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PRESENTATION TO THE PARLIAMENTARY PORTFOLIO COMMITTEE ON ENERGY

Mrs Cecilia KhuzwayoChairperson

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NERSA BUSINESS PLAN AND BUDGET (2011/12)

Mrs Cecilia KhuzwayoChairperson

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CONTENT• Introduction• Regulated Industries• Vision, Mission, Values and Regulatory Principles• Mandate• Strategic Objectives for 2011/12• Budget and Funding for 2011/12• Challenges• Plans for future

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INTRODUCTION• The National Energy Regulator (NERSA) was established on 1 October

2005 in terms of the National Energy Regulator Act, 2004 (Act No. 40 of 2004) to regulate:– Electricity industry (Electricity Regulation Act, 2006 (Act No. 4 of 2006))– Piped-Gas industry (Gas Act, 2001 (Act No. 48 of 2001))– Petroleum Pipelines industry (Petroleum Pipelines Act, 2003 (Act No. 60

of 2003))

• NERSA’s predecessor, the National Electricity Regulator (NER) regulated the electricity industry between 1995 until 16 July 2006

• NERSA is expected to implement its mandate and to proactively take necessary regulatory actions in anticipation of and in response to the changing circumstances in the energy industry

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REGULATED INDUSTRIES ELECTRICITY

• Eskom dominance– 95% of electricity generated

• Municipal Fragmentation– Over 174 Distribution and 9 Generation licensees

• In 2009/10 – 217 TWh of electricity sold

• The Structure of the electricity supply industry of South Africa is presented below:

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REGULATED INDUSTRIES ELECTRICITY (Cont.)

Eskom Transmission

Eskom Distribution

Customers b Customers a Customers n

Eskom Generation

Large Power Users

D1 D3 D2 Dn

Imports / Exports

IPPs

Municipal Generators

Local Authority Distributors

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REGULATED INDUSTRIES PIPED-GAS

• Accounts for less than 2% of energy needs of South Africa– Approximately 120 MGJ/annum natural gas imported

from Mozambique– Approx 188 MGJ/annum of methane rich gas produced

by Sasol Gas in Secunda

• Sasol Gas dominates regulated areas

• Transmission Operators – Sasol Gas, Transnet Pipelines, Republic of Mozambique Pipeline Company (ROMPCO)

• Distribution Operator – Sasol Gas

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REGULATED INDUSTRIES PIPED-GAS (Cont.)

• Traders – Sasol Gas, Spring Lights Gas, NOVO Energy*, Virtual Gas Network*, NGV Gas*

• Storage Operator – Virtual Gas Network

• Reticulation (<2 bar(g)) not regulated by NERSA but in municipal executive authority– Egoli in Johannesburg– EasiGas in Port Elizabeth

• NERSA has registered 11 entities in the production of gas in various areas in the country

* New entrants into the market

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REGULATED INDUSTRIES PETROLEUM PIPELINES

• Transnet dominates pipeline infrastructure– Owns the Durban-Gauteng refined products pipelines and

distribution lines in Gauteng– Transport crude oil for the NATREF refinery– Has a single storage facility in Tarlton

• The Oil Majors dominate storage facilities– BP, Shell, Chevron, Engen, Total and Sasol Oil– Approximately 26 storage facilities connected to the Transnet

network

• Approximately 4.5 billion litres per annum transported by pipeline to Gauteng areas – Road and Rail a further ~2 billion litres per annum

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VISION

“To be a world-class leader in energy regulation”

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MISSION

“To regulate the energy industry in accordance with government laws and policies, standards and international best practices in support of sustainable development”

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VALUES

• Passion • Spirit of Partnership • Excellence • Innovation • Integrity • Responsibility • Professionalism

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REGULATORY PRINCIPLES• Underpinned by NERSA’s legal mandate

– Transparency – Neutrality – Consistency and Predictability– Independence – Accountability – Integrity– Efficiency

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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)

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MANDATE (Cont)

– 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)

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STRATEGIC OBJECTIVES (2011/12)• To create regulatory certainty in the energy sector;

• To protect the interests of the public and the customers;

• To create a dispensation for fair competition for industry players;

• To create energy supply certainty; and

• To create an effective organisation that delivers on its mandate and purpose

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BUDGET AND FUNDING FOR 2011/12

