NERT RSA Electricity Status Report

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NERTRSA Electricity Status Report
August 2008
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Managing the RSA Electricity Crisis

• Identify the Critical Performance Areas (CPA) X
  12
• Understand the Context each CPA
• KPIs
• Targets
• Constraints
• Initiatives
• Hard
• Soft
• Facts/Assumptions/Measurements
• Communicating (Data/Trends/Issues/Solutions etc)
• Links to other Agencies
• Assign Role Responsibilities for each CPA

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CPA - Risk Watch Report 22 August 2008
Work Stream Focus Areas?
Road Failure?
Baseline Mandatory Rules?
Advisory Council ? PMU ?
Slow/No Response?
PMU for Skills?
Regulatory Response and 2009 Elections?
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Reliability of Gx Supply
Generation Actual Load Losses
Load losses - Increasing trend Not meeting set
targets RTS (Camden) - High unavailability SSCs -
Causing disruptions Summer 08/09 very tight. NB
Cyclical load losses increase this time of the
year. Of concern - Current month increasing trend
worse than historical trend, and starting to
occur sooner than normal.
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Reliability of Tx Supply
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Eskom Coal Supply Situation
25.9 days as at 05 Aug 08
Risks Impact on roads due to high reliance on
road transport
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Power Conservation Status
Energy Savings in Percentage
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Top 12 Metros Energy Demand

• Actual Energy demand in April was between 8 and
  9 lower than forecast. This includes load
  shedding.
• Adding back load shedding the saving against
  forecast is probably between 4 and 6.

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Implementing ECS will not be easy due to
regulatory issues, customer ability to capture
savings and uneven distributor readiness
Challenge
Description
Implication
Lengthy regulation process

• Regulatory changes required before enactment
• This requires extensive stakeholder participation
  and lengthy processes

• It will take at least 2-4 months before ECS can
  be made mandatory
• The initial phase of ECS is voluntary, and does
  not have the desired effect

Ability of customers to capture savings

• Although most consumers can capture savings,
  implementing such measures will take time and
  effort
• This will have significant economic impact, as
  customers may be forced to cut production to
  achieve savings

• The delay in capture could be compensated for by
• Providing trading as an option in ECS
• Encouraging customers to generate their own
  electricity

Distributor readiness

• There are over 180 distributors, with
  non-standard operating systems
• Organisational and operational changes required
  to monitor ECS will be complex and difficult to
  implement at the same pace across customers

• High risk that customers will receive
  inconsistent treatment across distributors
  regarding ECS
• A phased roll-out is recommended to ensure
  consistency and capacity of distributors

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TIMELINE - ROLL-OUT OF VOLUNTARY AND MANDATORY
ECS PROGRAMS
Pre-July 2008
July 1st Oct 1st
Oct 1st end 2008
2009 and beyond
Pre-ECS
Voluntary ECS
Mandatory ECS
Full ECS / DSM

• Savings primarily driven by large industrial
  customers
• Savings purely voluntary

• Formalised ECS program rolled out starting with
  larger customers, and increasingly covering
  smaller and smaller customers
• Initially no penalties or incentives, but the
  program provides opportunity for industrials to
  have a head start

• Upon successful passing of legislation or
  introduction of sufficient pricing regulation,
  ECS able to provide incentives and penalties
• Will include trading on a multi-lateral basis for
  further incentives

• Full ECS roll-out and implementation to all
  applicable customers
• Full DSM effort for all other customers

Will require introduction of either legislation
or pricing regulations to enable formalisation of
the mandatory program
Will require successful systems roll-out at both
Eskom and the municipalities to capture all
target customers in full ECS
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Managing the Crisis

• RFP to establish the PMU Closes 25 August 2008.
• Identify and Establish Work Streams Urgent and
  Important

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Workstream 1 - Communication

• Mandate
• To review the current communication protocols
  with a view of improving the delivery of load
  shedding messages

• Objectives
• To communicate in context - the state of
  electricity supply (eg emergency, recovery,
  short, medium, long term)
• To communicate a timeous and consistent message
  to all the stakeholders across all the
  communication channels under Eskom control
• To extend the reach of the Eskom Distribution
  communication value chain to include all large /
  industrial embedded customers
• To continuously improve the performance of the
  recovery state communication in partnership with
  the Eskom internal and external stakeholders

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RSA Electricity Demand Growth Critical Issues

• Ratio GDP Electricity growth rates?
• Changing electricity consumption fundamentals
• Other Generators?

