Introduction

1. Proposed framework for charges for generators connected to the Distribution networkPlease note that the contents of this presentation are proposals at this stage and are not yet approved Eskom stances

2. Introduction • Generators and loads are both customers of the network provider • Loads pay published and approved charges for the use of the network • These may be explicit unbundled charges or not! • There is currently no regulated framework for use-of-system charges for embedded generators (generators connected to the Distribution network) • This presentation sets out a proposed framework for use of system charges

3. Background • Some generators may sell to Eskom through approved power purchase agreements, whilst others may wish to wheel energy to third parties • Eskom will allow wheeling BUT the wheeling arrangement is subject to the generator receiving its approvals to generate and trade • Generators that wish to wheel energy face challenges related to the use-of-system charges. • Use-of-system charges for generators selling to the Eskom have no risk associated with use-of-system charges but generators that want to wheel energy are exposed to the risk of the level and structure of these charges. • There is urgent need to address these issues and propose a framework for use of system charges • The proposed framework together with the Eskom wheeling policy aims to reduce barriers to entry and risk for non-Eskom generators • In particular for generators that wish to wheel energy

4. Transactions with generators The proposed framework with deals the generator use of system charges Use of system charges for Generators • The generator will contract with the network provider to provide network services. The network provider will raise charges for these services. • The generator will contract with the entity purchasing the energy through a PPA and this may be with Eskom, a third party or for own generation. • If the energy is sold to a third party, the electricity bill must be adjusted for the wheeled energy through a supplementary contract. The customer will pay the standard tariffs associated with the cost of delivering the energy. • All of the above transactions are separate contracts and deal with different issues. PPA between generator and buyer Use of system charges for Loads

5. Wheeling charges • Generators are liable for charges for the use of the network • Loads are liable for charges for the use of the network • The 2 are NOT linked. • Generators, whether they sell energy to Eskom or wheel energy to third parties will pay equitable use-of-system charges • Loads that receive wheeled energy from a non-Eskom generator or energy from Eskom will pay the equitable use of system charges • A wheeling transaction is a financial adjustment for the energy not supplied by Eskom. • The service provided with regard to the use of the network is independent from who owns the energy • Any use-of-system benefit or cost associated with a generator’s location accrues to that generator and not to the purchaser of the energy.

6. Allocation of network charges between loads and generators Generator R/kVA network charge Generators will pay equitably for the network usage Generator A R/kVA network charge Load Meter Load R/kVA network charge 100 kWh Sum of all load and generator network charges = Distribution revenue requirement Load A Meter Meter 1000 kWh Generator B Loads will pay equitably for the network usage Meter Load B Load R/kVA network charge Generator R/kVA network charge Buys (non-Eskom) energy 100 kWh

7. Use of system charges for embedded generators • It is significantly more complex to determine network charges for generators connected to a distribution network and this is a challenge for distributors everywhere in the world. • What needs to be resolved is how to make the situation fair, transparent and predictable. • A framework must be developed on use-of-system charges for all embedded generators • Level the playing field for generators selling energy to Eskom and generators selling energy to third parties without resorting to special pricing arrangements. • As there are not sufficient generators connected to the Distribution network on which to calculate network charges, a theoretical, practical and simple to apply approach is proposed. • Based on the research and inputs from stakeholders, the following are considered potential options regarding network charges (all would require NERSA framework and approval):

8. Options considered/recommended

9. Proposed framework for Generator use of system charges (GUoS) • The use-of-system charges will comprise, • network charges, • network charge rebate, • reliability services charges (same as criteria for loads) and • service and administration charges (same as criteria for loads). • The network charge will comprise • A HV R/kVA tariff network charge (>66kV < 132 KV) using the average cost-reflective distribution network costs as currently calculated determined for loads, based on the maximum export capacity. • This charge will increase at a given indexed value. • The HV network charges are rebated • Based on energy produced based on the standard tariff loss factors, per transmission zone and voltage at the base WEPS/Megaflex energy rates (the rate excluding losses and reliability services), • Not rebated beyond extinction. • For medium voltage (<66 KV – mainly 11 and 22 kV) connected generators, no network charges to be raised • The rebate scheme to be revaluated in the future, but it is proposed that all generators that connect in the next 5 years will remain on the rebate scheme until termination.

