1. 1 Critical Electricity Pricing Issues DME Portfolio Committee 23 May 2007

2. 2 THE BRIEF To address the committee on the following: Affordability, reliability and accesibility to electricity for all South Africans; The Eskom price increase of 18% - what informed this significant increase; The Eskom view on the pricing methodology developed by NERSA

3. 3 Peak demand (MW) Reserve margin = 25% Reserve margin = 20% Reserve margin = 16% Reserve margin aspiration = 15% Reserve margin = 8- 10%

4. 4 Capacity expansion - driven by long term demand forecast Eskom position based on 4% growth electricity growth supporting 6% economic growth 77960 MW 56710 MW Eskom moderate position 2.3% electricity growth based economic growth of 4%

5. 5 Capital Expenditure - R150bn 72%  Mothballed stations  2 Coal base load stations  Hydro and gas options  Nuclear plant  Refurbishment 2% 14%  Lines and cables  Network improvements  Refurbishment 12%  Network strengthening  Cater for growth  Refurbishment Generation Transmission Distribution Corporate

6. 6 Research PBMR UCG Concentrating Solar Cogeneration Hydro Nuclear Gas Coal Solar Transmission Renewables * Red outer circle indicates – out of Borders project Opportunity Identification New Coal Supply Oscar Yankee Discard Coal November Victor Gas 2 Zulu Mike Hwange Coal 1 Hydro 1 CBM Coal 2 Non Eskom Generation 1 Hydro 2 Whiskey 26 125 MW Pre-feasibility Tango Sierra Co-Gen 1 Foxtrot HVDC 1 Golf Nuclear n 22 650 MW 4500 3500 1600 1200 1775 1200 100 6000 500 400 500 1000 0 2000 350 1000 500 165 350 100 1150 1600 900 4500 0 10000 Feasibility, Business Case, Contract Concluding India Lima Papa Nuclear 1 Echo Quebec Delta Juliett Kilo Bravo 600 1500 2400 3000 1000 1050 2400 600 1300 4500 18 350 MW Build Renewable 1 Ingula Komati Camden Grootvlei Medupi Arnot P1&P2 Gas 1 OCGT 400kV 765kV 11 941 MW 100 1332 961 1520 1128 4500 300 1050 Capacity projects funnel

7. 7 Generation Major Projects Major Generation Projects ProjectTypeProject Approval R billion MWApproval Date1st UnitProject Completion CamdenCoal5.21 600Dec-03Jul-05Mar-08 GrootvleiCoal4.81 200Dec-03Sep-07Oct-09 KomatiCoal6.11 000Dec-04Sep-08Oct-11 MedupiCoal78.64 500Dec-05Apr-11Jan-15 ArnotCoal1.0300Jun-05Apr-06Nov-10 Commercial windWind1.1100Dec-06Dec-09Dec-10 Angerlik & Gourikwa (OCGT) Gas3.51 050Jun-05Jan-07May-07 GAS 1Gas4.31 050Aug-06May-08Sep-08 IngulaPump storage8.91 332Mar-06Mar-12Dec-12 Kriel refurbishmentCoal1.6-Dec-04Nov-06Nov-11 Matla refurbishmentCoal1.9-Dec-06Apr-09Apr-14 Majuba RailRailway1.9-Dec-04N/ADec-09 Bravo *Coal84.85160Mar-07Mar-12Dec-15 Total 203.6 * Awaiting PFMA approval

8. 8 Transmission projects BLOEMFONTEIN DE AAR KOMATIPOORT RICHARD'S BAY WITBANK Namibia Botswana Mozambique Swaziland CAPE TOWN DURBAN EAST LONDON PORT ELIZABETH PRETORIA DE AAR Mercury Perseus Hydra Gamma Omega Kudu 2009 2010 765 kV 400 kV Matimba 2009/10 for integration of project Alpha Marang Dinaledi Grassridge Eros Delphi Neptune 2010 2007 BEAUFORT WEST Juno Bloemfontein 2009

