1. ELECTRICITY PRICING POLICY AND IMPACT ON THE MULTI YEAR PRICE DETERMINATION BY NERSA
Matthews Bantsijang
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2. Presentation outline Electricity Pricing Policy Mandate
Background
Electricity Pricing Policy Mandate
Electricity Pricing Policy Principles
Funding the Integrated Resource Plan
Protecting the poor
Challenges and Status
Conclusion
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3. BACKGROUND
Regulation of electricity prices started after the National Electricity Regulator (NER) was established in 1995.
At the time of first licensing there were 378 electricity distributors, after the rationalisation of local government in 2000 the number was reduced to 177.
The Eskom price increase application for 2003 was unbundled for the first time into separate applications for their regulated businesses of generation, transmission and distribution.
In 2005 it was decided to move to a multi-year price determination (MYPD) for Eskom covering the period April 2006 to March The MYPD would allow price stability in the period of Eskom’s has to start providing for massive capital investments in new generation capacity.
In February 2006 the first MYPD price revue was decided on by the NERSA granting Eskom a price increase of CPI plus 1%.
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4. BACKGROUND
The National Energy Regulator (NERSA) was established on 1 October Its predecessor, the National Electricity Regulator (NER) regulated the electricity industry from 1995 until 16 July 2006.
On 30 April 2007, after one year of operating under the MYPD1 control, Eskom applied for a rule change to reduce their revenue risk exposure.
On 20 December 2007, following wide consultation, the Regulator:
Declined the rule change for consideration in the second MYPD, but recognised Eskom’s capital financing needs;
Granted Eskom a 14.2% increase in 2008/9, translating into a 12% increase for municipalities.
From January 2008 to March 2008 Eskom engaged in extensive load shedding due to a national electricity supply shortage.
On 18 March 2008 Eskom applied for a revision of the 14.2% increase to 60% from 1 April 2008 based on changes in its business environment, increased primary energy costs and an accelerated DSM programme due to the power conservation programme (PCP).
On 18 June 2008, the Regulator approved a price increase of 13.3% in addition to the already approved 14.2% (27.5% overall increase for 2008/9).
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5. BACKGROUND
DOE published the South African Electricity Pricing Policy (EPP) in December 2008.
In January 2009 the MYPD2 rules were approved by the Energy Regulator following consultation and a public hearing.
On 5 May 2009 Eskom applied for a 34% price increase. The Regulator granted a 31.3% increase, including that Eskom absorb the 2c/kWh environmental levy imposed by the Minister of Finance from 1 July 2009.
Eskom submited their MYPD2 price increase application for April 2010 to March 2013 by end September 2009 to obtain the necessary approvals for implementation in March 2009.
Despite the large nominal increase in Eskom’s prices, in real terms it is still below the price level experienced during the generation expansion in the 1970’s.
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6. Electricity Pricing Mandate
The Electricity Regulation Act (ERA) and the Electricity Pricing Policy of the DOE guides the structuring of tariffs.
Section 15 of the ERA, 2006 (Act no 40 of 2006 as amended) requires inter alia that:
“The regulation of revenues
Must allow an efficient licensee to recover the full cost of its licensed activities, including a reasonable margin or return;
Must provide for or prescribe incentives for continued improvement of technical and economic efficiency with which services are to be delivered.”
“Charges and tariffs
Must give end users proper information regarding the costs that their consumption imposes on the licensees business;
Must avoid undue discrimination between customer categories”;
May permit the cross-subsidy of tariffs to certain classes of customers.
Various regulatory methodologies are used by the Regulator to ensure that the allowed revenues, charges and tariffs complies with the requirement of the Act.
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7. Electricity Pricing Policy Principles
Approved December 2008, provides guidance and is being implemented by NERSA;
Consist of 60 policy statements confirming existing practices, removing uncertainties and introducing new requirements that talks to:
Improved social equity by addressing needs of the poor;
Enhanced efficiency and competitiveness to provide low-cost and high quality inputs to all sectors;
Environmentally sustainable short and long-term usage of our natural resources;
Open non-discriminatory access to the transmission system;
Private sector participation in the industry;
Universal access to electricity;
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8. Electricity Pricing Policy Principles
Investment in the infrastructure to ensure sustainability;
Accelerated access to electricity by the previously disadvantaged;
Improvement of the technical and economic efficiency with which services are be provided;
Efficient use of electricity as a scarce resource;
Lowered cost of electricity as input to economic activity;
Poverty net for the indigent; and
More renewable energy generation in the energy mix.
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9. Electricity Pricing One part versus Two part tariff
Over recovery
One part tariff not cost reflective
IBT
Y-axis = Consumer cost / Utility Revenue (Rands)
Two part tariff reflects cost of supply
Subsidy
Two part tariff subsidises one part tariff
One part tariff subsidises two part tariff
Breakeven at 400 kWh/m
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10. Funding IRP 2010 – 2030 is the biggest driver of tariffs

