1. PRESENTATION TO WHOLESALE ENERGY PROCUREMENT POSITION PAPER
01 MARCH 2007

2. Presentation Outline Objective Trading Model / Structure
Wholesale Purchases
Standard wholesale purchases
Non-Standard wholesale purchases
Inter-RED purchases
Customer Contestability
Levies and Cross-Subsidies
Electrification Levy
Distribution Network Levy
Inter-RED Levy
Other comments
Implementation Consideration
Wholesale Administrator
Determination of charges
Contractual arrangements
Implementation Date
Next Steps
22 September 2018

3. Objective of Presentation
This presentation deals with the key issues pertaining to wholesale energy procurement for REDs
It provides a brief discussion of the key points and sets out a proposed set of positions and recommendations
Presents proposed positions and recommendations for approval by the PMBC
Once approved the positions and recommendations will:
Guide the EDI Holdings approach to the tariff harmonisation strategy;
Be used to influence legislative amendments where necessary
22 September 2018

4. Review of Existing Positions
The following documents were reviewed in preparation of this project:
Bulk electricity purchasing arrangements within a restructured Electricity Distribution Industry (EDI Holdings), 2005
National Electricity Pricing Policy of the South African Electricity Industry, April 2004
Blueprint for Electricity Distribution Industry Restructuring, 2001
Local Government: Municipal System Act, 2000
The positions and recommendations in this presentation are broadly compliant with the principles outlined in the above documents.
22 September 2018

5. Trading Model Discussion
NERSA considered 3 types of trading models. The models differed mainly to the degree they allow retail choice for large customers
MODEL 1: RED only Retailer
MODEL 2: RED / Eskom Retailer
MODEL 3: Wholesale Market
NERSA adopted model 2
The proposed EDI Holdings, trading model is based on NERSA’ s model 2 but with some changes
22 September 2018

6. EDI Holdings Proposed Trading Model
International
Customers
Generation Transmission
Eskom Holdings A
Eskom
Retail
Industry Wholesaler B A B E D
RED G
All munics not in RED
LEGEND:
WEPS rates including approved levies
Existing and new NPAs
Purchases from embedded generators at approved rates
Inter RED and munic purchases in accordance with approved methodologies including levies
Payment to RED for wheeling of energy to contestable customers
Bundled retail tariffs
Purchases from Eskom Retailer at approved rates
International sales and purchases C
Embedded own
Generators
≤ 50 MW
Private
Generators
Existing Eskom contestable customers
≥ 100 GWh F
Existing customers and all new customers
22 September 2018

7. Proposed Trading Model
Discussion
The major differences between the proposed EDI Holdings trading model and the model selected by NERSA are:
There is no retail choice hence customers can not choose their retailer. The introduction of customer choice is a complex issue that require the development of rules to deal with issues such as protocols for customer switching and the retailer-of-last-resort.
All new distribution customers (including large customers) will be serviced by the relevant RED.
The introduction of levies at wholesale level to facilitate the need for regional cross-subsidies.
The proposed EDI Holdings’ trading model makes provision for Eskom to sell directly to the current Eskom large customers (100GWh/year). However all customers served from the RED’s networks will be subject to wires charges and approved levies.
22 September 2018

8. Proposed Trading Model Recommendations
Recommendations following from EDI Holdings’ Proposed Trading Model:
Adopt the EDI Holdings proposed trading model.
REDs / Eskom(Retailer) will buy electricity at the wholesale level directly from the industry wholesaler (potentially Eskom Holdings until the industry wholesaler is established) subject to the same tariffs & conditions.
Sales between REDs and between REDs will be treated in accordance with approved methodology.
Municipalities not incorporated in the relevant RED will be treated as a customer of the relevant RED.
Existing Eskom embedded contestable customers (100GWh and greater) to buy from Eskom (Retailer) until contract has terminated. Customer will then default to RED in the absence of an established market.
Eskom(Retailer) customers and RED customers to buy at rates approved by NERSA
All new distribution customers to buy from RED.
Industry wholesaler to purchase from embedded generators at approved rates.
Any entity (including Eskom Retailer, RED, Munic) who uses a 3rd parties distribution network must pay relevant charges including DUOS, retail, losses, approved levies, surcharges, etc.
22 September 2018

