Pricing and the tariff

Size: px
Start display at page:

Download "Pricing and the tariff"

Transcription

1 Pricing and the tariff A message from the chairman There are two major long-term causes of Eskom s financial woes. Firstly, South Africa has priced electricity below its full cost for many decades. Whereas electricity costs between 8 and 9 US cents per kilowatt-hour in the developed economies belonging to the OECD, the average tariff in South Africa is 3 US cents. Electricity consumers elsewhere on the African continent also pay much higher prices. There is an urgent need to achieve an average tariff that recovers the full cost of producing electricity incurred by an efficient public utility, as well as allowing it to build up reserves to partly fund the capital expansion. Within the context of this, average tariff measures can be put in place to Chairman: Bobby Godsell ensure that electricity remains affordable for the poorest consumer. The South African government subsidises the first 50 kilowatt- a homelight tariff for rural hours of monthly consumption for all consumers. Eskom operates communities, but a nationally consistent and effective pro poor tariff is needed. Secondly, it is not possible to fund the first major expansion of our electricity grid for several decades through revenue generated from tariffs alone. The growth of a business is normally funded by a sensible balance between owner s equity, accumulated reserves and debt. The R9,7 billion loss incurred by Eskom this year needs to be seen in the context of the R30 billion spent on the build programme, R18 billion more than in the previous year. Clearly this is not sustainable. The bottom-line in terms of the funding model is that Eskom can only build new infrastructure if we have the money to do so. At present we have not secured all the funding needed for the current build projects. We have taken a conscious decision that we will stop or delay projects if we do not have the funding. We need to mobilise greater equity resources to fund the build programme. The government has already provided R60 billion in a loan with equity characteristics. Government revenues are likely to be severely constrained in the near future. We need to find other sources of expansion funding, perhaps in the form of a development bond that will enable South Africans to invest in the expansion of our country s energy system. A major source of cost inflation has been the cost of coal purchased. Eskom is urgently engaging the coal mining industry to better manage these costs. Eskom has a number of commodity-linked pricing contracts with aluminium producers, which both offer discounted prices, and also link the electricity prices to commodity prices and exchange rates.

2 The year-end valuation of these contracts (embedded derivatives) resulted in an accounting loss of R9,5 billion. They are clearly not sustainable and Eskom will be engaging these customers with a view to achieving more equitable pricing. A message from the chief executive F rom the Preamble of the Constitution and other sources, we as Eskom ha ve d eveloped the following six universal principles which we believe represent the hopes and aspiration of the country and will guide all our thoughts and actions. 1. A united, democratic and prosperous South Africa 2. Eradication of poverty an d unemployment 3. A thriving eco nomy, connected to the world and integrated with the broader African continent 4. A sustainable economy, not harmful to the environment and committed to climate change Chief executive: Jacob Maroga 5. Enhancing the potential of each citizen 6. Leveraging the role of state-owned enterprises for the economic development of the country Operating costs The full recovery cost to Eskom, and in particular some of the extraordinary measures taken last year, has dominated the results we are submitting. Increased primary energy cost: At the end of March 2008, the coal stock levels were at 13 days well below the required minimum of 20 days. While the total coal burned for the year under review was 121 million tons (2008: 125 million tons), Eskom purchased 133 million tons (2008: 120 million tons). Given that the long-term contracted coal suppliers could not respond to the short-term increase in our coal requirements, the additional coal was purchased mainly under the more expensive short-term coal contracts, which included coal transportation cost. The amount spent on primary energy (mainly coal) increased from R million in 2008 to R25 351million in This increase is mainly due to the use of short-term coal contracts and the significant escalation in the unit cost of coal. Higher manpower cost: During the year under review Eskom had to grow its employee complement not only to build new generation and network capacity but also to operate and maintain both existing and new plants. Eskom recruited employees in 2008/9. Eskom has been losing critical and scarce skills to a highly competitive labour market. In the prevailing skills climate in 2008, Eskom was forced to review its remuneration strategy in order to attract and retain staff, particularly those with scarce or critical skills. Consequently, group employee costs increased from R million in 2008 to R million in We have also spent R823 million on training for staff and instituted an academy of learning with six faculties: engineering, apprenticeship, services, project management, leadership and finance. Increased maintenance cost: During the year under review, significant progress was made in catching up with maintenance which could not be undertaken because our plant was run at full capacity during the latter half of 2007/8. During the year, maintenance costs increased to R5 891 million (2008: R4 526 million).