11. IRP programme committed capacity
New build options
Coal (PF, FBC, imports, own build)
Nuclear
Import hydro
Gas – CCGT
Peak – OCGT
Wind
CSP
Solar PV MW
2010
2011
2012
300
2013
2014
5001
400
2015
2016
100
2017
2018
4004
1004
3004
2019
250
2373
2020
2021
2022
1 1432
805
2023
1 600
1 1832
2024
2832
800
2025
1 000
2026
500
2027
2028
474
690
2029
237
2030
948
Total
6 250
9 600
2 609
2 370
3 910
8 400
Firm commitment now
Final commitment in IRP 2012
1. Built, owned & operated by IPPs 2. Commitment necessary due to required high-voltage infrastructure, which has long lead time 3. Commitment necessary due to required gas infrastructure, which has long lead time 4. Possibly required grid upgrade has long lead time and thus makes commitment to power capacity necessary

12. Affordability of Electricity Prices NERSA to Regulate for an Affordable Price Path
Sources: IRP2010, Eskom, Frost & Sullivan, EIUG

13. Alternative price paths
Assuming Eskom builds all new capacity, WACC 8,1%
Depreciation 25 years
Average electricity price in 2010-ZAR/kWh
RE IPPs, Nuclear Project financed, WACC 8,1%
Max = 1,12
RE IPPs, Nuclear project-financed, WACC 3%
RE IPPs, Nuclear project-financed, WACC 3%
Depreciation 40 yrs, reduced Tx, Dx expenditure
Min = 0,71
Eskom Debt : Equity Ratio at 3% WACC (0.5)
Eskom Debt : Equity Ratio at 8,1% WACC
2010
2015
2020
2025
2030

14. Issues from current regulatory model
Electricity price path can be reduced (with a lower weighted average cost of capital (WACC))
Impact on Eskom’s financing (higher debt ratios and lower interest cover)
Trade-off between placing additional funding burden on electricity consumers or tax-payer (through increased government support of Eskom and electricity industry)

15. Protecting the poor

16. Protecting the poor
Addressing affordability is a major issue during periods of high price increases
The following measures have been introduced to protect the poor:
Facilitating access to electricity through government subsidised electrification;
Free basic electricity (FBE) to the indigent. First 50kWh/m subsidised by Government.
Free connections provided to Eskom’s low consumption residential customers;
Lower price increases applied to low consumption domestic customers. (15% vs general increase of 31.3%)
Inclining block tariffs (IBT) being implemented by municipalities.
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17. Protecting the poor
Electricity Pricing Policy: Qualifying customers shall be subsidised through the application of a life line tariff (single energy rate with no fixed charge and limited in capacity to 20 Amps with a nominal connection fee).
Further options that could be implemented include:
Increase the FBE volume;
Making low consumption domestic tariffs VAT free;
Energy efficient housing.
The principles of cost of supply and cross subsidies needs further policy refinement for equitable tariff structures and tariff levels.
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18. CONCLUSION
DoE constantly reviews policy when there is a necessity to incorporate new developments.
Poverty alleviation is an important challenge for the country. The links between poverty and energy are clear, and electricity pricing policy introduced mitigation for the protection and the uplifting the poor.
Policy closes gap and creates regulatory certainty.
The principle of true cost of supply and future investment prompt large nominal increase in electricity prices, and in real terms it is still below the price level experienced during the generation expansion in the 1970’s.
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