9. Standard Bulk Purchases
Discussion
There are potentially 3 main sources of bulk energy purchases for the RED, namely:
Purchases from Eskom
Purchases from existing own embedded generators; and
Purhases from new embedded generators (e.g. IPPs)
Recommendations
REDs to purchase electricity from Eskom at the approved WEPS and NPA rates including all levies and surcharges
REDs and Munics to ringfence existing embedded generators
REDs will be allowed to utilise electricity from current own embedded generators
REDS will not be allowed to purchase electricity directly from new embedded generators (IPPs, co-generators and renewable energy generators)
Industry wholesaler will purchase available electricity from e.g. IPP’s, co-generators, renewable generators at the approved NERSA rates
22 September 2018

10. Non-Standard Bulk Purchase
Discussion
REDs will be allowed to enter into Negotiated Pricing Agreements (NPAs) with Eskom for its own purchases or for purchases on behalf of customers
NPA are highly customised and specialised agreements. There are many factors that can determine the conditions of the agreement including: duration, load factor, interruptibility, risk mitigation, etc.
DSM participation. REDs could either directly participate or allow its customers to directly participate in DSM products
Recommendation
REDs can enter into NPA contracts with Eskom to honour existing NPA contracts with no adverse impact on either the customer or the RED
REDs may enter into new NPA contracts subject to regulatory approval
REDs may enter into other special contracts to support Eskom’s demand side products provided that the financial, technical and operational matters have been addressed
22 September 2018

11. RED-RED & RED-Munic Bulk Purchases
Discussion
There are inter-connectors between REDs and Munics which will result in cross-border transactions
These transactions must be metered and settled
Recommendation
Optimise boundary arrangements to minimise cross-border challenges
Develop an efficient settlement methodology
Methodology must take into account the cost of bulk purchases as well as the cost of any additional value added services such as: DUOS, retail services, losses, and relevant levies
All relevant charges must be approved by NERSA
The above recommendations underline the importance of a clear separation between network and retail charges
22 September 2018

12. Customer Contestability
Discussion
EDI Holdings’ proposed trading model does not promote customer contestability & choice during the early stage of the EDI restructuring. Contestability is a complex issue that require:
Detailed procedures to facilitate customer switching,
Clarity in terms of the roles, responsibilities, regulation of retailers and in particular the conditions applicable to the retailer-of-last-resort,
NERSA should decide when and how contestability will be introduced and rolled out to other customers categories.
Recommendations
A detailed strategy should be developed by NERSA to facilitate the introduction of customer choice and customer contestability.
Retail choice should not be introduced until all the conditions for customer contestability have been met including the development, testing and implementation of the key rules to effectively regulate contestability.
NERSA should decide when and how contestability will be introduced.
Eskom customers, greater than 100GWh per annum at on consolidated point, should remain with Eskom
22 September 2018

13. Rate Rebalancing Levy (…1)
Discussion
There are a number of hidden cross-subsidies at the wholesale level.
The introduction of a cost reflective wholesale tariff will make these subsidies transparent.
These subsidies will however be required in the short term to maintain revenue balance between the entities, however it should be phased out.
Eskom has identified the need for a rate-rebalancing levy (cross subsidy from profitable to non-profitable sales) and a wholesale surcharge which is essentially a subsidy from high to low voltage customers.
Included in the above (but not separated out) is an inter-regional cross subsidy, since the area where the subsidy is collected is not necessarily the same as where the subsidy is required. This creates the need for an inter-regional subsidy to protect the financial balance of the regions.
The time period over which entities will be merged into the RED has a major impact on the calculation of subsidies needed to maintain revenue balance.
Every merging will require an update of the levies and cross-subsidies. This will create a significant administrative burden.
All munics not incorporated in the relevant RED will have to become customers of the relevant RED from RED DAY ONE
22 September 2018

