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PRESENTATION TO THE PARLIAMENTARY PORTFOLIO COMMITTEE ON ENERGY

Presentation to the Parliamentary Portfolio Committee on Energy by Mrs. Cecilia Khuzwayo, Chairperson of NERSA. Covering NERSA's mission, regulated industries, strategic objectives, challenges, and future plans for the energy sector in South Africa.

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PRESENTATION TO THE PARLIAMENTARY PORTFOLIO COMMITTEE ON ENERGY

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  1. PRESENTATION TO THE PARLIAMENTARY PORTFOLIO COMMITTEE ON ENERGY Mrs Cecilia Khuzwayo Chairperson

  2. NERSA BUSINESS PLAN AND BUDGET (2011/12) Mrs Cecilia Khuzwayo Chairperson

  3. Introduction Regulated Industries Vision, Mission, Values and Regulatory Principles Mandate Strategic Objectives for 2011/12 Budget and Funding for 2011/12 Challenges Plans for future CONTENT

  4. The National Energy Regulator (NERSA) was established on 1 October 2005 in terms of the National Energy Regulator Act, 2004 (Act No. 40 of 2004) to regulate: Electricity industry (Electricity Regulation Act, 2006 (Act No. 4 of 2006)) Piped-Gas industry (Gas Act, 2001 (Act No. 48 of 2001)) Petroleum Pipelines industry (Petroleum Pipelines Act, 2003 (Act No. 60 of 2003)) NERSA’s predecessor, the National Electricity Regulator (NER) regulated the electricity industry between 1995 until 16 July 2006 NERSA is expected to implement its mandate and to proactively take necessary regulatory actions in anticipation of and in response to the changing circumstances in the energy industry INTRODUCTION

  5. Eskom dominance 95% of electricity generated Municipal Fragmentation Over 174 Distribution and 9 Generation licensees In 2009/10 – 217 TWh of electricity sold The Structure of the electricity supply industry of South Africa is presented below: REGULATED INDUSTRIES ELECTRICITY

  6. REGULATED INDUSTRIES ELECTRICITY (Cont.)

  7. Accounts for less than 2% of energy needs of South Africa Approximately 120 MGJ/annum natural gas imported from Mozambique Approx 188 MGJ/annum of methane rich gas produced by Sasol Gas in Secunda Sasol Gas dominates regulated areas Transmission Operators – Sasol Gas, Transnet Pipelines, Republic of Mozambique Pipeline Company (ROMPCO) Distribution Operator – Sasol Gas REGULATED INDUSTRIES PIPED-GAS

  8. Traders – Sasol Gas, Spring Lights Gas, NOVO Energy*, Virtual Gas Network*, NGV Gas* Storage Operator – Virtual Gas Network Reticulation (<2 bar(g)) not regulated by NERSA but in municipal executive authority Egoli in Johannesburg EasiGas in Port Elizabeth NERSA has registered 11 entities in the production of gas in various areas in the country * New entrants into the market REGULATED INDUSTRIES PIPED-GAS (Cont.)

  9. Transnet dominates pipeline infrastructure Owns the Durban-Gauteng refined products pipelines and distribution lines in Gauteng Transport crude oil for the NATREF refinery Has a single storage facility in Tarlton The Oil Majors dominate storage facilities BP, Shell, Chevron, Engen, Total and Sasol Oil Approximately 26 storage facilities connected to the Transnet network Approximately 4.5 billion litres per annum transported by pipeline to Gauteng areas Road and Rail a further ~2 billion litres per annum REGULATED INDUSTRIES PETROLEUM PIPELINES

  10. VISION “To be a world-class leader in energy regulation”

  11. MISSION “To regulate the energy industry in accordance with government laws and policies, standards and international best practices in support of sustainable development”

  12. Passion Spirit of Partnership Excellence Innovation Integrity Responsibility Professionalism VALUES

  13. Underpinned by NERSA’s legal mandate Transparency Neutrality Consistency and Predictability Independence Accountability Integrity Efficiency REGULATORY PRINCIPLES

  14. NERSA’s Mandate is anchored in 4 Primary Acts: National Energy Regulator Act, 2004 (Act No. 40 of 2004) Electricity Regulation Act, 2006 (Act No. 4 of 2006) Gas Act, 2001 (Act No. 48 of 2001) Petroleum Pipelines Act, 2003 (Act No. 60 of 2003) 3 Levies Acts: Gas Regulator Levies Act, 2002 (Act No. 75 of 2002) Petroleum Pipelines Levies Act, 2004 (Act No. 28 of 2004) Section 5B of the Electricity Act, 1987 (Act No. 41 of 1987) MANDATE