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RSA Electricity Demand Growth
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New Connections
5 demand savings
10 demand savings
Net reserve margin expected to get progressively
worse!
Eskom base case
Net capacity reserve margin
Key assumptions

• Growth 4 p.a.
• Supply side assumptions
• Eskom supply base case plans including Medupi,
  Bravo and Mmamabula (2013)
• Excluding UCG at Majuba, extra wind capacity,
  OCGT/CCGT conversions, Co-Gen and DME IPP
• Demand savings calculation
• Annual energy is reduced by 5 or 10, and then
  the peak demand is calculated to derive the
  projected reserve margin

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05
07
09
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Energy Conservation Scheme Proposed
Decision tree
Core focus of ECS
Initiatives
Levers
Implementation approach
?

• Primary energy

Limited contribution in short term (6-12 mths)
Increase supply
?

• Co-gen/IPP/MTPPP

?
Significant contribution in short term (6-12 mths)
ECS will encourage uptake of DSM and some co-gen

• New build RTS

How can South Africa reduce the shortfall of
26TWh/ 3,000MW in the short-medium term required
to stabilise system and create sufficient buffer
for new growth?

• Maintenance

• Plant efficiency

• Voluntary reduction by consumer

• Load shedding

Reduce demand
?

• Power buy-backs

• Increase pricing (modify behaviour and encourage
  efficiency)

Degree of intensity

• Energy Conservation (through DSM co-gen)

Either of these options would address the energy
crisis, however each has varying implications and
consequences to the economy

• Standard Tariff adjustments under current
  regulations excluded from PCP scope.
• Only price deviations (penalties/ incentives)
  from current tariffs will be considered as part
  of PCP

• Mandatory regulations to reduce demand (ECS)

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Eskoms Progress on Key Activities for
Implementation of the Initial Voluntary Scheme
Completed
Descriptions
Status
Comments

• Facilitate discussions with NERSA and DME to
  ensure regulations in place for ECS

• Working with DME and NERSA to secure legislative
  and regulatory enablers

• Expand and finalise rules for initial phase

• Rules for initial phase have been developed and
  agreed

• Identify target customer groups to inform phasing
  approach

• Customers participating in initial phase
  identified and baseline data extracted

• Develop new operational systems and process to
  support ECS
• Develop relevant people through training

• Systems and process implemented
• Customer managers have undergone required training

• Operational readiness of municipalities

• Unlikely that municipalities will be ready to
  implement initial phase
• Lack of formal governance and regulations have
  contributed to delayed progress

• Develop authorisation and decision-making
  structures in Eskom for ECS

• ECS governance teams have been approved and are
  operational

• Engage key customers and communicate broadly on
  ECS

• In the process of engaging customers on ECS and
  finalisation of baselines

• Support government in developing and implementing
  framework for new connections

• New connections strategy developed
• Engagement process underway with dti to finalise
  proposed strategy

• Ensure alignment with government and obtain final
  approval

• Governance process with NERT is still to be
  finalised

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New connections below 50MVA will continue to be
connected, but large projects (gt50MVA) will phased
Actively enforced/managed
Indirectly manages e.g., mass communication,
education
Not enforced/managed
Require ECS compliance
Connect immediately
Enforce DSM
Objective
Re-phase
Category
1

• Manage (demand) electricity growth with as little
  intervention as possible, to reduce implications
  for the economy
• Hardwire and integrate ECS principles into growth
  as far as possible
• Optimise approach for differentiated customer base

• Small (1 MVA) and micro (100 kVA)
• Bulk of Dx and municipality customers
• Total capacity relatively low

2

• Medium-sized projects/(1-50 MVA) connections
• Several hundred
• Mostly in distribution and munics (large
  customers)

