INFRASTRUCTURE DIALOGUE

ELECTRICITY DISTRIBUTION INDUSTRY

INFRASTRUCTURE PERSPECTIVE

PRESENTED BY

DR WILLIE DE BEER

12 MAY 2011

Presentation Context

� Electricity Distribution Industry (EDI) Introduction

� Assessment of Asset Condition & Performance

� Investment Requirement

� Conclusion

� Recommendations/Discussion Considerations

ELECTRICITY DISTRIBUTION INDUSTRY ELECTRICITY DISTRIBUTION INDUSTRY

INTRODUCTIONINTRODUCTIONINTRODUCTIONINTRODUCTION

Electricity Supply ChainElectricity Supply Chain

Transmission LinesPOWER STATIONS

GENERATION

TRANSMISSION

(765/400/275 kV)

TRANSMISSION

SUBSTATION

DISTRIBUTION (765/400/275 kV) DISTRIBUTION

(132/88/66/44/33

kV)

Reticulation HV Lines 22 and 11kV

Reticulation Lines

DISTRIBUTION

SUBSTATION

Distribution Lines

Reticulation

LV Lines 380/220VSERVICE CONNECTION

ELECTRICITY DISTRIBUTION INDUSTRY (EDI)

EDI ProfileEDI Profile

� Revenue : R40 bn

� Customers : ~9.2 m

� Staff : ~31 000

� Replacement Asset Value (2008) : ~R260 bn

� Energy Purchases (ESI 2008) : ~224 TWh

� Distribution Lines : >400 000 km

� Distribution Cables : >217 000 km

� Transformers : ~ 366 584

� 2008 Figures

Electricity Distribution Industry IntroductionElectricity Distribution Industry Introduction

� The electricity distribution industry (EDI) plays a

significant role in the economic growth and development

of any country;

� The EDI is an asset centric business;

� For sustainability, the EDI is directly dependant on the � For sustainability, the EDI is directly dependant on the

infrastructure performance, the ability to serve the

customers effectively and to collect the revenue

associated with the products and services delivered.

ASSESSMENT OF ASSET CONDITION ASSESSMENT OF ASSET CONDITION

& &

PERFORMANCE PERFORMANCE PERFORMANCE PERFORMANCE

EDI Asset & Performance AssessmentEDI Asset & Performance Assessment

� Various summits and reports were produced:◦ 2003 Maintenance Summit;◦ 2004 & 2008 Follow up Maintenance Summit;◦ 2006 NERSA Audit Reports (11 Electricity Distributors);◦ 2008 UBS Investment Research Report◦ 2008 EDI Holdings: Approach to Distribution Asset ◦ 2008 EDI Holdings: Approach to Distribution Asset

Management (ADAM) Report;◦ 2006 to 2010 EDI Holdings Ringfencing Reports (56

Electricity Distributors);◦ 2010 Eskom Identified 1000 constraint feeders.

NOTE: Latest NERSA electricity distributor audit results not released

Some Key EDI Insights (…1)Some Key EDI Insights (…1)

� The EDI is currently generating revenue however the business model is not

sustainable;

� In general the current practices in the EDI do not guarantee business

sustainability and economic growth;

� The Electricity Distribution Industry (EDI) in South Africa is currently

experiencing significant challenges as a result of amongst others;

◦ Under investment in asset maintenance

◦ Lack of refurbishment investment◦ Lack of refurbishment investment

◦ Under performing industry

◦ Shortage of skills

� To effectively manage the future maintenance and refurbishment requirement,

an estimated additional R2.5bn per annum will be required (2008);

� The maintenance, refurbishment & strengthening backlog is estimated at

R27.4bn (2008);

� While there are pockets of good performance; to avoid a collapse of the EDI it

is essential for an urgent structured intervention;

Some Key EDI Insights (…2)Some Key EDI Insights (…2)

� The pockets of good performance are decreasing;

� The increased operation of under maintained plant is a recipe for disaster;

� Maintenance plans and implementation thereof is not evident in most

municipalities’ electricity departments;

� Maintenance investment is not consistent or in line with NERSA

recommendations;

� Capital investment plans are not clearly defined on a consistent basis;

� Average capital investment is < 5% of actual revenue from electricity in a large� Average capital investment is < 5% of actual revenue from electricity in a large

percentage of municipalities;

� In terms of electricity, municipalities achieved approximately 47% of their total

electricity budgeted capital investment;

� Demand growth exceeds the loading capacity of the networks which will

amongst others pose a significant risk to the effective introduction of Energy

Efficiency Strategies;

� Recruitment, training and retention of skills are significant EDI sustainability

risks.

