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ESKOM’S PROPOSED REVENUE APPLICATION MULTI-YEAR PRICE DETERMINATION 2010/11 TO 2012/13 (MYPD2)

ESKOM’S PROPOSED REVENUE APPLICATION MULTI-YEAR PRICE DETERMINATION 2010/11 TO 2012/13 (MYPD2). NERSA’s PUBLIC HEARING 19 January 2010 - Port Elizabeth by Dr Wolsey Barnard and Mr George Ferreira Enbar consulting. Generation. Transmission. Distribution.

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ESKOM’S PROPOSED REVENUE APPLICATION MULTI-YEAR PRICE DETERMINATION 2010/11 TO 2012/13 (MYPD2)

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  1. ESKOM’S PROPOSED REVENUE APPLICATION MULTI-YEAR PRICE DETERMINATION 2010/11 TO 2012/13 (MYPD2) NERSA’s PUBLIC HEARING 19 January 2010 - Port Elizabeth by Dr Wolsey Barnard and Mr George Ferreira Enbar consulting EnBar Consulting

  2. Generation Transmission Distribution Current Electricity Supply Industry Structure Physical Energy Flow Eskom Customers 46%, Sales 58% Financial Flow ~44 000 MW installed ESKOM Industry/Mining Eskom: 98% Coal 89%, Nuclear 4% Gas 2% Hydro 1.5% Pump storage 3.5% Residential Eskom:100% Municipalities Municipalities (175) Customers 54%, Sales 42% Business EnBar Consulting

  3. Effect of not Implementing Energy Policies • No change in Electricity market structure. • Kept ESI vertical integrated with no competition allowed. • As a result no IPPs could be established, since Eskom is in control of the System Operator and open excess of the Transmission lines is not practically possible. • No diversification of supply options – no Renewable Energy producers to date in country and might be so for a while until the market structure is sorted out. • Limited restructuring of Eskom. • Government propagated from 1999 – 2005 that Eskom will not have to build new power stations, since competition will be introduced with Eskom the supplier of last resort. • NERSA been faced from 2000 with challenge of not allowing Eskom a tariff increases wrt new capacity – result, unsustainable low annual Eskom tariff increases allowed until 2006. • IRP and shortages of generation capacity predicted in late 90’s and early 2000’s not taken seriously– country currently in dangerous territory wrt generation capacity. • Lack of restructure Distribution sector into RED’s. • No restructuring legislation from 2000 to 2008 – proposed Constitution Amendment in 2009. • Inefficiencies of EDI have escalating dramatically in last 8 years. • Non-payment of customers to municipalities and municipalities to Eskom are increasing at an alarming rate – financial viability for whole electricity sector in danger. EnBar Consulting

  4. Effect of not Implementing Energy Policies (cont.) • Eskom been asked at a very late stage to take up the responsibility as supplier of last resort. • No allowance has been made by Eskom nor Government for the capital cost to build two new mega coal fired power station such as Medupi and Kusile. • It does not take very clever financial calculations to work out that if a dramatic increase is not allowed now to finance these capital expenditures, the country has to face either a much higher increase (60 -70%) in two to three years time or to face massive rolling black-outs from 2015 onwards. • Irrespectively, the country is still facing serious generation shortages from 2011 onwards until the new generators are on line in 2014/5. • The additional challenge NERSA is facing in evaluating the Eskom application is that Eskom as a utility, shows serious managerial, financial and strategic shortcomings. • If the rapidly deteriorated EDI is not turned around urgently, the income stream of the ESI as a whole will decrease dramatically. EnBar Consulting

