Submission in response to Eskom’s application to NERSA

by Chris Yelland CEngManaging director

EE Publishers

Documentation

The full text submission and this slide

presentation to NERSA by Chris Yelland

is available at: www.ee.co.za

Outline

The price impact is worse that it seems The question of affordability An example of the financial impact Environmental levy not applicable Costs claimed result from Eskom’s own failings Claims grossly overstated and neglect offset costs Recalculation taking offset costs into account Inadequate disclosure Alternatives to a price increase Conclusions and recommendations

Price impact is worse than it seems

A 12,69% increase came into effect on 1 April 2015. If granted, the extra 12,61% claimed would become

effective on 1 August 2015 at the earliest. If recovered over balance of 2015/16 (i.e. 8 months) the

extra 12,61% becomes 12,61 x 12 / 8 = 18,92% Thus the price increase from 1 Aug 2015 to 31 Mar

2016 will be 12,69 + 18,92 = 31,61% This has not been budgeted by domestic, municipal,

agricultural, commercial, industrial, mining customers.

The question of affordability

The question of affordability to the economy and to electricity customers has not been considered by Eskom at all.

Many submissions to NERSA will deal with the issue of affordability.

Therefore affordability will not be dealt with in this submission, save for just one example.

An example of the financial impact

A directive from National Treasury:

“Any decision that NERSA makes after 15 May 2015 will need to be deferred to the 2016/17 municipal financial year.” Thus municipalities cannot pass through any further

price determination by NERSA till 1 July 2016. Municipalities will also not be able to pay Eskom for any

further price increase arising after 15 May 2015 as this would be unbudgeted and unauthorised expenditure for the 2015/16 financial year.

Environmental levy not applicable

Eskom’s application has assumed that the environmental levy will take effect on 1 July 2015.

But the environmental levy increase has not been published in Government Gazette, and is not in effect.

NERSA should reject Eskom’s application for a price increase i.r.o. the environmental levy until the effective date of the levy increase is formally announced.

Extra costs claimed by Eskom result from its own failings

By Eskom’s own admission, the unbudgeted diesel and STPPP costs follow directly from:– Late completion of Medupi, Kusile and Ingula– Boiler rupture at Duvha– Silo collapse at Majuba

Unbudgeted Eskom diesel and STPPP costs are therefor a direct result of Eskom’s own failings.

Therefore by no stretch of the imagination can the unbudgeted diesel and STPPP costs be considered as “prudently and efficiently incurred”.

Eskom’s diesel & STPPP claims are overstated and neglect cost offsets

In MYPD 3, Eskom included costs of electricity from Medupi, Kusile & Ingula from 1 Apr 2015 to 30 Mar 2018.

Due to late completion of Medupi, Kusile & Ingula, Eskom has extra incurred diesel and STPPP costs.

These extra diesel and STPPP costs must therefor be offset by the LCOE savings by NOT producing electricity from Medupi, Kusile & Ingula.

Yet no mention is made of any cost reduction offsets in Eskom’s application for “selective reopener” of MYPD 3.

Recalculation taking cost reduction offsets into account

In 2012, NERSA publicly stated its estimate for the LCOE from Medupi as about R0,97/kWh.

Based on an average LCOE from Medupi, Kusile & Ingula of R1,00/kWh, the net claim for 2015/16 is:– Diesel: R11,0bn – R5,4bn = R5,6bn net extra diesel cost– STPPP: R5,4bn – R5,1bn = R0,3bn net extra STPPP cost

Removing the environmental levy claim and reducing the diesel & STPPP claim as above reduces Eskom’s claim for 2015/16 from 12,61% to 3,63%.

Alternatives to diesel

For the 2015/16 financial year, additional diesel costs are probably inevitable, but the relevant offset cost reductions MUST be taken into account.

However for 2016/17 and 2017/18 there are no doubt lower cost options to unbudgeted diesel, such as:

Integrated demand management Demand market participation Conversion of OCGTs to LNG Increased renewable energy Increased IPP participation

Power buy-backs Power ships Domestic time-of-use tariffs Ripple control receivers Increased industrial co-gen

Inadequate disclosure

Information disclosed in Eskom’s application is completely inadequate.

Every reasonable effort to establish from Eskom the real offset costs, the estimated CTC (including the overnight construction costs, FGD, IDC and outstanding contractor claims) and LCOE, for Medupi, Kusile & Ingula, has failed.

However NERSA and Eskom have at their disposal suitable resources and data to perform this recalculation very accurately.

The meaning of “selective reopener”

The meaning of Eskom’s new term “selective reopener” now becomes clear:

Eskom gets to select the highest possible costs that should be passed through to the customer for the next 3 years.

Eskom chooses to ignore any cost reduction offsets that may benefit the customer.

Alternatives to price increases

Eskom and its shareholder should also consider new funding options to recapitalise Eskom and ensure financial sustainability, other than simply applying for massive tariff increases year after year, such as:

Implement the 1998 Government White Paper on Energy Policy Unbundle and restructure Eskom Generation Sale by Eskom of non-core assets and/or power stations Take on strategic equity partner(s) Increased public participation in Eskom through an initial public

offering on the JSE and other bourses

Conclusion and recommendations

The 2,51% price increase to recover the environmental levy should be rejected until the levy is gazetted.

The claim for extra diesel and STPPP costs for 2015/16 should be rejected due to:

Overstated costs without disclosure of cost reduction offsets The unbudgeted costs claimed result from Eskom’s own failings Eskom CEO says Eskom can cope without the 12,61% increase Damage to economy and users by further 12,61% increase Ruling by National Treasury that any extra price will need to be

deferred to the 2016/17 municipal financial year

Conclusion and recommendations

The claim for extra diesel and STPPP costs for 2016/17 & 2017/18 should be rejected pending disclosure of cost reduction offsets and alternative technology options.

Any additional price increase for 2015/16 must take into account offset cost reductions.

NERSA should advise Eskom and its shareholder to consider other funding options to recapitalise Eskom and ensure its financial sustainability rather than simply applying for massive tariff increases year after year.