised price already granted by Nersa 12.69% Nersa decision awarded after

RCA

Selective Reopener 9.58% Required to reduce load

shedding

- Open cycle gas turbines (OCGTs) 6.43% Applied for R10.9bn

- Short term power procurement programme (STPPP) 3.15% Applied for R5.3bn

Environmental levy increase *(if gazetted) 2.51% Pass through of levy costs

Overall price to consumer (1+2+3) 24.78%

1

2

3

A tariff increase is required to leverage supply options and reduce the impact of load shedding on the economy

4

Changes to

assumptions in the

MYPD application

have resulted in

reduced capacity

and space to

reduce backlog

maintenance

The selective

reopener is aimed at

reducing levels of

load shedding to

reduce the impact

on the economy

Eskom has lived within MYPD3 8% tariff decision

through

‒ Optimisation and reduction of the cost base,

achieved through an internal efficiency program

‒ Maximised borrowings by leveraging the balance

sheet

‒ Shareholder equity injection

Tariffs are not cost reflective

Financial

Operational

Ageing Generation fleet

Delays to the New Build Programme have been

exacerbated by major incidents (e.g. Duvha, Majuba)

Challenge Circumstances

Availability of OCGTs and STPPP reduced peak hour load shedding in April by more than 50%

5

Load shedding avoided during April 2015, due to OCGT and STPPP usage

MW

OCGTs and STPPP

usage reduced load

shedding by

providing additional

capacity

If OCGTs and STPPP

were not dispatched

in April, load

shedding would have

been required

everyday

Actual load

shedding was

reduced by more

than 50% owing to

OCGTs and STPPP

Without OCGTs and STPPP load shedding will be more regular and severe

- Shortfall is calculated on demand and

1000MW operational reserves

- Shortfall does NOT take primary

energy constraints into account

0

01. A

pr

2015

500

1,000

2,000

3,000

4,000

5,000

6,000

1,500

2,500

3,500

4,500

5,500

6,500

30. A

pr

2015

29. A

pr

2015

28. A

pr

2015

27. A

pr

2015

26. A

pr

2015

23. A

pr

2015

22. A

pr

2015

21. A

pr

2015

20. A

pr

2015

19. A

pr

2015

18. A

pr

2015

17. A

pr

2015

16. A

pr

2015

15. A

pr

2015

14. A

pr

2015

13. A

pr

2015

12. A

pr

2015

11. A

pr

2015

10. A

pr

2015

09. A

pr

2015

08. A

pr

2015

07. A

pr

2015

06. A

pr

2015

05. A

pr

2015

04. A

pr

2015

03. A

pr

2015

02. A

pr

2015

24. A

pr

2015

25. A

pr

2015

Actual Load shedding Load shedding without OCGTs Load shedding without STPPP

Eskom agrees that cost savings setoff must be taken into account but computation thereof must be correct

6

Selective reopener for 2015/16 Unit STPPP OCGTs TOTAL

Energy volumes GWh 5 794 5 400 11 194

Costs applied for Rands R5 357m R10 950m R16 307m

Net costs after costs savings setoff

Generation total price – 53c/kWh Rands -R5 933m R10 374m

Generation variable price – 23c/kWh Rands -R2 575m R13 732m

• MYPD3 decision of 8% included recovery of costs of production from Generation stations

• Eskom can only offset the price which was incorporated in the original MYPD3 decision

• In 2015/16 the total selling price awarded by Nersa was 75c/kWh which covers the entire Eskom value

chain of Generation, Transmission and Distribution

• Generation business comprises about 75% of the Eskom operations and thus its contribution is

53c/kWh

• However within the Generation business there are fixed and variable cost components which are linked

to production. Hence only variable costs of 23c/kWh must be used for calculating cost set off savings

Approach to computing cost savings setoffs

1

2

Costs savings setoff cannot exceed the total selling price of 75c/kWh . The offset of R2.5bn will

reduce the price from 9.58% to ~8%

Eskom discounts on diesel purchases are included in the calculation of additional funding for OCGTs

7

Eskom discounts on diesel purchases were included in the calculation of

the R12.5bn requirement for FY2016. These discounts include

• R3.10/litre rebate

• R0.30/litre wholesale discount

Key insights

▪ Only 2.8% of post

outage UCLF was as a

result of direct

execution quality, owing

to outage work well

within the 10% target

▪ Drivers of post outage

UCLF include

– Postponed mid life

refurbishment of

units

– Insufficient funding

– Capacity constraints

forcing outages to be

postponed

▪ Postponement of

outage scope accounts

for the majority of post

outage UCLF

2.80.1

1.82.00.2

5.64.44.6

0.0

6.19.1

1.01.8

17.3

27.229.0

25.123.1

18.019.718.718.5

11.6

3.44.52.5

Ave Apr May Mar Feb Jan Dec Nov Oct Sep Aug Jul Jun

Post maintenance UCLF on areas within scope is well within international standards and target

Post outage UCLF as a result of direct execution quality UCLF % (June 2014 – May 2015)

Post outage UCLF as a result of other plant failures UCLF % (June 2014 – May 2015)

8

Transmission technical performance measures meet and exceed Nersa targets

Year SM < 1 MI's LF/100km

2003/04 2.398 1 1.90

2004/05 4.555 0 2.20

2005/06 3.131 4 2.60

2006/07 3.486 1 2.70

2007/08 3.564 5 2.31

2008/09 4.211 3 2.46

2009/10 4.09 1 2.54

2010/11 2.626 0 2.72

2011/12 4.733 1 2.41

2012/13 3.519 3 1.74

10 Y Avg 3.6 1.9 2.36

St Dev 0.78 1.73 0.33

Historical Performance

Major Incidents System Minutes < 1

Line Faults/100km

9

2015 = 2.85 2014 = 3.05

2014 = 0

2015 = 2

2014 = 1.73 2015 = 2.01

Distribution technical performance measure, SAIDI, meets and exceed Nersa targets

The system average interruption duration index (SAIDI) scheme consists of a dead band, an

incentive/reward zone and a penalty zone as indicated. Both the incentive/reward and penalty zones

are capped at R145.9m (50% weight) per annum. There is a dead band between the incentive and

penalty. Improved performance is lowering the number

Incentive

between green

and brown

Dead band

black box

Penalty

between blue

and orange

10

Conclusion

11

The selective reopener is required to improve supply options available to Eskom

so that

‒ Load shedding can be minimised

‒ System stability can be improved

‒ Impact on the economy is reduced

Owing to operational challenges, high cost supply options must be deployed to

meet demand which include OCGTs and STPPP

Additional OCGT and STPPP usage costs are low compared to the effect of load

shedding on economic sustainability

Load shedding costs R9-R15/kWh1 compared to OCGT costs ~R3/kWh

Every R1bn spent on OCGTs saves the economy up to R4bn

MYPD3 approved tariffs do not include allowance for recovery of STPPP costs

and only a small allowance for OCGT costs

Access to funding is limited which has resulted in the need to request additional

tariff increases rather than wait for an RCA claw back

1. Source Trade & Industrial Policy Strategies (TIPS)_February 2015