9. 9 Transmission Major Projects Major Transmission Projects ProjectTypeProject Approval R millionApproval DateProject Completion Cape Strengthening WG400kV line & substations1100Mar-04Jun-07 Line reinsulation (Western & Southern Grid)Lines192Mar-06Mar-08 Substation reinsulation (Western & Southern Grid)Substation212Apr-06Apr-10 Camden HV YardSubstation70Apr-04Sep-07 Komati HV YardSubstation145May-06Apr-09 Gourikwa HV Yard400kV line & substation166Jul-05May-07 Ankerlig HV Yard400kV line & Substations170Jul-05May-07 Grootvlei HV YardSubstation123Oct-05Apr-08 ErosSubstation81Sep-05Dec-07 Majuba Umfolozi765kV line & substations775Jan-07Dec-09 Tabor Spencer 275kV line400kV line & substations463Jul-05Jun-07 Apollo RefurbishmentHVDC substation440Jul-05May-08 Shunt Caps (Beta, Hydra & Perseus)Substations99Jan-06Dec-07 Duvha Leseding 400kV Line400kV line & substations289Aug-06Nov-08 Platinum Basin400kV line & substations1300Jun-03Jun-06 Lowveld Transformation Capacity400kV line & substations150Jul-06Jul-08 Witkop 3rd TrfSubstation82Sep-04Mar-08 Tabor Spencer 275kV line275kV line & substations182Jun-06Oct-08 Medupi HV Yard Integration765kV & 400kV lines & substations2000Oct-06Dec-09 Zeus Hydra765kV line & substations3000Aug-06Jun-09 Hydra Omega765kV line & substations3300Aug-06Jun-09 Dedisa400kV line & substations427Jan-07Dec-09 GAS 1 HV YardSubstations335Oct-06Dec-08 JBH North UpgradeSubstations408Dec-06Dec-08 Total15509

10. 10  50% from retained earnings  50% from debt of which  At least 25% from the domestic market  Long tenors (matches our assets), best value, no currency risk  Up to 25% from international markets  Various instruments - Export Credit Agency, Bonds, Private placements Funding strategy

11. 11 Rating Status Moody’sS&PFitch Foreign Currency Local Currency Domestic Long-term Domestic Short-term Outlook A2 A1 - - Stable BBB+ A- AA+ A1 - A AAA A1+ Eskom’s credit rating

12. 12 Investment Grade Investors require (per Rating Agencies): 1.Predictable regulatory framework with tariffs for efficient cost recovery 2.Asset security for loans: 3.Control over cash flows from an effective customer base 4.Confidence in the sustainability of critical capabilities: Methods to protect all national capabilities – capital build, electrification, demand side management 5.Continuity of successful management: Assurance of business continuity through competence & planned succession

13. 13 Demand-side management  Targets:  8 000 MW by 2025  Investment of R10 billion planned by 2012, 3000MW  Focus areas  Installation of an energy saving culture  Adoption of energy efficient technologies e.g.. lighting  Tariff reform, particularly for households  Dynamic market pricing for industrial customers (DMP)  Use of renewable energy with households – Solar Water Heating  Approach to be followed  Aggressive roll-out planned nationally, with emphasis on areas with network constraints  Partnership between government, local authorities and Eskom

14. 14 Our competitive advantage will continue into the future Source NUS April 2006 Restricted and Confidential South Africa 30% cheaper than Australia

15. 15 Mining cost: Unpredictable cost inflation… Most recent data from Stats SA  SA mining costs have increased by 25,7% since Oct. 2005.  SA coal costs (for SA consumption) have increased by 18,2% since Oct. 2005. Stats SA’s coal cost index was increasing at only 3,3% (year on year) at the time Eskom lodged its revenue application to the NER in 2005. * Includes coal, metal ores, and other minerals 25.7% 18.2%

16. 16 Price of Electricity in real c/kWh new Restricted and Confidential

17. 17 Real price increases are not uncommon - Benchmarking Some recent price increases seen globally Brazil – The Brazilian regulator Aneel has allowed a increase of domestic tariffs by 13%, and industrial tariffs by 18% primarily due to rising fuel costs. Chile – The Chilean regulator INE has increased prices paid to generators by 11% in the central grid and 14% in the northern grid which will be passed through to customers. Ireland – the Irish regulator CER has allowed for an increase in ESB’s end use prices by almost 20% in the New Year primarily driven by high fuel costs. Portugal – The Portuguese regulator ERSE has provided an initial proposal to allow for a 15.7% increase to average tariff levels. China - East China's Shandong Province, Huaneng Power recently raised tariffs by 7.3 per cent to 381.4 Yuan (US$47.03) per megawatt-hour (MWh), while in South China's Guangdong Province, the company raised prices by 6.2 per cent to 497.71 Yuan (US$61.37) per MWh. Austria – The Austrian regulator E-Control has allowed price increases of about 5%, driven by an increase in the energy component of some 10%. Ontario – where since cost reflective prices have been established starting in 2003, tariffs have increased by roughly 100%. Restricted and Confidential

18. 18 Key Strategic Issues Affordability Industry viability Internationally competitive prices

19. 19 Conclusion  Achievement of the capacity expansion programme objectives is non negotiable  Eskom plan cater for higher economic growth  Eskom always ensure a long term view of the industry  Maintain our position of being the world’s lowest cost producer  South Africa to remain an attractive investment destination for energy intensive industry

20. Restricted and Confidential 20 Thank You