3 Achieving the requested price increases Eskom applied for an interim price increase of 34% for 2009/10. On 25 June 2009, Nersa approved an average price increase of 31,3% for Eskom for the nine months from 1 July 2009 to 31 March Included in the 31,3% increase is the 2c/kWh environmental levy payable to government (levied on the sale of electricity generated from non- sources) which must be recovered by Eskom within the price increase. Adjusting for the renewable levy, Eskom will receive a net price increase of 24,08% on average. The approved price increase from Nersa includes a limit of 15% for poor customers of both Eskom and municipalities. Refer to Impact on the poor section. The second multi-year price determination (MYPD 2) application will be made based on the current Nersa rules and the Electricity Pricing Policy1. At the same time Eskom will in conjunction with stakeholders develop an appropriate funding model that addresses the funding requirements for the building of new infrastructure. Eskom s average price adjustment for the last 15 years: To put the current price increase application into perspective, the table shows Eskom s average tariff adjustment for the last 15 years compared to CPI: Year Average CPI price adjustment Price increase above/(below) CPI 01-Jan-94 7,00% 8,82% -1,82% 01-Jan-95 4,00% 8,71% -4,71% 01-Jan-96 4,00% 7,32% -3,32% 01-Jan-97 5,00% 8,62% -3,62% 01-Jan-98 5,00% 6,87% -1,87% 01-Jan-99 4,50% 5,21% -0,71% 01-Jan-00 5,50% 5,37% 0,13% 01-Jan-01 5,20% 5,70% -0,50% 01-Jan-02 6,20% 9,20% -3,00% 01-Jan-03 8,43% 5,80% 2,63% 01-Jan-04 2,50% 1,40% 1,10% 01-Jan-05 4,10% 3,42% 0,68% 01-Apr-06 5,10% 4,70% 0,01% 01-Apr-07 5,90% 7,10% -1,20% 01-Apr ,5% 10,40% 17,10% 1. This is the av erage of the two price increases received by Eskom for the current financial year The NUS (National Utility Service Inc) study, an independent international study, has looked at a range of countries average price for a 1 MW supply (the size of a small shopping centre). This states that Eskom currently has the cheapest price of electricity in the world for a 1MW supply for industrial tariffs and the second cheapest for residential tariffs. Using a different source (IEA Statistics, 2007), comparing average prices of electricity for both developing and developed countries, the following results are obtained (source gives the average price for residential and industrial prices in different countries).

4 Approved five year capital expenditure forecast The Eskom Board approved capital expenditure for the financial years 2007/08 to 2012/13 amounting to R385 billion in nominal terms. Most of the big spending projects in this timeframe have already been approved and committed. The funding options will consist of a combination of borrowings, capital support from the shareholder and tariff increases. Eskom Holdings: capital expenditure 2009~2013 (nominal rand millions) Total Generation Transmission Distribution Corporate Net regulated total Capex for electrification is funded by the DME and is excluded from this capex plan