Manage Availability of Supply (Sample of Manage Availability of Supply (Sample of

Distributors)Distributors)Municipality No. of Outages

(Monthly)Average

Downtime per Outage

# 3 0 (Planned)

20 (Unplanned)3 hrs to 1 week

# 520 (Planned)

30 (Unplanned)

Planned – < 8 hours

Unplanned – < 1 hour

From research conducted, unplanned outages mainly occur due to assets not being well maintained and lack of capacity to perform preventative maintenance;A policy of reactive maintenance is adopted in many cases (rather then preventative maintenance) as planned maintenance does not

Key Points

Slide 11

# 116 (Planned)

6 (Unplanned)6 – 48 hours

# 14 8 (Planned)

150 (Unplanned)Not available

# 191 (Planned)

3 (Unplanned)½ hour

# 21 2 1 Hour

# 22 Not available Not available

# 231 (Planned)

2 (Unplanned)2-3 Hours

planned maintenance does not exist in most municipalities;Skills shortage and key resource vacancies is a key driver of outages;Maintenance plans do not exist in over 50% of the municipalities researched;Data available challenges;Limited system driven management information available.

Source: EDI Holdings

Ringfencing Insights

Debtors’ Days and Bad Debt Challenges Debtors’ Days and Bad Debt Challenges

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Debtors Days - significant variationbetween the various municipaldistributors.

Notable increase for one specificmunic of 27 days (07/08) to 142days (08/09) - could be the resultof a decision not to prosecutecustomers in arrears.

Average Debtor Days: 74 Days

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Average Debtor Days: 74 Days

Bad Debt - significant increase in baddebt (for municipal distributors thatdisclosed relevant information).

The weighted average bad debtincreased by 74% from R61m(07/08) to R107m (08/09).

Total bad debt has risen 93% fromR311m (07/08) to R600m (08/09).

Source: EDI Holdings 2010 Survey

Technical & Non Technical Losses Technical & Non Technical Losses

ManagementManagement

ENTITY TECHNICAL(R’bn)

NON TECHNICAL (R’bn)

TOTAL (R’bn)

Source: EDI HoldingsSource: EDI Holdings

Eskom Dx 1.444 2.404 3.848

Municipalities 0.856 4.082 4.938

TOTAL 2.3 6.486 8.786

Summary of Key ChallengesSummary of Key Challenges

� Management and Leadership;

� Effective management of revenue cycle;

� Reduce technical and non technical losses;

� R27,4 billion (2008) Maintenance, Refurbishment and Strengthening backlog;

� R2,5 billion backlog growth per annum;� R2,5 billion backlog growth per annum;

� 35% average vacancy rate;

� Skills recruitment, retention and development.

INVESTMENT REQUIREMENT INVESTMENT REQUIREMENT

(ADAM as Reference)(ADAM as Reference)(ADAM as Reference)(ADAM as Reference)

Approach to Distribution Asset Management (ADAM)Approach to Distribution Asset Management (ADAM)

� ADAM focus on a holistic approach to distribution asset management;

maintenance, refurbishment and strengthening requirements, to ensure network

reliability, a sustainable industry and an ability to support the required economic

growth from an electricity distribution capacity perspective;

� ADAM is a holistic Asset Management initiative, centrally driven and locally

executed, which will follow a parallel phased approach, governed by strict

programme and project management practices;

� ADAM’s immediate priority will be the NERSA audited entities and short term� ADAM’s immediate priority will be the NERSA audited entities and short term

projects indentified;

� ADAM will address the existing skills shortage through:

� Complementing existing resources in the industry with external expertise;

� Identifying skilled resources that left the industry, and enticing them back;

� Focusing on sustainable skills transfer and capacity building during

execution;

� Run in parallel to the normal daily operations of the utilities.

Source: EDI Holdings ADAM Report

Investment Requirement per RegionInvestment Requirement per Region

Total Backlog Maintenance Refurbishment Short term Strengthening

Total R 27,369,146,995 R 2,736,914,699 R 8,210,744,098 R 16,421,488,197

Note: The Local Government Budget and Expenditure review 2003/04 to 2009/10 by National Treasury

reveals that the capital expenditure on electricity as a percentage of total capital expenditure is decreasing

in real terms by R400m per annum and that the available, capital budget would not be sufficient to cater for

growth and the identified backlog.

Entity Total Backlog Maintenance RefurbishmentShort term

Strengthening

RED ONE (City of Cape Town)

R 3,851,578,245 R 385,157,825 R 1,155,473,474 R 2,310,946,947

RED TWO(Ekurhuleni)

R 5,132,373,764 R 513,237,376 R 1,539,712,129 R 3,079,424,259

RED THREER 2,186,296,025 R 218,629,602 R 655,888,807 R 1,311,777,615

National Picture: EDI Infrastructure Investment National Picture: EDI Infrastructure Investment

Backlog by “RED region”Backlog by “RED region”

RED THREE(Nelson Mandela Bay)

R 2,186,296,025 R 218,629,602 R 655,888,807 R 1,311,777,615

RED FOUR(City of Johannesburg)

