NYPD3 Selective Reopener Nersa public hearings - 23 June 2015

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1. Eskom MYPD3 Selective Re-opener Public Hearings 23 June 2015 2. Agenda 1 • Introduction • Breakdown of the selective reopener • Operational and financial challenges…
1. Eskom MYPD3 Selective Re-opener Public Hearings 23 June 2015 2. Agenda 1 • Introduction • Breakdown of the selective reopener • Operational and financial challenges • Benefit of OCGT and STPPP usage • Conclusion 3. Regulatory rules allow application to reopen tariffs if circumstances significantly change from the decision 2  Eskom has implemented initiatives to operate within the 8% tariff increase  The original decision is removed from current realities  Eskom, therefore, needs a selective reopener to address immediate operational and financial challenges  The selective reopener (9.58%) will fund higher OCGT usage and cover the cost of STPPP capacity which requires  R32.5bn for OCGTs over MYPD3 (6.43%)  R17.5bn for STPPP over MYPD3 (3.15%)  Alternatively, costs would be recovered through the RCA process retrospectively if necessary, once deemed prudent by Nersa  OCGTs and STPPP will be purely used to reduce intensity of load shedding and cost to the economy 4. The selective reopener application will add 9.58% to the already approved 12.69% for 2015/16 3 2015/16 Comments Rest of normal costs and returns 6.8% Open cycle gas turbines (OCGTs) 0.1% Allowed R1,5bn Other IPPs (Renewables and DOE Peaker) 0.7% Allowed R14.4bn Short term power procurement programme (STPPP) 0% Allowed R0bn Environmental levy 0.4% Allowed R9.3bn MYPD3 Original price decision 8.0% MYPD2 RCA clawback decision by Nersa 4.69% Revised price already granted by Nersa 12.69% Nersa decision awarded after RCA Selective Reopener 9.58% Required to reduce load shedding - Open cycle gas turbines (OCGTs) 6.43% Applied for R10.9bn - Short term power procurement programme (STPPP) 3.15% Applied for R5.3bn Environmental levy increase *(if gazetted) 2.51% Pass through of levy costs Overall price to consumer (1+2+3) 24.78% 1 2 3 5. A tariff increase is required to leverage supply options and reduce the impact of load shedding on the economy 4  Changes to assumptions in the MYPD application have resulted in reduced capacity and space to reduce backlog maintenance  The selective reopener is aimed at reducing levels of load shedding to reduce the impact on the economy  Eskom has lived within MYPD3 8% tariff decision through ‒ Optimisation and reduction of the cost base, achieved through an internal efficiency program ‒ Maximised borrowings by leveraging the balance sheet ‒ Shareholder equity injection  Tariffs are not cost reflective Financial Operational  Ageing Generation fleet  Delays to the New Build Programme have been exacerbated by major incidents (e.g. Duvha, Majuba) Challenge Circumstances 6. Availability of OCGTs and STPPP reduced peak hour load shedding in April by more than 50% 5 Load shedding avoided during April 2015, due to OCGT and STPPP usage MW  OCGTs and STPPP usage reduced load shedding by providing additional capacity  If OCGTs and STPPP were not dispatched in April, load shedding would have been required everyday  Actual load shedding was reduced by more than 50% owing to OCGTs and STPPP Without OCGTs and STPPP load shedding will be more regular and severe - Shortfall is calculated on demand and 1000MW operational reserves - Shortfall does NOT take primary energy constraints into account 0 01.Apr2015 500 1,000 2,000 3,000 4,000 5,000 6,000 1,500 2,500 3,500 4,500 5,500 6,500 30.Apr2015 29.Apr2015 28.Apr2015 27.Apr2015 26.Apr2015 23.Apr2015 22.Apr2015 21.Apr2015 20.Apr2015 19.Apr2015 18.Apr2015 17.Apr2015 16.Apr2015 15.Apr2015 14.Apr2015 13.Apr2015 12.Apr2015 11.Apr2015 10.Apr2015 09.Apr2015 08.Apr2015 07.Apr2015 06.Apr2015 05.Apr2015 04.Apr2015 03.Apr2015 02.Apr2015 24.Apr2015 25.Apr2015 Actual Load sheddingLoad shedding without OCGTsLoad shedding without STPPP 7. Eskom agrees that cost savings setoff must be taken into account but computation thereof must be