  15. 3 Facilitating Acts: Public Finance Management Act, 1999 (Act No. 1 of 1999) (PFMA) Promotion of Access to Information Act, 2000 (Act No. 2 of 2000) (PAIA) Promotion of Administrative Justice Act, 2000 (Act No. 3 of 2000) (PAJA) MANDATE (Cont)

  16. To create regulatory certainty in the energy sector; To protect the interests of the public and the customers; To create a dispensation for fair competition for industry players; To create energy supply certainty; and To create an effective organisation that delivers on its mandate and purpose STRATEGIC OBJECTIVES (2011/12)

  17. BUDGET AND FUNDING FOR 2011/12 Difference between expenditure and income budgets amounts to R75.6 million which is attributable to a refund of surplus funds to the different industries being regulated and interest receivable from short term investments

  18. Security of Supply Noncompliance issues especially with municipal distributors – maintenance backlog and not meeting reporting requirements Implementation of Inclining Block Tariffs CHALLENGES FACING NERSA (Electricity Industry Regulation)

  19. Regulation of certain piped gas activities not specifically catered for in the Gas Act CNG Monitoring and enforcing Sasol’s compliance with the regulatory agreement Enforcement of the market value pricing Approve maximum prices in absence of clear market value of gas Private sector investment and markets for gas Private sector investment in infrastructure faces many hurdles i.t.o. supply and offtake agreements CHALLENGES FACING NERSA (Piped-Gas Industry Regulation)

  20. Security of supply of petroleum to the inland areas State Owned Entity (Transnet) funding challenges and the setting of its tariffs Promoting access to petroleum storage facilities by Historically Disadvantaged South African wholesalers CHALLENGES FACING NERSA (Petroleum Pipelines Industry Regulation)

  21. To monitor and enforce compliance by all licencees Introduction of more Independent Power Producers Promotion of Renewable Energies in the generation mix – hence Renewable Energy Feed-In Tariffs (REFIT) To monitor the implementation of the second Multi-Year Price Determination (MYPD2) by Eskom and to revise the rules for the MYPD2 if necessary To start preparing for the third Multi-Year Price Determination for Eskom for the period 2013/14 – 2015/16, to continue giving certainty and predictability in terms of electricity prices PLANS FOR FUTURE(Electricity Industry Regulation)

  22. To streamline regulatory processes in the areas of licensing, tariff reviews and appraisals To rationalize tariff structures, taking into account regional pricing and geographical differentiation PLANS FOR FUTURE(Electricity Industry Regulation) (Cont.)

  23. To educate customers in order to assist in the enforcement of Market Value Pricing To implement a compliance framework for licence conditions To conduct a study on the integrity of the gas pipeline network To benchmark licence conditions PLANS FOR FUTURE(Piped-Gas Industry Regulation)

  24. To highlight to the policy maker the need for a review of the Gas Act to address: Definitions and provisions that hamper effective regulation of the gas industry Infrastructure Planning and Construction Licences; NERSA’s Tariff Mandate (Distribution and Transmission); and Licensing deadlines Transition to regulating maximum prices Monitoring compliance to licence conditions PLANS FOR FUTURE(Piped-Gas Industry Regulation) (Cont.)

  25. To monitor the escalations in costs as well as the delays in construction of new infrastructure To monitor and manage as far as possible a tariff spike through tariff structures To monitor licensees in the petroleum pipelines industry’s behaviour and act if and when necessary To facilitate market entry by historically disadvantaged players To facilitate third party access Monitoring compliance to licence conditions PLANS FOR FUTURE(Petroleum Pipelines Industry Regulation)

  26. UPDATE ON TRANSNET’S NEW MULTI PRODUCTS PIPELINE PROJECT Dr Rod Crompton Regulator Member

  27. New Multi Products Pipeline Concept Map of New Multi Products Pipeline Background Completion Date Forecasts Costs Risks Risk 1: Coastal End (Durban) Risk 2: Line Fill (NMPP) Risk 3: Security of Inland Supply Road and Rail Requirement – Data Challenges Road and Rail Requirement Estimate Pipeline Tariff: Durban to Johannesburg (Rounded) Tariff forecast for Durban to Alrode Pipeline Tariff Impact on Gauteng Petrol Price CONTENT

  28. NEW MULTI PRODUCTS PIPELINE CONCEPT Terminal Terminal “Bullet train”

  29. Source: Transnet, NERSA

  30. BACKGROUND • Licence granted -12 September 2007 • Conditions : • Ready in 4 years; and • Deadlines for parts.

  31. COMPLETION DATE FORECASTS

  32. COSTS • 2007: R 11 bn • 2009: R 12.6 bn • 2010: R 15.4 bn • 2010: R 23.4 bn (+ interest) • 2011: R 22 bn (+ interest) • Next: ????