• Large projects/connections (50 MVA)
• Mostly related to the large industrial consumers
• Projects are fewer and can be managed at a
  portfolio level

3
Requirement to implement ECS savings on
current consumption Phase projects start
dates in line with availability of new supply
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IPP and Co-Generation

• Barriers to entry for potential co-generators
• Co-gen feed in rates
• Bilateral negotiations with Eskom for a fair
  price to ensure bankability proved to be
  extremely difficult, resource intensive and time
  consuming, irrespective of the obvious need for
  investment in electricity generation.
• Publication of MTPPP prices was a big step
  forward.  In its submission to NERSA Eskom
  proposed to offer the minimum of the band for
  both the SRMC and LRMC profiles (65c/kWh and
  35c/kWh).  It may be more appropriate, given the
  supply situation, to be more bold and offer a
  price in the middle of the range (80c and 42c)
• The 2012 and 2018 deadlines in the MTPPP could be
  extended, given the threats of schedule slippage
  in the build program, and the Mamabula delay or
  cancellation.
• Lack of resources to pursue co-gen opportunities
• Not core business of large power users, have to
  manage severe internal skills shortages
• Complexities of integration into production
  process can easily be underestimated.  A lot of
  front-end loading and detailed engineering are
  required, versus matching an off-the-shelf
  power station to the fuel spec for a green fields
  power station.  It is not true that co-gen is
  necessarily cheaper and faster than green fields,
  but it is cleaner.
• Asymmetry of risk uptake between buyer and seller
  
• Eskom commercial and legal processes (inflexible,
  take it of leave it attitude).  A lot of the
  requirements are unnecessary for projects
  financed directly from balance sheets of seller.
• Example Liquidated damages, versus no real
  damages to buyer in current situation
• No provision for fact that co-generation under
  delivery may coincide with demand reduction from
  industrial process, leaving Eskom neutral
• Resistance from co-generators to accept risk in
  current situation (Knee jerk reaction We are
  helping Eskom, and they should accommodate us.
   They dont pay penalties if we are load shed,
  but we must pay penalties if we cant deliver,
  etc. etc.)
• Under the MTPPP an under-delivery in one year
  leads to less income for the co-generator
  (correct), but also to penalties in the following
  year (more difficult to swallow)
• List of more detailed comments on proforma MTPPP
  PPA attached below
• Permitting challenges Proposals on how to fast
  track
• EIAs DEAT to set up special panel to fast track
  co-gen applications.  
• NERSA to issue preliminary license approvals, for
  paper work to happen in parallel to project
  execution

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Eskom's Financial Governance Health
Tariff restructuring plan schedule for 2008/9
Aug-08
Start Mar-08 The NERSA decision
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Primary energy costs
Primary energy costs

• Increased utilisation of individual stations due
  to inadequate reserve margin
• Dedicated collieries used above contractual
  volumes
• 85 of all coal purchased from top 3 coal
  suppliers
• Increased utilisation of short term contracts
• Increased from 2 in 2001 to 21 in 2008
• Higher cost due to road transportation
• High utilization of diesel fired Open Cycle Gas
  Turbines

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The funding challenge

• Significant tariff increases by NERSA
• Pass-through of prudent costs accepted as a
  principal
• 20-25 per annum in the next 3 years
• Significant shareholder support
• R60bn committed
• Significant borrowings
• Up to R150bn both local and foreign in the next 5
  years

Lima Pumped storage scheme 1 500MW
Ingula Pumped storage scheme 1
352MW
Bravo (coal) 4 818MW
Medupi Coal 4 788MW
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Eskom New Build Program1
Projects totalling R260 billion approved since
2004
Open-cycle gas turbines 2 078MW
Return to service stations 3600MW
Ingula Pumped storage scheme 1
352MW
18 886 MW of power generation capacity committed
since 2004

• Return to service stations 3 600MW
• Open-cycle gas turbines 2 078MW
• Ingula Pumped storage 1 352MW
• Medupi Coal 4 788MW
• Renewable wind facility 100MW
• Bravo Coal 4 818MW

Renewable 100MW Wind facility
Bravo (coal) 4 818MW
Medupi Coal 4 788MW
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Eskom New Build Program2
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Skills
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Expedite the national initiative for skills
development (academic artisan levels).