R 6,413,148,398 R 641,314,840 R 1,923,944,519 R 3,847,889,039

RED FIVE(eThekwini)

R 4,158,350,649 R 415,835,065 R 1,247,505,195 R 2,495,010,389

RED SIX (Tshwane)

R 5,627,399,914 R 562,739,991 R 1,688,219,974 R 3,376,439,948

TOTAL R 27,369,146,995 R 2,736,914,699 R 8,210,744,098 R 16,421,488,197

Entity Name

TOTALCurrent

Municipal Allocation

Current Allocation

Towards Routine Maintenance

Current Allocation

Towards Backlog

Backlog

Requirement Shortfall per

Financial Year

Rustenburg R 54,000,000 R 43,200,000 R 10 800 000 R 69,375,000 R 58,575,000

Polokwane R 120,000,000 R 96,000,000 R 24 000 000 R 129,079,000 R 105,079,000

Ekurhuleni R 370,000,000 R 296,000,000 R 74 000 000 R 542,096,000 R 468,096,000

Emfuleni R 47,000,000 R 37,600,000 R 9 400 000 R 219,147,000 R 209,747,000

Nelson Mandela

Indicative Current Investment per Financial Year Indicative Current Investment per Financial Year

2008 Data2008 Data

Nelson Mandela

BayR 43,000,000 R 34,400,000 R 8 600 000 R 244,292,000 R 235,692,000

Umsunduzi R 63,500,000 R 50,800,000 R 12 700 000 R 210,079,000 R 197,379,000

Mbombela R 27,200,000 R 21,760,000 R 5 440 000 R 102,196,000 R 96,756,000

eThekwini R 735,000,000 R 620,000,000 R 115,000,000 R 173,000,000 R 58,000,000

Mangaung R 174,000,000 R 167,724,000 R 6,276,000 R 113,867,000 R 107,591,000

City of Jo’burg R 1,305,000,000 R 1,237,500,000 R 67,500,000 R 390,355,000 R 322,855,000

City of Tshwane R 640,000,000 R 544,000,000 R 96,000,000 R 199,815,000 R 103,815,000

City of Cape Town R 711,000,000 R 606,000,000 R 105,000,000 R 184,860,000 R 79,860,000

� The infrastructure challenges in the electricity distribution industry are real;

� The backlog figure is not static and the longer it takes to address it the bigger the

backlog will become and equally the need for funding and competent resources

to address the backlog will increase;

� The EDI asset turnaround programme must be rolled out to stabilise the EDI, but

the biggest challenges remain the funding and skills recruitment;

Conclusion …1Conclusion …1

� While a 5 year execution period is ideal, given the current capital programmes

and skills shortage in the industry, this would not be achievable, hence a 10 year

plan is proposed;

� The successful execution of an asset turnaround programme will call for

dedicated resources and very tight programme management;

Conclusion …2Conclusion …2

� The EDI asset turnaround programme presents a significant skills transfer and job

creation opportunity and therefore it is important to establish the necessary

mechanism, inclusive of trainers, to ensure effective skills transfer during the EDI asset

turnaround programme roll-out;

� The EDI asset turnaround programme is also a unique national opportunity for a

focused long term technical skills development programme across the full engineering

spectrum i.e. construction staff, artisans, technicians, technologists, certificatedspectrum i.e. construction staff, artisans, technicians, technologists, certificated

engineers, engineers and training institutions;

� The EDI asset turnaround programme will fail in its overall objective if it had to recruit

resources currently deployed in the industry, to execute the projects associated with

the EDI asset turnaround programme programme;

� It is essential that the appropriate resource allocation and infrastructure required to

execute this programme be agreed to upfront and be allocated before the EDI asset

turnaround programme is rolled out.

Recommendations/Discussion ConsiderationsRecommendations/Discussion Considerations

� Implement ADAM as a centrally driven holistic (10 year project with a 20

year funding plan) National Priority to deal with the infrastructure

maintenance, refurbishment and strengthening backlog;

� Investigated ADAM funding options and make funding available through a

“central” mechanism;

� Leverage, harness and utilise the skills, expertise and experience gathered

during the EDI restructuring process as well as the stakeholder relations

Note: Note: ADAM Report was presented to ASGISA, IDTT on Energy, ADAM Report was presented to ASGISA, IDTT on Energy, CoGTACoGTA Tech MINMEC, NERSA and various industry Tech MINMEC, NERSA and various industry

stakeholdersstakeholders

during the EDI restructuring process as well as the stakeholder relations

and structures developed to resolve the EDI challenges and improve

service delivery, especially amongst municipalities;

� Introduce, through NERSA and National Treasury, tighter regulation and

compliance of the electricity distribution entities, inclusive of investment in

assets and skills development;

� Enforce ringfencing of the electricity businesses and accountability through

NERSA, CoGTA and the National Treasury.

THANK YOUTHANK YOUTHANK YOUTHANK YOU