5 Impact on the poor Eskom recognises that increases in electricity tariffs will impact the poor and that mechanisms must be developed to address affordability. When addressing affordability of electricity tariffs we need to balance practical, economic and financial realities and at the same time ensure that the tariffs are transparent and easy to implement. Consideration should also be given to the impact on subsidy contributors. If subsidies become too large, subsidising tariffs may also become unaffordable thereby eroding the subsidy base. In the 2008 request for a rule change of the MYPD 1, Eskom recommended that one method to soften the impact of higher price increases was to apply lower price increases to the Homelight tariff. Nersa, in its July 2008 decision, determined that the increase for the Homelight customers was to be limited to the 14,2% already implemented by Eskom in April The lower price increase for the Homelight tariff was subsidised by all non-municipal tariffs through a slightly higher increase of 2% to these tariffs. The 2009 approved 31,3% Nersa price increase includes a limit of 15% for poor customers of both Eskom and municipalities (the Homelight 1 and 2 tariffs). The lower price increase for the Homelight tariff will be subsidised by other users through a slightly higher increase. This is seen by Nersa as an interim measure until the implementation of inclining block rate tariffs for the protection of the poor in the MYPD 2. Government aims to bring relief to lowincome households through the national electricity basic services support tariff, thereby ensuring optimal socio-economic benefits from the national electrification programme. Qualifying customers are eligible for 50kWh of free electricity per month. Tariff restructuring The price of any product influences the way in which customers use the product. Our electricity tariffs are therefore designed to send out signals that resemble the cost to supply the electricity. With this approach, customers are guided through price signals to use electricity in an economic and efficient way. Our tariffs are designed to support both energy and capacity efficiency. Energy efficiency is supported through energy rates that are time-of-day and seasonally differentiated while cost reflective network charges ensure that the networks are used in an optimal way as customers pay for what they use and for what they reserve on the network for their own requirements. The tariffs are designed to be as non-discriminatory as possible by taking into account the needs of all customers on a fair and equitable basis. Our tariff options are based on consumers demand sizes, with charges differentiated in terms of location and voltage for the larger supplies. Eskom standard tariffs already include various pricing options to promote efficiency, but have been reviewed to ensure optimum support for the latest energy conservation initiatives. Initiatives to enhance energy efficiency include: The National Energy Regulator of South Africa (Nersa) approved changes to the notified maximum demand rules during 2008 that will ensure a stronger pricing incentive not to exceed the notified maximum demand. This will be implemented during 2009/10. The development of a price signal during 2009/10 to incentivise customers to improve low power factors that will encourage the efficient use of electricity and promote energy savings. Tariff structural changes that propose further unbundled large supply size tariff options, increased cost-reflectivity and phasing-in the rationalisation of subsidy contributions were developed and approved by Nersa in 2008 for implementation in 2009/10. These structural changes to the tariffs will, however, not be implemented on 1 April 2009 but be aligned with the implementation of the 2009 price increase when approved by Nersa. In 2009 Eskom will introduce the Landlight tariff that was approved by the Nersa during 2008 for rural customers to ensure that there is equity for electrification customers and customers in rural areas with the same electricity needs but do not form part of the official electrification programme funded by the Department of Minerals and Energy. This initiative will support universal access.

6 How is the cost of supply determined and justified? Eskom does extensive research on tariffs. Costs are allocated as follows: Energy cost Energy costs are allocated to customers based on the cost of generation using consumption profiles and approved kwh volumes. An important factor is how customers use electricity during peak, standard and off-peak time periods during the year. Therefore customers who use more electricity in peak periods and in winter have a higher average cost per kwh. Network costs The network costs are allocated based on capacity, the voltage of the supply and whether a supply is on a rural or urban network. Lower voltage rural networks have the highest cost per kwh. Retail costs The retail costs are allocated based on the size of the supply, and smaller supply sizes are allocated lower costs versus larger consumers. Even though the amount may be less, it is a R/customer cost which when divided by the average consumption it results in a higher c/kwh value. The sums of all costs as well as the total revenues are calculated to be in line with the approved Nersa revenue requirement. The following table shows a comparison of the average costs per tariff versus the average tariff rates in c/kwh. Tariff Costs c/kwh Tariff rate c/kwh Difference Megaflex 20,6 22,5 9% Nightsave Urban 21,9 25,0 14% Miniflex 24,4 26,3 8% Nightsave Rural 45,1 36,4-19% Ruraflex 53,8 34,0-37% Businessrate 36,7 43,7 19% Homepower 52,2 48,9-6% Homelight 77,7 53,9-31% Landrate 73,6 56,6-23% Total 25,5 25,5 0% Eskom s larger customers (Megaflex and Nightsave Urban tariffs) made a higher contribution in relation to the cost to supply them. If Eskom tariffs were made cost reflective, the Homelight tariff and the Ruraflex, Nightsave Rural and Landrate tariffs would have to be increased significantly. The tariff receiving the largest subsidy is Ruraflex, which mainly supplies large points of supply on farms and smaller municipalities. Therefore the opposite of the common misconception is true industrial customers subsidise the bulk of Eskom s residential supplies. As the number of customers on Homelight has increased by over two million customers over the last 10 years, the average price of the residential tariff has increased. Eskom has also in the past made proposals to reduce the level of subsidies to the Homelight and the rural tariffs to more sustainable levels, which were approved by Nersa. During 2008/9, however, the subsidies increased again when the price of the Homelight tariffs was adjusted by only 14.2% to address affordability. The application of the price increase to tariffs Eskom s price application is a price increase for all regulated tariffs. The bulk of our sales are to industry, mining and municipalities, all of which are on standard tariffs and are subject to the same price increase as any other customer. These customers are subject to exactly the same Nersa rules as any other customers and their tariff structures and prices increase are included in our revenue requirement and are approved by Nersa.