10. Network charge rebate • The rebate is based on the reduction of (technical) losses to Eskom • The generator’s network charge is reduced by a c/kWh rebate based on the amount of energy produced by the generator. • Justified by assumed reduction of cost of losses on the Distribution network. • Cost of losses is costs calculated as c/kWh energy rates at standard tariff loss factors • The rebate incentivises generators: • That have higher load factors • That are located in areas with high loss factors • While the rebate approach provides a signal for the losses benefit - it is not cost reflective, therefore • The rebate should be never be beyond extinction. • The rebate should not be applied to the service, administration and reliability service charges. Network charge rebate = {Delivered energyt x (distribution loss factorV x transmission loss factorZ-1) x Pt} Where: V = at the relevant voltage level Z= transmission zone and t = the appropriate peak, standard or off peak time period and Pt= Megaflex energy price excluding losses and reliability services for each PSO time period.

11. Cost reflective network charges Urban network charge Indicative cost reflective network cost per KVA

12. Example

13. Example Based on peak, standard and off-peak generation profile The higher the load factor, the greater the rebate. At a load factor of 60%, the network charge is fully rebated.

14. Connection Charges • Generators will pay the cost of dedicated incremental costs associated with the connection as an upfront connection charge. • Where there are upstream costs, these will not be charged directly to the customer, but a signal for actual upstream cost will be given by raising an early termination guarantee equal to the value of an appropriate share of upstream costs.

15. Proposed framework continued • When the Distribution network is unavailable, due to Eskom-induced supply interruptions, Eskom's forced outages (unplanned load shedding events) and Force Majeure a demand exemption will be given on the network charge for the period of unavailability. • An indicative forward price curve is provided to enable better estimation of use-of-system charges and rebates. • For co-generators (both importer and exporter of energy), the network use-of-system charges are based on the higher of import (load) or export (generator) network charges

16. Summary of proposed framework • Generators use-of-system charges will comprise, connection charges, network charges, network charge rebate, reliability services charges (same as criteria for loads) and service and administration charges (same as criteria for loads). • Connection charges: • Generators will pay the cost of dedicated incremental costs associated with the connection as an upfront connection charge. Where there are upstream costs, these will not be charged directly to the customer, but to mitigate the risk of stranded assets in the event of early termination, a signal for actual upstream cost will be given by raising an early termination guarantee equal to the value of an appropriate share of upstream costs. • Network charges • A R/kVA tariff network charge will be raised for generators connected at high voltage (>66kV <132 KV) using the average cost-reflective distribution network costs as currently calculated determined for loads, based on the maximum export capacity. This charge will increase at a given indexed value. • The HV network charges will be rebated on energy produced based on the standard tariff loss factors, per transmission zone and voltage at the Megaflex energy rates[1] excluding losses and reliability services, but not beyond extinction. • The rebate scheme to be revaluated in the future, but it is proposed that all generators that connect in the next 5 years will remain on the rebate scheme until termination. • For medium voltage (11 and 22 kV) connected generators, no network charges to be raised. • General: • When the Distribution network is unavailable, due to Eskom-induced supply interruptions, Eskom's forced outages (unplanned load shedding events) and Force Majeure a demand exemption will be given on the network charge for the period of unavailability. • An indicative forward price curve is provided to enable better estimation of use-of-system charges and rebates. • For co-generators (both importer and exporter of energy), the network use-of-system charges are based on the higher of import (load) or export (generator) network charges.

17. Conclusion • Framework will be submitted to NERSA once approved within Eskom • The eventual framework implemented will be that finalised and approved by NERSA • Once approved, Eskom will calculate and submit rates for approval