Critical Electricity Pricing Issues

1
Critical Electricity Pricing Issues
DME Portfolio Committee 23 May 2007
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
Peak demand (MW)
Reserve margin 8-10
Reserve margin 16
Reserve margin 20
Reserve margin 25
Reserve margin aspiration 15
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
Capital Expenditure - R150bn

• 72
• Mothballed stations
• 2 Coal base load stations
• Hydro and gas options
• Nuclear plant
• Refurbishment

• 14
• Lines and cables
• Network improvements
• Refurbishment

• 12
• Network strengthening
• Cater for growth
• Refurbishment

2
6
Capacity projects funnel
Opportunity Identification
Build
Research
Feasibility, Business Case, Contract Concluding
Pre-feasibility
165
4500
PBMR
3500
New Coal Supply
1600
350
Oscar
Yankee
1150
1500
1200
961
1775
100
1332
1600
600
UCG
Lima
Tango
Komati
Renewable 1
Discard Coal
Ingula
November
1200
Sierra
India
100
1520
1128
Victor
900
2400
3000
6000
100
Grootvlei
Camden
Concentrating Solar
Nuclear 1
Papa
Co-Gen 1
Mike
4500
Gas 2
500
300
1050
Foxtrot
400
1000
4500
Zulu
2400
Quebec
Arnot P1P2
0
Cogeneration
Hwange
500
Medupi
Echo
1000
Delta
HVDC 1
4500
Hydro
0
Coal 1
Hydro 1
600
4500
Golf
1050
1050
CBM
10000
Nuclear
350
Juliett
Bravo
1300
Gas 1
2000
OCGT
Nuclear n
500
1000
Gas
Non Eskom Generation 1
Coal 2
Kilo
Whiskey
Hydro 2
Coal
765kV
400kV
Solar
26 125 MW
22 650 MW
18 350 MW
11 941 MW
Transmission
Renewables
Red outer circle indicates out of Borders
project
7
Generation Major Projects
Major Generation Projects Major Generation Projects Major Generation Projects Major Generation Projects Major Generation Projects Major Generation Projects Major Generation Projects
Project Type Project Approval R billion MW Approval Date 1st Unit Project Completion
Project   Project Approval R billion MW   1st Unit Project Completion
Camden Coal 5.2 1 600 Dec-03 Jul-05 Mar-08
Grootvlei Coal 4.8 1 200 Dec-03 Sep-07 Oct-09
Komati Coal 6.1 1 000 Dec-04 Sep-08 Oct-11
Medupi Coal 78.6 4 500 Dec-05 Apr-11 Jan-15
Arnot Coal 1.0 300 Jun-05 Apr-06 Nov-10
Commercial wind Wind 1.1 100 Dec-06 Dec-09 Dec-10
Angerlik Gourikwa (OCGT) Gas 3.5 1 050 Jun-05 Jan-07 May-07
GAS 1 Gas 4.3 1 050 Aug-06 May-08 Sep-08
Ingula Pump storage 8.9 1 332 Mar-06 Mar-12 Dec-12
Kriel refurbishment Coal 1.6 - Dec-04 Nov-06 Nov-11
Matla refurbishment Coal 1.9 - Dec-06 Apr-09 Apr-14
Majuba Rail Railway 1.9 - Dec-04 N/A Dec-09
Bravo Coal 84.8 5160 Mar-07 Mar-12 Dec-15
Total   203.6        
Awaiting PFMA approval
8
Transmission projects
2009/10 for integration of project Alpha
Matimba
Botswana
Mozambique
Dinaledi
PRETORIA
KOMATIPOORT
Marang
WITBANK
Namibia
Mercury
Swaziland
Kudu
Perseus
2009
Bloemfontein
RICHARD'S BAY
BLOEMFONTEIN
2007
DURBAN
Eros
Hydra
2009
DE AAR
DE AAR
2009
Gamma
Delphi
Juno
2010
Neptune
BEAUFORT WEST
EAST LONDON
Grassridge
Omega
PORT ELIZABETH
CAPE TOWN
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Transmission Major Projects
Major Transmission Projects Major Transmission Projects Major Transmission Projects Major Transmission Projects Major Transmission Projects
Project Type Project Approval R million Approval Date Project Completion
Cape Strengthening WG 400kV line substations 1100 Mar-04 Jun-07
Line reinsulation (Western Southern Grid) Lines 192 Mar-06 Mar-08
Substation reinsulation (Western Southern Grid) Substation 212 Apr-06 Apr-10
Camden HV Yard Substation 70 Apr-04 Sep-07
Komati HV Yard Substation 145 May-06 Apr-09
Gourikwa HV Yard 400kV line substation 166 Jul-05 May-07
Ankerlig HV Yard 400kV line Substations 170 Jul-05 May-07
Grootvlei HV Yard Substation 123 Oct-05 Apr-08
Eros Substation 81 Sep-05 Dec-07
Majuba Umfolozi 765kV line substations 775 Jan-07 Dec-09
Tabor Spencer 275kV line 400kV line substations 463 Jul-05 Jun-07
Apollo Refurbishment HVDC substation 440 Jul-05 May-08
Shunt Caps (Beta, Hydra Perseus) Substations 99 Jan-06 Dec-07
Duvha Leseding 400kV Line 400kV line substations 289 Aug-06 Nov-08
Platinum Basin 400kV line substations 1300 Jun-03 Jun-06
Lowveld Transformation Capacity 400kV line substations 150 Jul-06 Jul-08
Witkop 3rd Trf Substation 82 Sep-04 Mar-08
Tabor Spencer 275kV line 275kV line substations 182 Jun-06 Oct-08
Medupi HV Yard Integration 765kV 400kV lines substations 2000 Oct-06 Dec-09
Zeus Hydra 765kV line substations 3000 Aug-06 Jun-09
Hydra Omega 765kV line substations 3300 Aug-06 Jun-09
Dedisa 400kV line substations 427 Jan-07 Dec-09
GAS 1 HV Yard Substations 335 Oct-06 Dec-08
JBH North Upgrade Substations 408 Dec-06 Dec-08
Total 15509
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Funding strategy

• 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

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Eskoms credit rating
Moodys
SP
Fitch
Rating Status
Foreign Currency
A2
BBB
-
A-
Local Currency
A1
A
-
Domestic Long-term
AA
AAA
Domestic Short-term
-
A1
A1
Outlook
Stable
Stable
Stable
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Investment Grade

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

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

25.7
18.2
Includes coal, metal ores, and other minerals
Stats SAs 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.
16
Price of Electricity in real c/kWh new
Restricted and Confidential
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 ESBs 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 (US47.03) per megawatt-hour (MWh),
  while in South China's Guangdong Province, the
  company raised prices by 6.2 per cent to 497.71
  Yuan (US61.37) 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
Key Strategic Issues

• Affordability
• Industry viability
• Internationally competitive prices

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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 worlds
• lowest cost producer
• South Africa to remain an attractive
• investment destination for energy intensive
• industry

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Thank You