14. Rate Rebalancing Levy (…2)
Recommendations
That the cross-subsidisation at the wholesale level be retained in the interim to protect the economic and financial integrity of the REDs but that it be phased out taking into account the sustainability of the REDs.
A single rate-rebalancing levy at wholesale level to be introduced to protect the revenue balance of the industry. This levy will replace the Eskom rate-rebalancing levy, WEPS surcharge and the need for an inter-regional subsidy.
All wholesale purchasers should be subject to the levy. The funds from the levy to be disbursed to the entities in accordance with an agreed methodology.
EDI Holdings in conjunction with NERSA to determine the levy and to draft the disbursement methodology.
NERSA to approve the levy and the disbursement methodology.
NERSA to develop the wholesale tariff arrangement and levies and to confirm it prior to the establishment of the REDs to enable the REDs to enjoy the benefits from a level playing field from inception.
22 September 2018

15. General Comment: Levies
Discussion
Unless levies are implemented in a responsible way they could result in unwanted outcomes such as wasteful expenditure to avoid the levies.
Recommendations
All levies and surcharges must be transparent
Levies and surcharges must be applicable to all customer categories and all retailers and distributors
NERSA, in collaboration with the DME and the National Treasury, to regulate all levies, subsidies and surcharges
22 September 2018

16. Wholesale Administrator (…1)
Discussion
NERSA has identified the need to establish an impartial Wholesale Administrator to oversee all wholesale transactions.
This recommendation will ensure that all wholesale customers are treated equally by removing the incentive to unfairly discriminate between Eskom and non-Eskom wholesale transactions.
The Administrator will assume responsibility for the following:
Custodianship of all Wholesale Agreements,
Reading of meters,
Reconciliation of Meter Readings,
Production and Issue of Monthly Bills,
Administration of all applicable levies and surcharges.
NERSA recommended that Eskom Transmission fulfill the role of Wholesale Administrator.
22 September 2018

17. Wholesale Administrator (…2)
Recommendations
Endorse NERSA’s position for the establishment of a Wholesale Administrator.
Eskom Transmission to assume the role of Wholesale Administrator, provided that NERSA puts into place the necessary checks and balances to ensure equal and fair treatment between all wholesale purchases.
22 September 2018

18. DUOS, Embedded Generation and Retail Charges
Discussion
To enable the wholesale purchase pricing mechanism it is important that REDs (and the Eskom Retailer where applicable) determine:
DUOS charges,
Losses charges,
Embedded generation charges,
Retail charges/margins, and
Levies
The above requires that the relevant NERSA policies and methodologies are developed, approved and implemented
Recommendations
EDI Holdings to assist NERSA, the custodian responsible for policies and methodologies, in the development of draft policies where possible
22 September 2018

19. Contracting Arrangements
Discussion
Care should be taken to minimise the number of contractual agreements between the different parties and the costs associated with it. Theses contractual agreements inter alia includes:
Adjacent REDs
Eskom Wholesale
Wholesale Administrator
Eskom Retailer
Contestable and captive customers
Re-distributors
Recommendations
For wholesale customers apply a single agreement for energy and network services
Between Eskom and the relevant RED consider a single contract for energy, transmission network, and retailer services.
22 September 2018

20. Implementation Date Discussion
The viability of the REDs depends on the implementation of a fair and non-discriminatory wholesale pricing mechanism with appropriate and transparent levies.
Recommendations
Develop the relevant methodologies and calculate the relevant charges and levies applicable to the wholesale electricity pricing prior to the establishment of the REDs
Allow the REDs to benefit from wholesale electricity pricing from inception
22 September 2018

21. Next Steps
Discuss with the relevant stakeholders and provide input to NERSA based on the recommended EDI Holdings positions on Wholesale Purchases
NERSA to develop necessary policies and methodologies (EDI Holdings to assist where possible)
EDI Holdings to assist with the calculation of charges and levies as approved per RED
22 September 2018

22. THANK YOU