  5. REALITY • The electricity industry must be sustainable on its own and can not expect major National fiscal support. • Conventional coal fired, nuclear and gas generation capacity must be rebuild and as such re-capitalised every 40 to 50 years. • Such re-capitalisation takes place at current international costs. • It is therefore unavoidable that international electricity generation prices will be largely reflected in new generation plant. • New coal contracts will also be reflective of international coal prices. • Electricity prices in other countries utilizing the same technologies than SA, are about 2 to 3 times higher than SA current tariffs. • The cost of electricity generation by newly constructed coal fired power stations will probably be about 85c per unit ( based on capacity cost of about R25mil per MW). • All stakeholders in the country will have to make a serious contribution to get through this very tough times. • . EnBar Consulting

  6. Actions from National Government • Government needs to assist with funding capital generation expansion programme, through international loans and underwriting of Eskom borrowings. • Implement ESI and EDI restructuring as discussed above, as a matter of urgency. • Must developed regulatory policies that is sustainable and practically implementable by NERSA. • Promoting Energy Efficiency and DSM policies – increased subsidies for solar water heater good examples. • Subsidisation policies for basic electricity for indigent and poor customers. • Address the managerial, financial and strategic shortcomings within Eskom. • Ensuring that Government (National and Provincial) pay their respective electricity accounts promptly.. EnBar Consulting

  7. Eskom improvements required • Implement immediate actions to address managerial, financial and strategic shortcomings. • Look seriously to alternative funding- options and models. • Review all special deals based on historic low electricity prices. • Actively pursue the reduction of losses and programs to curb the theft of electricity – efficiency improvements. • Eskom to concentration more on their core business – allow IPP’s to play a more supportive capacity role. • Improvement of skills and the restoring of Eskom as a world class electricity utility. • Acting against all non-payment by Municipalities as well as direct customers promptly and without any external interference. EnBar Consulting

  8. Actions from Municipalities • Eskom costs accounts for about 65% of the cost paid by Municipalities – as an example a 30% - 35% increase in the Eskom price will account for an increase of 24% to 28 % to Municipal customers, if all other increases are limited to 10% maximum. • Municipalities must implement and actively promotion EE and DSM measure/technologies. • Dramatically improve their revenue collection measures. • EDI restructuring process to be implemented by municipalities as a matter of urgency. • Manage their electricity asset in line with the income received through the sales of electricity. EnBar Consulting

  9. Alternatives for customers • Free basic electricity for all poor and indigent household: • Level to be fixed nationally and be made transparent. • Non indigent residential customers can do the following: • Install solar water heaters – saving 25% on average on usage. • Introduced Energy efficient measures. • Change of customer behaviour. • Industrial and Commercial customers: • Strong drive on EE and DSM measures. • Energy switching. • Let Energy becomes a monthly reporting item. EnBar Consulting

  10. Affect on Renewable Energy • No convincing needed that Renewable energy must become a major player in the future energy mix in South Africa. • Currently Eskom electricity prices: • Based on historic cost and not sustainable. • Based largely on “dirty” coal technology. • Not inclusive of the environmental cost associated with the type of generation – externalities not factored into price. • The attractiveness of renewable energy and energy efficiency sources are unfairly been compromised by comparing it to unsustainable tariffs based on historic costs. EnBar Consulting

  11. Conclusion • The current dramatic high increase requested by Eskom for the 2010 – 2013 period is mostly due to a lack of not implementing ESI and EDI restructuring policies, as well as managerial, financial and strategic shortcomings within Eskom – if this is not adhere to this industry is heading for self-destruction. • To oppose this application based on short term unrealistic cost consideration is not in the National interest - NERSA does not have a choice but to allow an increase that secure our supply of electricity in the most cost effective manner. • If all stakeholders (National government, municipalities, Eskom, NERSA and customers) are not playing its part, this dramatic tariff increase we debating today will again and again be debated for years to come. • More effort and funding need to be allocated for EE and DSM options and technologies. • Diversification of supply mix in the country needs to include Renewable Energy as a priory in the next few years to assist with the generation capacity challenges from 2011 onwards, as well as to contribute towards more greener energy supply option. EnBar Consulting

  12. THE END EnBar Consulting

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