1. Protection of the Poor through the implementation of the Social Electricity Tariffs: The South African Experience Author & Presenter: S D Salvoldi, B Comm, MSc, Corporate Specialist, Electricity Pricing Eskom

2. Introduction Protection of the poor in South Africa is part of a broader national strategy - government policy, implementation challenges and resources. Needs to deal not only with electricity, but also other basic services. A holistic solution is required considering all role players i.e., municipal distributors, the National Energy Regulator of South Africa (NERSA), Government, local government and other stakeholders. Protection of the poor is not a decision that the electricity utility should be making But - in times of increasing electricity prices, utilities have a role to play If not, potential for increased non-payment, usage of firewood and candles affecting the environment and quality of life of particularly children and women. This presentation shares the South African experience related to social electricity tariffs, the challenges with implementation and the suggested solutions. Protection of the poor in South Africa is part of a broader national strategy - government policy, implementation challenges and resources. Needs to deal not only with electricity, but also other basic services. A holistic solution is required considering all role players i.e., municipal distributors, the National Energy Regulator of South Africa (NERSA), Government, local government and other stakeholders. Protection of the poor is not a decision that the electricity utility should be making But - in times of increasing electricity prices, utilities have a role to play If not, potential for increased non-payment, usage of firewood and candles affecting the environment and quality of life of particularly children and women. This presentation shares the South African experience related to social electricity tariffs, the challenges with implementation and the suggested solutions. 2

3. Demographics of the Eskom customer base Eskom supplies about 40% of customers in South Africa Has 4.5 million customers – majority residential Many are poor and situated in rural areas All Eskom customers lie within the jurisdiction of a municipality i.e. we supply customers within every municipality in South Africa The constitutional obligation to protect the poor lies with municipalities – even to customers supplied directly from Eskom Municipalities make up 44% of Eskom sales Eskom tariffs are based on the cost-to-serve –up to the point customers consume electricity Thereafter subsidies are applied

4. Socio-economic mechanisms already introduced for electricity South Africa has already made significant strides in addressing affordability: The electrification programme, subsidising the cost of connection which provides free connections to 20A supplies in addition to a subsidised tariff. The free basic electricity (FBE) programme funded by national government, provides 50 kWh free per month to identified indigent customers. Lower increases than the average price increase. Support for energy efficiency by providing CFL bulbs free of charge and providing rebates for solar water heaters. 4

5. Government policy on protection of the poor Government policy There is government policy that guides the setting of electricity prices and direction for socio-economic subsidies i.e. the Electricity Pricing Policy of the Department of Energy. Notable policy positions regarding affordability are: Cross subsidies must be approved and have a minimal impact on the economy (policy position 44) Qualifying customers must be subsidised through the application of a life line tariff, which has a single energy rate limited to 20 Amps (policy position 48). The level of the life line tariff should breakeven with cost at 350 kWh per month (Policy Position 49). Domestic tariffs to become more cost-reflective, offering a suite of supply options with progressive capacity-differentiated tariffs at one end single energy rate and finally providing time of use tariffs for higher consumption supplies (policy position 36). 5

6. Free basic electricity (FBE) programme The aim of the programme is to provide a basic amount of free electricity (50 kWh per month) to customers classified as indigent. Programme financed by National Government Funding given to directly to municipalities Eskom receives no direct funding for FBE Local government decides who qualifies to receive FBE In Eskom areas of supply, the municipality provides the names of qualifying customers to Eskom. Eskom is a Service Agent to the municipality The terms and conditions set out in a Service Level Agreement between Eskom and the municipality. 6

7. Cross subsidies in tariffs Eskom has a number of different tariffs catering for different categories of customers. 7

8. Cross subsidies in tariffs Eskom supplies 40% of the customers in South Africa to about 4.5 million customers, the majority of which are indigent. In recognition that many customers cannot afford to pay cost-reflective tariffs, Eskoms retail tariffs also include cross- subsidies for specific tariff categories. Tariffs receiving subsidies pay less that the cost to serve and tariffs paying the subsidies pay more than the cost to serve. The tariff rates are also designed to achieve other objectives suchas specifying a breakeven with costs of 350 kWh. 8

9. Using tariff structures - NERSAs introduction of the inclining block rate tariff (IBT) NERSA introduced inclining block tariffs in 2010 with 4 blocks The IBT is a tariff structure that provides increasing energy charges as consumption 9

10. Using tariff structures - NERSAs introduction of the inclining block rate tariff (IBT) Tariff was applied to all residential customers but wide range of consumption between customers 10