Difference between expenditure and income budgets amounts to R75.6 million which is attributable to a refund of surplus funds to the different industries being regulated and interest receivable from short term investments

Expenditure Levy Income Levies

Electricity R124 667 690 R73 408 045 0.0286 c/kWh

Piped-Gas R50 486 314 R40 496 714 0.2872 c/GJ

Petroleum Pipelines

R47 867 696 R33 503 616 0.1905 c/l

Total R223 021 701 R147 408 375

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CHALLENGES FACING NERSA (Electricity Industry Regulation)

• Security of Supply

• Noncompliance issues especially with municipal distributors – maintenance backlog and not meeting reporting requirements

• Implementation of Inclining Block Tariffs

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CHALLENGES FACING NERSA (Piped-Gas Industry Regulation)

• Regulation of certain piped gas activities not specifically catered for in the Gas Act

– CNG

• Monitoring and enforcing Sasol’s compliance with the regulatory agreement

– Enforcement of the market value pricing

• Approve maximum prices in absence of clear market value of gas

• Private sector investment and markets for gas– Private sector investment in infrastructure faces many hurdles

i.t.o. supply and offtake agreements

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CHALLENGES FACING NERSA (Petroleum Pipelines Industry Regulation)

• Security of supply of petroleum to the inland areas

• State Owned Entity (Transnet) funding challenges and the setting of its tariffs

• Promoting access to petroleum storage facilities by Historically Disadvantaged South African wholesalers

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PLANS FOR FUTURE(Electricity Industry Regulation)

• To monitor and enforce compliance by all licencees• Introduction of more Independent Power Producers• Promotion of Renewable Energies in the generation mix –

hence Renewable Energy Feed-In Tariffs (REFIT)• To monitor the implementation of the second Multi-Year

Price Determination (MYPD2) by Eskom and to revise the rules for the MYPD2 if necessary

• To start preparing for the third Multi-Year Price Determination for Eskom for the period 2013/14 – 2015/16, to continue giving certainty and predictability in terms of electricity prices

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PLANS FOR FUTURE(Electricity Industry Regulation) (Cont.)

• To streamline regulatory processes in the areas of licensing, tariff reviews and appraisals

• To rationalize tariff structures, taking into account regional pricing and geographical differentiation

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PLANS FOR FUTURE(Piped-Gas Industry Regulation)

• To educate customers in order to assist in the enforcement of Market Value Pricing

• To implement a compliance framework for licence conditions

• To conduct a study on the integrity of the gas pipeline network

• To benchmark licence conditions

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PLANS FOR FUTURE(Piped-Gas Industry Regulation) (Cont.)

• To highlight to the policy maker the need for a review of the Gas Act to address:– Definitions and provisions that hamper effective regulation of the

gas industry– Infrastructure Planning and Construction Licences;– NERSA’s Tariff Mandate (Distribution and Transmission); and– Licensing deadlines

• Transition to regulating maximum prices• Monitoring compliance to licence conditions

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PLANS FOR FUTURE(Petroleum Pipelines Industry Regulation)

• To monitor the escalations in costs as well as the delays in construction of new infrastructure

• To monitor and manage as far as possible a tariff spike through tariff structures

• To monitor licensees in the petroleum pipelines industry’s behaviour and act if and when necessary

• To facilitate market entry by historically disadvantaged players

• To facilitate third party access• Monitoring compliance to licence conditions

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UPDATE ON TRANSNET’S NEW MULTI PRODUCTS PIPELINE PROJECT

Dr Rod CromptonRegulator Member

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CONTENT• New Multi Products Pipeline Concept• Map of New Multi Products Pipeline• Background• Completion Date Forecasts• Costs• Risks

– Risk 1: Coastal End (Durban)– Risk 2: Line Fill (NMPP)– Risk 3: Security of Inland Supply

• Road and Rail Requirement – Data Challenges• Road and Rail Requirement Estimate

• Pipeline Tariff: Durban to Johannesburg (Rounded)• Tariff forecast for Durban to Alrode• Pipeline Tariff Impact on Gauteng Petrol Price

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Terminal Terminal

“Bullet train”

NEW MULTI PRODUCTS PIPELINE CONCEPT

Source: Transnet, NERSA

• Licence granted -12 September 2007

• Conditions : – Ready in 4 years; and– Deadlines for parts.

