25 July 2011 PRESS RELEASE ON NAMPOWER TARIFF ADJUSTMENT FOR 2011/2012

Transcription

1 25 July 2011 PRESS RELEASE ON NAMPOWER TARIFF ADJUSTMENT FOR 2011/2012 ESTEEMED BOARD MEMBERS, CAPTAINS OF THE MEDIA INDUSTRY COLLEAGUES, 1. TARIFF APPLICATION REVIEW OUTCOME It is my honour to announce that NamPower made an application to the Electricity Control Board (ECB) in terms of section 27 of the Electricity Act, 4 of 2007, for an annual tariff increase amounting to an effective increase of 19.8%, for the financial year 2011/2012, to become cost reflective. The ECB, a statutory body established under the 2000 and 2007 Electricity Acts respectively (the former having been repealed by the latter), has amongst other obligations and functions, the sole mandate to regulate and control all electricity generation, transmission and distribution tariffs in Namibia since The mandate includes developing electricity tariff methodologies as well as independently reviewing and approving electricity tariffs. The Electricity Control Board (ECB), after a rigorous review process, awarded an 18.28% effective tariff increase to NamPower for the year 2011/2012. The 18.28% tariff increase includes a 13.93% cost reflective

2 tariff increase and a 4.35% increase that would cater for other Electricity Supply Industry needs. As part of the review process leading to the 18.28% tariff increase approval decision, the ECB analysed the NamPower submission and also closely scrutinized and made use of provisions of relevant documentation such as the White Paper on Energy Policy 1998, the approved ECB Tariff Methodology Model, Government Policy guidelines, expectations of key stakeholders and the possible impacts that the tariff could have on the Namibian economy. 2. REASONS PROVIDED BY NAMPOWER FOR THEIR TARIFF INCREASE REQUEST: To recover the required revenue (consistent with Government s commitment), while signalling the supply imbalance, extensive capital investment and subsequent excessive tariff increases in the region. Imports to remain a considerable portion of the generation tariff. Taking into consideration the increase of fuel costs for running NamPower s thermal power stations to sustain security of supply. To remain consistent with NamPower s Debt Service Cover Ratio minimum obligation of 1.5 required to avoid defaulting on its loan covenants. NamPower s strong standpoint that any lag in reaching cost reflectivity now, will cause an ever more increasing challenge to reach the latter in future, since the gap will remain, or more so, increase, to the detriment of the Utility. To take into consideration the forecasted energy price of new generation, due to the approved generation tariff methodology being based on historical costs only. 2

3 3. PRINCIPLE FACTORS CONSIDERED BY THE ECB The tariff application review process leading to approving the 18.28% tariff increase considered a number of factors, including the following: The Cabinet decision no 21/ /006 taken in September 2005, in that that NamPower tariffs should reach cost reflectivity by the year 2011/2012. This decision was however revised in 2009 and the due date to reach cost reflectivity was extended to the year 2011/2012. The Electricity Control Board (ECB) has been committed to this decision and has granted Nampower real increases for the past five years to ensure that cost reflective tariff levels are reached by 21011/2012. The prevailing power shortages in the Southern African region and the need to streamline generation strategies to adequately address security of supply. The increase is aligned to the White Paper on Energy Policy of 1998 that states that Namibia should have been generating more than 75% of its energy and supply 100% of peak power from its own generation by The need to create and maintain a conducive environment to attract investment in the energy sector and to stimulate economic growth. The need for NamPower to sustain its operations and service delivery in the short, medium and long term. 3

4 The challenges posed by imports on cost reflectivity as a result of import price volatility. 4. FUTURE OUTLOOK One of the objectives stated in the White Paper on Energy Policy, 1998 is that tariffs should reflect the long run marginal cost of supply. In view of this, tariffs will have to continue to increase at least until 2019/2020 to reach this objective and to ensure new investment in generation. There is a substantial shortage of energy in the Southern Africa region at this stage and this situation will prevail over the next couple of years until enough new generation has been built. This puts pressure on energy prices not only in Namibia but in all of the countries in the SADC region. Currently, Namibia is a net importer importing between 50-70% of its energy requirements from the region depending on the availability of water at the Ruacana power station. Although a number of generation plants are planned, most of these plants will start generating only after The current ZESA contract will expire in 2014 leaving Namibia with a capacity shortage of 150MW. If no other supplier can be found in the short run, Namibia will have to buy this energy on the emergency market from the region at emergency prices. This will create a price shock to the Namibian economy if not planned for properly. 4

5 The above increase will ensure that NamPower remains on the long run marginal cost path to enable it to build up sufficient reserves to protect the Namibian consumer against price shocks in the future. It is important that the ECB, as regulator, takes a long term view and not only focus on the current year to ensure that the economy, the end consumer and NamPower as well as private investors are protected over the next number of years which are critical if Namibia is to ensure sufficient electricity supply. The Cabinet decision that NamPower should be cost reflective in 2011/12 implies that NamPower should remain cost reflective and it is the ECB s responsibility to plan according to that directive. Reaching the long run marginal cost of capital (LRMC) as per the White Paper on Energy Policy of 1998 is a further indication that tariffs should remain cost reflective and be able to fund future investment in the electricity industry. 5. CONCLUDING REMARKS Electricity prices in Namibia, just like in most SADC countries, will continue to rise over the next five years. However the Electricity Control Board in consultation with Government intends on embarking on a study to address the issue of affordability. Various capital projects need to be undertaken in generation and transmission in order for Namibia to become self-reliant in meeting its power demand and move away from being a net importer. Importing power from its neighbours is not a perpetually sustainable option for Namibia since it has no control over the 5

6 energy import price escalations and will have a negative impact on NamPower, its customers and the economy as a whole. However Namibia will continue to pursue projects promoting regional integration for mutual benefit. There is a need to build power stations to address the power shortage gaps and enhance security of supply as soon as possible to ensure continued investment in the mining and manufacturing industries, whose output will further boost economic growth. There is a need to recover and provide for the costs of future network and generation expansions to alleviate possible future price shocks to consumers. Substantial increases in the demand for new electricity generation & transmission infrastructure, not only in the region, but also globally, exerts upward pressure on the capital cost of these new investments. The approved effective tariff adjustment of 18.28% for the 2011/2012 financial year is intended to ensure that NamPower can sustainably provide for the future electricity needs of the nation. This is in line with the Government s White Paper on Energy Policy, 1998 objectives that tariffs should be cost reflective and reflect long run marginal cost of supply. I THANK YOU! Siseho C Simasiku Chief Executive Officer 6