Electricity Pricing: Presented by: AT Audat (Acting CD: Electricity) 06 August 2013

1. Electricity Pricing: Presented by: AT Audat (Acting CD: Electricity) 06 August 2013

2. Table of Contents Introduction: Enabling Policy Legislative Mandate Policy Position: Generator Pricing (Utility) Generator Pricing (IPP) Wholesale Pricing Focus: Electricity Pricing Methodology Historical Cost approach. Depreciated Replacement Cost approach. Eskom’s asset re-evaluation Conclusion

3. Introduction

4. Introduction

5. Introduction

6. Policy Position

7. Policy Position: (General) • In addition to the standard range of pricing products provision is also made in the EPP for the development and introduction of special products and prices. • The revenue requirement for a regulated licensee must be set at a level which will cover the full cost (including a reasonable margin or return). • The regulatory methodology must anticipate investment cycles and other cost trends in order to prevent unreasonable price volatility and shocks (price spikes) while ensuring financial viability, continuity, fundability and stability over the short, medium and long term assuming an efficient and prudent operator.

8. Policy Position: Generator Pricing • Generating pricing structures will reflect the cost of supply of the generator or any approved power purchase agreement (for IPP’s). • Generator pricing structures must not hinder efficient and least cost dispatch of the generating units. • The price paid for electricity generated in South Africa or imported to South Africa must be based on either the appropriate and approved regulatory method or on conditions set out in the approved PPA. • Electricity purchases from new supply options must be evaluated and approved against the appropriate avoided system cost. • NERSA may approve a framework to expedite the determination and approval of prices from supply options (e.g. short term purchases).

9. Policy Position: Generator Pricing (RE- IPP’s) • Additional economic implications following the introduction of renewable energy support mechanism will be factored into the price of electricity in accordance with prevailing policy. • Cost of renewable energy sources approved by NERSA will be recouped from customers in the same way as for “conventional” energy sources (for example a Single Buyer of electricity). • Licensees must take full advantage of the financial benefits that flow from the Carbon Development Mechanism and other similar mechanisms (including tax concessions.) which should be factored into the price of electricity.

10. Policy Position: Wholesale Pricing • Wholesale energy prices must encourage the efficient use of electricity at all times and must reflect the Time Of Use structure differentiated cost of supply. • The wholesale energy prices structure must be periodically reviewed and updated by the wholesaler. • Wholesale energy prices must cover the cost of wholesale energy and purchases. • International customers connected to the transmission system must not pay or receive subsidies intended for South African customers.

11. Policy Position: Wholesale Pricing • All licensed wholesale purchasers must have access to the wholesale pricing mechanism on a non-discriminatory basis. • Wholesale energy prices must be available to all qualifying wholesale purchasers (including licensees who export electricity) on a fair and non-discriminatory basis. • NERSA to determine qualification criteria for Wholesale Electricity Pricing System (WEPS) customers and implementation subject to cross subsidy stipulations in this EPP document.

12. Focus: Electricity Pricing

13. Electricity Generation Costs • Cost Drivers: • Acquisition cost of asset • Operating and maintenance cost • Fuel cost • “Cost reflective revenues” imply recovery of these costs, over the operational life of the assets. • The basic regulatory revenue formula (to recover these costs over the life cycle of the assets) consist of four ‘building blocks’: • AR=PE + O&M + Depreciation + Return on Capital • - with Depreciation and Return being the mechanism for recovery of the original acquisition cost (whether using historical cost or replacement methods) • Note: AR = Allowed Revenue, with the average tariff being AR / sales volume

14. Life cycle revenue profile of four ‘building blocks’ : historical cost basis (HC) (single asset) HC method ‘Constant’ Rand billion The four building blocks as shown in the graph do nothing more than to recover the full life cycle cost, however with steeply declining tariff. NOTE: Historical Cost (HC), and Levelized Cost Of Energy (LCOE) are equal to each other, and equal to original asset acquisition cost.

15. Life cycle revenue profile of four ‘building blocks’ : replacement value / inflation indexed basis (single asset) DRC method ‘Constant’ Rand billion The four building blocks as shown in the graph do nothing more than to recover the full life cycle cost, but with much flatter tariff profile. NOTE: Depreciated Replacement Cost (DRC) and LCOE are equal to each other, and equal to original asset acquisition cost.

16. Revaluation of old assets: does it not twice capture the high parts of the life cycle tariff profile? Eskom tariffs set from 1988 to 2000 on basis of Real ROA and ‘current cost’ of assets (similar concept to replacement values) – %ROA however a bit below real WACC% EPP and MYPD2 & 3 intends to migrate back to the original tariff path, without however recovering earlier shortfalls From 2001 to 2008 Eskom was regulated on the basis of historical cost (but making losses in some years)

17. Conclusion

18. Conclusion

19. Thank You