BACKGROUND

COMPLETION DATE FORECASTSLicensed activity License

condition (original)

Latest forecast(# in operation)

Pipeline Waltloo to Kendal Dec 2009 April 2011 #

Pipeline Jameson Park to Alrode Sept 2011 May 2011 #

Pipeline Alrode to Langlaagte Sept 2011 May 2011 #

Pipeline Durban to Jameson Park March 2011 Jan 2012 (partial)

Coastal Terminal Sept 2011 Dec 2013

Inland Terminal Sept 2011 Dec 2013

• 2007: R 11 bn• 2009: R 12.6 bn• 2010: R 15.4 bn• 2010: R 23.4 bn (+ interest)• 2011: R 22 bn (+ interest)• Next: ????

COSTS

1. Coastal end (Durban)

2. Line fill (NMPP)

3. Security of inland supply

RISKS

• Construction delays in coastal terminal and feeder lines from oil companies

• Solution: “tight lining” until accumulator facility is ready

RISK 1: COASTAL END (DURBAN)

• Costs:

• Who pays? Not resolved• Resulted in commencement delays on 3

branch lines• Worst case: NMPP finished but no line fill

3 Branch lines R 108 mil Sasol “loan”

Trunk line R 1 bn ????

Total R1.1 bn ????

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RISK 2: LINE FILL (NMPP)

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INLAND MARKET INCLUDES:FREE STATE; GAUTENG; MPUMALANGA; LIMPOPO; NORTH WEST;

PRODUCTS INCLUDED IN THE ANALYSIS:Petrol; Diesel; Jet Fuel;

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Inland Fuel demand incl exports c = a+b 15 542 15 287 15 054 15 659 16 029 16 536 17 130 17 737 18 328 18 894

Inland Fuel supply d 9 072 8 480 8 883 8 949 9 125 9 125 9 125 9 125 9 125 10 200Pipeline capacity (excluding Petroline) e 4 065 4 459 4 389 4 380 3 749 5 891 6 045 6 068 6 310 8 760

35 578 41 051 17 540 27 050 54 514 24 533 35 025 48 907 57 226 -

Number of road tankers required daily l = k/365 98 113 49 75 150 68 96 134 157.00 -

Number of road tankers required per hour m = l /24 4 5 2 3 6 3 4 6 7 -

How many minutes between trucks? n 15 13 29 19 10 21 15 11 9 - Note: Pariffi n is excluded from the model as the inland market supply suffice in meeting inland demand

1. Fuel demand growth forecast as per BER 5 October 2010

2. Overland exports to Botswana, Zimbabwe, Zambia and Malawi

3. As per Transnet presentation dated 17/18 Feb 2011 at DoE Liquid Fuels Bosberaad

4. Dedicated jet fuel train that runs from Durban to OR Tambo Airport dialy

5. j = c - (d + e + f + g)

NMPP commences operation 1 January 2012. The whole project will be completed by 1 April 2014 i.e. NMPP reaches full capacity at 1 April 2014. This is as per Transnet's presentation to NERSA on 7 December 2010.

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NMPP pipeline capacity

DJP pipeline capacity

Inland Jet Fuel supply

Inland IP supply

Inland Diesel supply

Inland Petrol supply

Inland Fuel demand

Inland Fuel demand incl. exports

Road and rail requirement is indicated by the area between the demand lines and the bars

RISK 3: SECURITY OF INLAND SUPPLY

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- Riskiest period to en 2011

- Transnet’s Mitigation strategy until NMPP finished:

a) use both old and new pipelines in parallel

b) road and rail

RISK 3: SECURITY OF INLAND SUPPLY (Cont.)