  33. RISKS • Coastal end (Durban) • Line fill (NMPP) • Security of inland supply

  34. RISK 1: COASTAL END (DURBAN) • Construction delays in coastal terminal and feeder lines from oil companies • Solution: “tight lining” until accumulator facility is ready

  35. RISK 2: LINE FILL (NMPP) • Costs: • Who pays? Not resolved • Resulted in commencement delays on 3 branch lines • Worst case: NMPP finished but no line fill 43

  36. RISK 3: SECURITY OF INLAND SUPPLY 44

  37. RISK 3: SECURITY OF INLAND SUPPLY (Cont.) • Riskiest period to en 2011 • Transnet’s Mitigation strategy until NMPP finished: • use both old and new pipelines in parallel • road and rail 45

  38. ROAD AND RAIL REQUIREMENT – DATA CHALLENGES 46

  39. ROAD AND RAIL REQUIREMENT ESTIMATE 47

  40. PIPELINE TARIFF: DURBAN TO JOHANNESBURG (ROUNDED) 48

  41. TARIFF FORECAST FOR DURBAN TO ALRODE 49

  42. PIPELINE TARIFF IMPACT ON GAUTENG PETROL PRICE 50

  43. RENEWABLE ENERGY FEED-IN TARIFFS (REFIT) REVIEW Mr Thembani Bukula Regulator Member

  44. Background NERSA’s Mandate REFIT Guidelines 2009 Latest Developments Outstanding Matters CONTENT

  45. White Paper on Renewable Energy 2003 10 000GWh by 2013 (i.e. 1141MW @ 100% Load Factor) Consultations between 2004 and 2008 Regulatory framework (funding, implementation rules/methods, technologies) REFIT guidelines published in March & October 2009 New generation regulations promulgated in August 2009 REFIT Programme & IPP Programme for conventional power NERSA to develop selection criteria & standardised PPA Eskom (System Operator) to purchase power according to the selection criteria MYPD2 approval in February 2010 with REFIT allocation R12.3bn for 1025MW over the 3 year period Implementation date 1 April 2010 BACKGROUND

  46. National Energy Regulator Act, 2004 The custodian & enforcer of the national electricity regulatory framework To provide licenses and provide for matters connected therewith Electricity Regulation Act, 2006 Issue rules designed to implement national government’s electricity policy framework Regulate prices & tariffs Furnish potential licensees with all the information necessary for licensing Make guidelines, rules, codes of conduct after consultation with interested parties Facilitate the conclusion of Power Purchase Agreements Make license conditions relating to: Setting of prices, tariffs & charges The methodology to be used in determining tariffs The format & contents of agreements entered into by licensees Period of validity of licenses NERSA’s MANDATE

  47. REFIT GUIDELINES 2009 • REFIT’s based on levelised cost of electricity (LCOE) • Stimulate the Renewable Energy industry • Over a 20 year period (20 year Power Purchase Agreement (PPA)) • Wind, Landfill gas, Small scale hydro, biogas, biomass and solar • Annual review for the next 5 years & every 3 years thereafter applicable to new projects • No reduction rate (as in other countries such as Spain, Germany, Denmark) • Reasonable/attractive Returns of 17% (ZAR) • Consultation papers on the selection criteria & PPA Feb 2010 • Plant location and technology that contributes to local economic development • Compliance with legislation in respect of advancement of HDI’s • Projects demonstrating the ability to raise finance • Small distributed generators over centralised generators • Shortest commissioning times • Network integration & stabilisation, transmission losses, environmental approvals

  48. LATEST DEVELOPMENTS • Consultation paper on REFIT review issued in March 2011 • Reduction in capital costs (solar PV reduction around 40%, Wind 5%) • Significant changes in the foreign exchange rate (from ZAR10/$ to ZAR8/$) • Creation of space for additional renewable energy technologies • Maintaining the reasonable/attractive returns of 17%(ZAR) • New generation regulations promulgated on 4 May 2011 • REFIT programme replaced by IPP procurement programme • DoE the procurer & PPA negotiator, • Eskom the buyer/off-taker • Minister’s press release 26 May 2011 • Current REFIT procurement programme will use 2009 REFIT • 2nd phase procurement will use the revised REFIT (March 2011 Consultation paper) • Completed the procurement of 1000MW by December 2011

  49. OUTSTANDING MATTERS • Section 34(1) Determination by the Minister • Generation capacity for security of supply • Types of energy sources • Manner of purchase and selling the electricity produced • Tendering procedure (fair, transparent, equitable, competitive & cost effective) • Provide for private sector participation • Concurrence by NERSA on the above Section 34(1) determination • Finalisation by 30 June 2011 • Issuing of the Request for Proposal (RFP) documents • Stating the tendering process (June 2011) • Licensing of successful IPP’s by NERSA • Maximum of 120 after application is lodged • Shorter period can be facilitated

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