Conversations with the Media on the Electricity Industry and its - PowerPoint PPT Presentation

Conversations with the Media on the Electricity Industry and its Regulatory Approaches Nhlanhla Gumede 1 Full Time Member of the Regulator 1

Who is NERSA • NERSA was established in terms of the National Energy Regulator Act, Act No 40 of 2004 – Independent Regulator • 4 Full-Time with primary responsibilities • 5 Part-Time Members – Responsible for the regulation of three energy industries: • electricity industry • piped-gas industry • petroleum pipelines industry – Rest of the NERSA staff support the Regulator – Decisions based on reasons, facts and evidence 2 2

Legislative Mandate • NERSA’s mandate is anchored in – 4 Primary Acts: • National Energy Regulator Act, 2004 (Act No. 40 of 2004) • Electricity Regulation Act, 2006 (Act No. 4 of 2006) • Gas Act, 2001 (Act No. 48 of 2001) • Petroleum Pipelines Act, 2003 (Act No. 60 of 2003) – 3 Levies Acts: • Gas Regulator Levies Act, 2002 (Act No. 75 of 2002) • Petroleum Pipelines Levies Act, 2004 (Act No. 28 of 2004) • Section 5B of the Electricity Act, 1987 (Act No. 41 of 1987) 3 3

Facilitation legislation • The Regulator’s activities are guided by 3 Facilitating Acts : – Public Finance Management Act, 1999 (Act No. 1 of 1999) (PFMA) – Promotion of Access to Information Act, 2000 (Act No. 2 of 2000) (PAIA) – Promotion of Administrative Justice Act, 2000 (Act No. 3 of 2000) (PAJA) 4 4

Electricity Regulation Mandate • Electricity Regulation Act, 2006 (Act No. 4 of 2006) (‘ERA’) – New Act under consideration • ERA Regulations and other regulatory instruments: – Electricity Pricing Policy (EPP) GN1398 • [19 December 2008] – Electricity Regulations on New Generation Capacity GN 399 • [4 May 2011] • “New Gen” regulations under consideration – Licensing Exemption and Registration Notice GN 43151 • [26 May 2020] • “Directives” 5 5

NERSA is a creature of stature and accordingly governed • National Energy Regulator Act, 2004 (Act No. 40 of 2004); – New Act under consideration • Electricity Regulation Act, 2006 (Act No. 4 of 2006) (‘ERA’) – New Act under consideration • ERA Regulations – Electricity Pricing Policy (EPP) GN1398 19 December 2008 – Electricity Regulations on New Generation Capacity GN 399 4 May 2011 – New “New Gen” regulations under consideration 6 6

ERA is not only about supply but about all aspects that make the ESI Are we doing in enough? Objects of the Act Supply side Demand side Off grid Achieve efficient, effective, sustainable & orderly  ?  development & operation of electricity supply infrastructure Ensure interests & needs of present & future    electricity customers & end users are safeguarded & met - governance, efficiency, effectiveness & long-term sustainability of ESI   Facilitate investment in the electricity supply  industry   Facilitate universal access to electricity ?   Promote use of diverse energy sources and energy efficiency    Promote competitiveness & customer and end- user choice Facilitate a fair balance between the interests of    customers and end users, licensees, investors in the electricity supply industry and the public 7 7

Current electricity price increases are not sustainable I Revision: n MYPD 3 Decision Revision Revision 2012 t 1: 2008 2: 2008 MYPD 1 Decision MYPD 2 Decision price e price in price in Mar MYPD r Dec 2007 Mar 2008 MYPD 3 2012 2 i RCA RCA m 2006 2007 2008 2008 2008 2009 2010 2011 2012 2012 2013 2014 2015 2015 2016 2017 Average Price 5.10 5.90 6.20 14.20 27.50 31.30 24.80 25.8 25.90 16.00 8 8 8 12.69 9.4 2.2 Increase (%) Average Price 17.91 18.09 18.27 22.61 25.24 33.14 41.57 52.3 65.85 60.66 65.51 70.75 76.41 79.73 87.23 89.13 (c/kWh) The Prices in Red actually applied The prices in Black were decisions which were superseded by another application or an RCA decision 8 8

History of ESKOM tariff application vs NERSA’s Decisions (excl. RCAs) INTERI MYPD 1 MYPD2 MYPD3 1 YEAR MYPD4 M 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21 2021/22 2006/7 2007/8 2008/9 STC Application Application % 5.9/18.7 6.2 / 60 34 35 35 35 / 16 16 16 16 16 16 19.9 15 15 15 5.9 6.2 25.9 Decision % 5.1 31.3 24.8 25.8 8 8 8 8 8 5.23 9.41 8.10 5.22 14.2 27.5 16 In 2007/08, 2008/09 and 2012/13 Eskom submitted more than 1 application because significant environmental changes that following load shedding incidences - mostly driven by Primary Energy costs and the construction program 9 9