11. Current level of subsidies for Eskom customers 2011/12 estimated subsidies in Eskom for residential customersR/billDescription ElectrificationR 1.70 Funding provided by government. Contributes towards the costs of connection Tariff subsidiesR 4.20 Shortfall of cost versus tariff rates (impacts large power users tariffs by 5%) FBER 0.38 Funding by government, contributes to 50 kWh free per month TotalR 6.28 The subsidies are significant. 11

12. Management of level of subsidies If the level of subsidies are not managed through an integrated holistic approach, subsidies will have unintended consequences and the very people that should receive these subsidies will not be benefit. The provision of subsidies: must be balanced against practical and financial realities, should be targeted (not create unintended consequences or allow the non-indigent to benefit), not create imbalances and inequity between tariffs – risk of migration, provide the correct economic signal - ensure that no wastage of a scarce resource, not be unsustainable and in turn make the subsidising tariffs unaffordable, and must be equitably given to all the deserving customers 12

13. Implementation challenges with current policy: Free basic electricity (FBE) Funding to municipalities for FBE is an unconditional grant i.e. it does not have to be used to provide basic services. There is an inequitable allocation of FBE funds to Eskom customers and municipality customers. Only about a quarter of Eskom receive FBE, while it is estimated that Eskom supplies the majority of the poor in South Africa. Funding is not provided directly to Eskom, but via the municipality. Difficulty in identifying the poor, including the manpower resources required to identify the poor. The cost to administer a targeted approach is high. 13

14. Implementation challenges with current policy: Inclining block rate tariffs (IBT) IBT does address affordability, but there are unintended consequences Customers don't understand the tariff Cannot remove fixed charge – removes capacity signal for higher supply sizes and creates a revenue risk for the network provider. Does not cater for multiple homes on one meter/stand (typically backyard dwellings and housing developments), The level of subsidies will increase unless the tariff is changed. IBT for prepayment customers is also conceptually unfair, as the payment is based on the point of purchase and not on actual consumption. The implementation of IBT not consistently applied between Eskom and other municipal distributors. A one-size-fits-all approach needs to be reviewed, including development of a guideline to direct the development of residential tariffs. 14

15. Understanding subsidies If tariffs are used to address affordability, must understand the subsidies – requires a cost-to-serve exercise to quantify the amount of subsidies. The cost of service study should provide properly unbundled costs, which are segmented into appropriate cost and customer categories. Will enable understanding: Of the subsidies to be provided, how to apply these subsidies to the targeted recipients, how to avoid leakage of the subsidies (to unintended beneficiaries) and the resultant impact on other customers. 15

16. Options to be considered…. Consideration needs to be give whether electricity tariffs or other funding mechanisms should be used to compensate for social requirements. Other options must be investigated such as: Optimising the targeting and funding mechanisms – funded by government Lower tariffs (cross subsidies) – funded ideally by government and not tariffs If funded through tariffs, subsidies must be targeted and tariff structures (inclining block tariffs or targeted single energy rates) must be appropriate and not cause unintended consequences Extending subsidy mechanisms such as grants by government for pensioners should be extended 16

17. Conclusion The need of the poor is must be addressed in times of increasing electricity prices Government programmes like FBE must be better targeted and more equitably allocated Subsidies should be provided within a national subsidy framework: i.e. who should receive, definition of the poor, the role players, and impact on the economy, etc. Without national framework there is inequity in the application of subsidies Subsidies add a significant burden on those paying the subsidies and could make their tariffs unaffordable. Tariffs structures need to be optimally designed and balance many factors; subsidies, energy efficiency, revenue impact, customer impact, fixed versus variable costs, and cost-reflectivity.. An IBT structure is a very complicated tariff structure for customers and utilities Energy efficiency, while a very important objective, can have a devastating impact on revenue of distributors if there are not fixed charges to cover fixed costs – as experienced in Brazil. The need of the poor is must be addressed in times of increasing electricity prices Government programmes like FBE must be better targeted and more equitably allocated Subsidies should be provided within a national subsidy framework: i.e. who should receive, definition of the poor, the role players, and impact on the economy, etc. Without national framework there is inequity in the application of subsidies Subsidies add a significant burden on those paying the subsidies and could make their tariffs unaffordable. Tariffs structures need to be optimally designed and balance many factors; subsidies, energy efficiency, revenue impact, customer impact, fixed versus variable costs, and cost-reflectivity.. An IBT structure is a very complicated tariff structure for customers and utilities Energy efficiency, while a very important objective, can have a devastating impact on revenue of distributors if there are not fixed charges to cover fixed costs – as experienced in Brazil. 17

18. Protection of the Poor through the implementation of the Social Electricity Tariffs: The South African Experience Thank you