7 Tariff structure During the 2008/9 financial year the tariff structures remained the same. The foundation is laid for improved time-of-use signals, cost reflectivity and transparency in future tariffs: Tariff structural changes that propose further unbundled large supply size tariff options, increased cost-reflectivity and phasing-in the rationalisation of subsidy contributions were developed and approved by the Nersa during The implementation of the proposed structural adjustments to the tariffs is anticipated for the 2009/10 financial year. During the period going forward the following changes will be implemented: o the unbundling of transmission and distribution network charges for Megaflex, Nightsave Urban, Miniflex, Nightsave Rural and Ruraflex tariffs. o differentiating transmission network charges according to transmission zones; o differentiating distribution network charges according to approved voltage categories and between rural and urban supplies; o separately showing and charging technical losses on the transmission and distribution system in accordance with Nersa-approved distribution and transmission loss factors; o an increase in the price differential of network charges between high-voltage and low-voltage customers from 0-17% to 0-25%, making voltage differentials more costreflective; o splitting of the current Nightsave Urban tariff into Nightsave Urban (small) for supply sizes <1MVA and Nightsave Urban (large) for supply sizes > 1MVA; o alignment, in a phased manner, of the contribution made through the raterebalancing levy to socio-economic subsidies for Megaflex, Miniflex and Nightsave Urban tariffs; o removal of the time-of-use conversion surcharge for existing and new supplies as far o as revenue risk permits; and introduction of a rate matrix for Megaflex, Nightsave Urban (small), Nightsave Urban (large), Miniflex, Nightsave Rural and Ruraflex tariffs to simplify the bill. The residential time-of-use tariff Homeflex development was finalised and is planned for rollout to medium and high-consumption residential customers (for example, households with geysers) once approved by Nersa. Eskom currently does electrification of supplies in high density urban areas on behalf of the government. These projects are funded through the national electrification fund (typically on the Homelight tariff). In more remote rural areas, the supplies similar to electrification do not have a choice customers (also applicable for commercial use) are lumped together and offered the Landrate tariff. In response and after consultation with customers a new tariff option - the Landlight tariff - was designed for low consumption rural supplies. With the introduction of the Landlight tariff that was approved by the NERSA in December 2008 Eskom will address the unfairness and provide a solution for these rural customers. This tariff will not only ensure that there is fair treatment of customers in rural areas with the same electricity needs as electrification customers, but will also support universal access. The Landlight tariff will be available to our customers from 1 April 2009.

8 Eskom s tariff options: Tariff Nightsave Urban Megaflex Miniflex Businessrate Homepower Standard Homepower Bulk Homelight Nightsave Rural Ruraflex Landrate Public lighting tariffs Description Electricity tariff for urban customers with an NMD (notified maximum demand) from 25kVA TOU (time of use) electricity tariff for urban customers who are able to shift load and with an NMD greater than 1MVA TOU electricity tariff for urban customers with an NMD from 25kVA up to 5MVA Electricity tariff for small businesses, governmental institutions or similar supplies in urban areas with an NMD of up to 100kVA Electricity tariff for medium to high-usage residential customers in urban areas with an NMD of up to 100kVA Electricity tariff for residential bulk supplies, typically sectional title developments and multiple housing units, in urban areas connected prior to 1 January 2004 Electricity tariff for single-phase, low-usage residential supplies in urban areas, but can also be applied to churches, schools, halls, or similar supplies with low-usage residential customers in urban areas Electricity tariff for high-load-factor rural customers with an NMD from 25kVA with a supply voltage 22kV (or 33kV where designated by Eskom as rural) TOU electricity tariff for rural customers with dual- and threephase supplies with an NMD from 25kVA with a supply voltage 22kV (or 33kV where designated by Eskom as rural) Electricity tariff for rural customers with an NMD up to 100kVA with a supply voltage 500V Electricity tariff for public lighting or similar supplies

9