Translation of MYPD Revenue to FY19/20 Individual Tariffs Revenue Average Price ERTSA Process Eskom Customer Requirement Categories & Adjust for FY difference to 102.62c/kWh (excl. RCA) Rm190 939 (excl. RCA) Municipalities 106.80c/kWh (incl. RCA) Rm198 715 (incl. RCA) Municipal Retail Tariff NERSA Determines from Eskom 109.65c/kWh NERSA Approves NERSA Municipal Tariff Guidelines & Benchmarks Municipality apply for Municipal Tariff approval of tariffs based upon based Schedules upon Different for each Municipal Tariff Municipality Guidelines & Benchmarks 10

As costs have been increasing, sales have been declining Eskom Sales MWh vs Price c/kWh 215 000 000 100,00 90,00 210 000 000 80,00 Sales (MWh per annum) 70,00 205 000 000 Prices (c/kWh) 60,00 200 000 000 50,00 40,00 195 000 000 30,00 20,00 190 000 000 10,00 185 000 000 0,00 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 Sales MWh Price c/kWh 11 Source: D Form Data 11

Negative downward spiral Price Demand Not only do we need to arrest the electricity prices increases but we need to reverse them 12

Electricity is important for all sectors but in different ways Sectoral cost drivers Household Financial intermediation Hotels and restaurants Trade Precious metals Basic Iron & Steel Non Metal minerals Glass Other Mining Metal Ores Agriculture 0,00 10,00 20,00 30,00 40,00 50,00 60,00 70,00 % Electricity % Labour % Metal ores % Transport % Basic iron & Steel % Chemicals % Telecommunication % Coke oven products Source : Statssa, Input – output tables 2014 13

Affecting some sectors more than others Select sectoral cost drivers Household 2,56 6,34 2,52 0,29 Financial intermediation 0,08 0,50 Hotels and restaurants 1,14 4,17 0,74 Trade 0,65 4,35 0,48 Precious metals 5,09 1,82 0,13 Basic Iron & Steel 4,45 4,30 0,48 Non Metal minerals 2,04 6,26 1,46 Glass 6,00 3,49 0,36 Other Mining 2,14 11,24 2,88 Metal Ores 6,14 7,97 3,25 Agriculture 2,06 9,44 9,63 0,00 5,00 10,00 15,00 20,00 25,00 Source : Statssa, Input – output tables 2014 % Electricity % Transport % Chemicals Source : Statssa, Input – output tables 2014 14

Electricity cost now a key driver in sectors that were traditionally driven by labour 15

Resulting in SA exporting its endowment and jobs Many minerals processing companies are intending to close shop soon primarily because of high electricity costs. 16 - 1

Unfortunately one cannot nit-pick parts of minerals processing value chain one likes x Source : https://www.angloamericanplatinum.com/~/media/Files/A/Anglo-American-Platinum/investor- presentation/standardbankconference-anglo-american-platinum-processing-111114.pdf Some people think that one can simply have Platinum Group Metals refining 17 and fabrication without smelting 17

Value realisation in the PGM sector Source : https://www.angloamericanplatinum.com/~/media/Files/A/Anglo-American-Platinum/investor- presentation/standardbankconference-anglo-american-platinum-processing-111114.pdf As a country, we need to make a choice, create or destroy value & jobs here in South Africa. It’s a simple choice! 18

Value drivers in the PGM industry Source : https://www.angloamericanplatinum.com/~/media/Files/A/Anglo-American-Platinum/investor- presentation/standardbankconference-anglo-american-platinum-processing-111114.pdf Although smelting & refining costs are only 15% of total costs, 85% of value is generated here 19

South Africa is de-industrialising Thin trend lines Thick trend lines Right vertical axis Left vertical axis Sectoral demand trend 120 14 12 100 10 80 Thousands GWh 8 Thousands GWh 60 6 40 4 20 2 - - 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Municipalities Industrial Mining International Residential Commercial Agriculture Traction Focusing electricity strategies on consumption sectors at the expense of 20 growth sectors makes little sense 20

Been fighting about the output of the tariff models & discretion instead of the construct of our regulatory approach “We have a dynamic mandate but static structures” - Minister Gwede Mantashe 21 21

Coal supply contracts as an example of a key source of conflict Names blanked out to protect confidentialities It is clear, by using actual contracts in the determination of primary energy costs, the current MYPD exposes consumers and does not provide an incentive for better contracting 22