• Eskom understands the skills crisis currently
  being faced by the country. In response, it has
  been actively involved in various initiatives to
  alleviate the crisis. These include
• Spending R 1.2 billion per year on education,
  training development of staff, trainees
  bursars
• Establishing Eskom University (in progress)
• Joint initiatives with other State Owned
  Enterprises (eg Denel) in training initiatives
• The Eskom schools programme aimed at attracting
  resources to required skills
• The adoption of three FET colleges (KZN, Limpopo
  and Gauteng)
• Involvement with various bodies that are
  addressing the problem, including JIPSA/AGSISA,
  DPE, SAPRO, ITT and E-Seta.
• Sponsorship of academic shares due to a lack of
  funding by these institutions to attract and
  retain academic staff.
• The skills shortage is a national problem and
  despite Eskoms initiatives to address the
  problem, real progress will only be made if the
  National initiative for skills development
  (academic and artisan level) is expedited, and if
  financial support for the development of
  technical skills is increased.

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Eskom Key Skills requirements 2008 - 2014

• 2500 Engineers (including Project managers)
• 250 Technologists
• 1000 Technicians
• 5000 Artisans
• 500 Accountants/Commercial

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Regulatory Governance
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Elimination of blockages

• Key areas of concern, tabled for Government to
  play a mitigating role
• Award of mining rights
• Funding for road repair
• Expediting skills development
• Streamlining Environmental Impact Assessments
• These are discussed in more detail in the slides
  that follow.

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Constraints that need to be addressed
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Road Repair - Background

• The National and Provincial roads network in
  Mpumalanga utilised by Eskom for haulage of coal
  in desperate need of repair, deteriorating at a
  rapid rate.
• Eskom has been involved in numerous discussions
  with Government at the highest levels to find a
  solution, these interventions have failed to
  yield the desired result.
• In December 2006, Eskom (GPE) undertook a
  comprehensive assessment on the condition of
  current and future coal haul routes. Total cost
  estimated at R3,5 billion.
• DRT at the time disclosed that funding was not
  available to repair the roads, while SANRAL had
  only limited funding available dedicated to other
  projects.
• The findings of the study were presented to the
  Mpumalanga Local Government EXCO. The committee
  indicated that it did not expect a favourable
  response from National Treasury.

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Funding for Road Repair Phase 2 Strategy

• A May 2008 study indicates total expenditure to
  repair coal haul routes of R10 billion (vs R3,6
  billion in December 2006) over a period of 5
  years.
• R3 billion currently required for Category 1
  roads, with provision included for interim
  maintenance on Category 2 3 roads.
• Increase in cost can be ascribed to
• Increase in construction cost
• Oil price fluctuation (linked to the price of
  bitumen)
• Deteriorating road conditions
• Construction cost is based on current contracted
  rates and compared to SANRAL rates.
• Assumed that all roads will be designed to
  accommodate current traffic loading and vehicle
  configurations.

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Environmental Impact Assessments

• Transmission lines for Medupi as there are tight
  deadlines
• The volume of EIAs required for co-generation
  and medium term power purchase programmes will
  increase substantially by the end of 2008.
• EIA's and related servitude acquisition for power
  lines remain an on-going priority and focus area
  for Eskom as they form an integral part of the
  new build programme.
• There is a degree of uncertainty in the time
  frames required for conducting EIAs particularly
  as a result of potential appeals from interested
  and affected parties. As a result Eskom has for
  the last three years been tracking all EIA's for
  capital expansion projects in conjunction with
  the Department of Environmental Affairs and
  Tourism (DEAT) and the Department of Public
  Enterprises (DPE).
• Various committees and structures and additional
  resources have been put in place to deal with the
  increase in volume of applications.
• Eskom also feeds back on progress and possible
  barriers to the Forum for Executives in Energy
  which also includes the Department of Minerals
  and Energy and the National Energy Regulator of
  South Africa.

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Population of the Proposed Work streams
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END