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ROAD AND RAIL REQUIREMENT – DATA CHALLENGES

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ROAD AND RAIL REQUIREMENT ESTIMATE

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PIPELINE TARIFF: DURBAN TO JOHANNESBURG (ROUNDED)

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TARIFF FORECAST FOR DURBAN TO ALRODE

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PIPELINE TARIFF IMPACT ON GAUTENG PETROL PRICE

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RENEWABLE ENERGY FEED-IN TARIFFS (REFIT) REVIEW

Mr Thembani BukulaRegulator Member

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CONTENT• Background• NERSA’s Mandate• REFIT Guidelines 2009• Latest Developments• Outstanding Matters

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• White Paper on Renewable Energy 2003– 10 000GWh by 2013 (i.e. 1141MW @ 100% Load Factor)

• Consultations between 2004 and 2008 – Regulatory framework (funding, implementation rules/methods, technologies)

• REFIT guidelines published in March & October 2009

• New generation regulations promulgated in August 2009– REFIT Programme & IPP Programme for conventional power– NERSA to develop selection criteria & standardised PPA– Eskom (System Operator) to purchase power according to the selection criteria

• MYPD2 approval in February 2010 with REFIT allocation– R12.3bn for 1025MW over the 3 year period– Implementation date 1 April 2010

BACKGROUND

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• National Energy Regulator Act, 2004– The custodian & enforcer of the national electricity regulatory framework– To provide licenses and provide for matters connected therewith

• Electricity Regulation Act, 2006– Issue rules designed to implement national government’s electricity policy

framework– Regulate prices & tariffs– Furnish potential licensees with all the information necessary for licensing– Make guidelines, rules, codes of conduct after consultation with interested

parties– Facilitate the conclusion of Power Purchase Agreements– Make license conditions relating to:

• Setting of prices, tariffs & charges• The methodology to be used in determining tariffs• The format & contents of agreements entered into by licensees• Period of validity of licenses

NERSA’s MANDATE

• REFIT’s based on levelised cost of electricity (LCOE)– Stimulate the Renewable Energy industry– Over a 20 year period (20 year Power Purchase Agreement (PPA))– Wind, Landfill gas, Small scale hydro, biogas, biomass and solar– Annual review for the next 5 years & every 3 years thereafter applicable to new

projects– No reduction rate (as in other countries such as Spain, Germany, Denmark)– Reasonable/attractive Returns of 17% (ZAR)

• Consultation papers on the selection criteria & PPA Feb 2010– Plant location and technology that contributes to local economic development– Compliance with legislation in respect of advancement of HDI’s– Projects demonstrating the ability to raise finance– Small distributed generators over centralised generators– Shortest commissioning times– Network integration & stabilisation, transmission losses, environmental approvals

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REFIT GUIDELINES 2009

• Consultation paper on REFIT review issued in March 2011– Reduction in capital costs (solar PV reduction around 40%, Wind 5%)– Significant changes in the foreign exchange rate (from ZAR10/$ to ZAR8/$)– Creation of space for additional renewable energy technologies– Maintaining the reasonable/attractive returns of 17%(ZAR)

• New generation regulations promulgated on 4 May 2011– REFIT programme replaced by IPP procurement programme – DoE the procurer & PPA negotiator, – Eskom the buyer/off-taker

• Minister’s press release 26 May 2011– Current REFIT procurement programme will use 2009 REFIT – 2nd phase procurement will use the revised REFIT (March 2011 Consultation paper)– Completed the procurement of 1000MW by December 2011

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LATEST DEVELOPMENTS

• Section 34(1) Determination by the Minister– Generation capacity for security of supply– Types of energy sources– Manner of purchase and selling the electricity produced– Tendering procedure (fair, transparent, equitable, competitive & cost effective)– Provide for private sector participation

• Concurrence by NERSA on the above Section 34(1) determination– Finalisation by 30 June 2011

• Issuing of the Request for Proposal (RFP) documents– Stating the tendering process (June 2011)

• Licensing of successful IPP’s by NERSA– Maximum of 120 after application is lodged– Shorter period can be facilitated

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OUTSTANDING MATTERS

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CONCLUSION

Mrs Cecilia KhuzwayoChairperson

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CONCLUSION• NERSA would like to thank the Portfolio Committee for the

opportunity to present its Business Plan for 2011/12 as well as to update the Committee on construction of the New Multi-Product Pipeline and the REFIT review

• Electricity regulation has matured whilst piped-gas and petroleum pipelines regulation is at its infancy - up to date the majority of the effort was located in the licensing of existing facilities but now compliance monitoring can start

• Balance is required between differences and synergies between and amongst the approaches in regulating the three industries

• Governance issues and legal regulatory requirements are being addressed

• MOU on concurrent jurisdiction is necessary

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THANK YOU