correct 6 Selective reopener for 2015/16 Unit STPPP OCGTs TOTAL Energy volumes GWh 5 794 5 400 11 194 Costs applied for Rands R5 357m R10 950m R16 307m Net costs after costs savings setoff Generation total price – 53c/kWh Rands -R5 933m R10 374m Generation variable price – 23c/kWh Rands -R2 575m R13 732m • MYPD3 decision of 8% included recovery of costs of production from Generation stations • Eskom can only offset the price which was incorporated in the original MYPD3 decision • In 2015/16 the total selling price awarded by Nersa was 75c/kWh which covers the entire Eskom value chain of Generation, Transmission and Distribution • Generation business comprises about 75% of the Eskom operations and thus its contribution is 53c/kWh • However within the Generation business there are fixed and variable cost components which are linked to production. Hence only variable costs of 23c/kWh must be used for calculating cost set off savings Approach to computing cost savings setoffs 1 2 Costs savings setoff cannot exceed the total selling price of 75c/kWh . The offset of R2.5bn will reduce the price from 9.58% to ~8% 8. Eskom discounts on diesel purchases are included in the calculation of additional funding for OCGTs 7 Eskom discounts on diesel purchases were included in the calculation of the R12.5bn requirement for FY2016. These discounts include • R3.10/litre rebate • R0.30/litre wholesale discount 9. Key insights ▪ Only 2.8% of post outage UCLF was as a result of direct execution quality, owing to outage work well within the 10% target ▪ Drivers of post outage UCLF include – Postponed mid life refurbishment of units – Insufficient funding – Capacity constraints forcing outages to be postponed ▪ Postponement of outage scope accounts for the majority of post outage UCLF 2.8 0.1 1.82.0 0.2 0.0 6.1 9.1 1.01.8 17.3 27.2 29.0 25.1 23.1 18.0 19.718.718.5 11.6 3.44.5 2.5 AveApr MayMarFebJanDecNovOctSepAugJulJun Post maintenance UCLF on areas within scope is well within international standards and target Post outage UCLF as a result of direct execution quality UCLF % (June 2014 – May 2015) Post outage UCLF as a result of other plant failures UCLF % (June 2014 – May 2015) 8 10. Transmission technical performance measures meet and exceed Nersa targets Year SM < 1 MI's LF/100km 2003/04 2.398 1 1.90 2004/05 4.555 0 2.20 2005/06 3.131 4 2.60 2006/07 3.486 1 2.70 2007/08 3.564 5 2.31 2008/09 4.211 3 2.46 2009/10 4.09 1 2.54 2010/11 2.626 0 2.72 2011/12 4.733 1 2.41 2012/13 3.519 3 1.74 10 Y Avg 3.6 1.9 2.36 St Dev 0.78 1.73 0.33 Historical Performance Major IncidentsSystem Minutes < 1 Line Faults/100km 9 2015 = 2.85 2014 = 3.05 2014 = 0 2015 = 2 2014 = 1.73 2015 = 2.01 11. Distribution technical performance measure, SAIDI, meets and exceed Nersa targets The system average interruption duration index (SAIDI) scheme consists of a dead band, an incentive/reward zone and a penalty zone as indicated. Both the incentive/reward and penalty zones are capped at R145.9m (50% weight) per annum. There is a dead band between the incentive and penalty. Improved performance is lowering the number Incentive between green and brown Dead band black box Penalty between blue and orange 10 12. Conclusion 11  The selective reopener is required to improve supply options available to Eskom so that ‒ Load shedding can be minimised ‒ System stability can be improved ‒ Impact on the economy is reduced  Owing to operational challenges, high cost supply options must be deployed to meet demand which include OCGTs and STPPP  Additional OCGT and STPPP usage costs are low compared to the effect of load shedding on economic sustainability  Load shedding costs R9-R15/kWh1 compared to OCGT costs ~R3/kWh  Every R1bn spent on OCGTs saves the economy up to R4bn  MYPD3 approved tariffs do not include allowance for recovery of STPPP costs and only a small allowance for OCGT costs  Access to funding is limited which has resulted in the need to request additional tariff increases rather than wait for an RCA claw back 1. Source Trade & Industrial Policy Strategies (TIPS)_February 2015