Regulatory Regime within the Electricity Supply Industry

17 September 2013

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Table of Contents

• Introduction:– Electricity Supply Industry –Value Chain.

– Current Regulatory Regime.

• Overview of the ESI. – Electricity Generation Mix Policy Position (20 year plan).

– Current Production, Transmission and Distribution.

– Legislative and electricity generation policy overview.

• National Energy Regulator of South Africa.

• Legislative Mandate: – Procurement of New Gen Capacity.

– Feed-In Tariff vs. Bid-based Tariff

Electricity Supply Industry –Value Chain

Generation

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Transmission Transmission LinesLines

TransmissionSubstations

TRANSMISSIONTRANSMISSION(765/220 kV)(765/220 kV)

Distribution Lines

DISTRIBUTION(132/33 kV)

Distribution Substations

POWER STATIONS

RETICULATION HV(11 & 22kV)

Reticulation LV

(380 / 220V)

Domestic

Commercial

AgricultureElectrification

Industrial

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Introduction• Almost 97% of South Africa’s electrical power requirements is supplied by

Eskom.

• 10 out of 11 of base-load power stations are located in Mpumalanga. Amounts to 80 % of total power generated by Eskom.

• Rationale - power stations closer to primary fuel (input fuel)

• Power is transported to load points throughout the country via a total of 353 000 km (TX and DX network).

• This topology is widely referred to as Centralized Power Generation.

• Due to distant load centres, the reliability of supply is dependent on the TX and DX networks as well.

• Increasing demand for power imposes constraints on these networks, resulting in controlled (or non-controlled) load shedding. (2008 Western Cape scenario)

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____________________Source: Eskom Website, Research Channel Electricity Review February 2011, Datamonitor South Africa Electricity Overview,

August 2010(1) Production figures are based on Eskom’s production(2) Falls under the Department of Public Enterprises

Overview of the South African electricity industry(Production/Transmission & Consumption)

Electricity consumption

Electricity production(1)

Overview

Electricity generation dominated by state-owned power company Eskom (2), which currently produces over 96.7% of the power used in the country

Eskom has a current nominal installed capacity of 44,175MW Government addressing electricity supply issues with Eskom and Independent

Power Producers (“IPPs”) South Africa needs over 45,600 MW new generation capacity by 2030 Eskom is part of Southern African Power Pool, a group of utilities in the region

aiming to create a common market for electricity in the region

Transmission and Distribution Overview

Currently, the transmission of electricity in South Africa is undertaken by Eskom The company has over 28,000km of transmission lines spanning the entire

country Electricity distribution is the final stage in the delivery of electricity to end users,

currently undertaken by Eskom, together with 187 municipalities Municipalities account for c.40% of the total electricity sales and c.60% of the

customer base

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South Africa’s Plant mix TYPE NUMBER MAX CAPACITY

Coal fired 13 stations 37 678 MW

Gas turbine 4 stations 1207 MW

Hydroelectric 2 stations 600 MW

Pumped storage 2 stations 1 400 MW

Nuclear 1 station 1 800 MW

Renewable Energy (Wind Farm)

1 station 3.2 MW

Distribution Embedded 4 stations 62 MW

TOTAL 27 Stations 44 175 MW

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____________________Source: Eskom Website, Research Channel Electricity Review February 2011, Datamonitor South Africa Electricity Overview, August 2010, 2010 BP Statistical Energy Survey(1) Map indicates South African power network and interconnections with neighboring countries(2) Figures represent Eskom’s capacity

Overview of the South African electricity industry(Current Sources of power)

Only one nuclear power station (Koeberg), a base-load station with a nominal installed capacity of 1,930MW (c.5%) Construction for the plant began in 1976 and full operation in 1985– Produced 12,806 GWh electricity in year ended 31 March 2010

Uses c.30tpa of enriched uranium Government authorized contracts in place to supply Koeberg for the next 8 years It is intended that nuclear will comprise 17% of South Africa’s base load energy mix by 2030

Hydro-electric power stations account for less than 2% of nominal installed capacity, while the gas/liquid fuel turbine accounts for c.6%(2)

Renewable Energy Programme – Current project in construction 2600 MW. (IPP’s) Potential to import hydro power (Grand Inga)

Nuclear power

Hydro-electric, Gas fuel and Renewable Projects

Coal power

c.93% of power in South Africa is generated from coal fired power stations South Africa is the 5th largest coal producing country in the world with coal reserves of 30,408mt (3.68% of world total) Coal accounts for 86% of Eskom’s nominal current capacity (37,755MW)

Electricity Supply Industry Legislative Overview

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____________________Source: Research Channel Electricity Review South Africa, February 2011(1) Excludes power to be decommissioned

Policy Adjusted IRP – Plans for South Africa’s generation mix

Long lead times for power generators and related infrastructure require timely firm commitments

Firm commitment necessary now

Firm commitment in IRP 2012

RTS Capacity

Medupi

Kusile

Ingula

DO

E OCG

T IPP

Cogeneration, Ow

n Build

Wind

CSP

Landfill, Hydro

Sere

Decom

missioning

Coal (PF, FBC, Im

ports, own build)

Gas CCG

T

Peak-OCG

T

Import H

ydro

Wind

Solar PV

CSP

Nuclear Fleet

Total New

and Com

mitt

ed Build

MW MW MW MW MW MW MW MW MW MW MW MW MW MW MW MW MW MW MW MW

2010 380 0 0 0 0 260 0 0 0 0 0 0 0 0 0 0 0 0 0 640

2011 679 0 0 0 0 130 200 0 0 0 0 0 0 0 0 0 0 0 0 1,009

2012 303 0 0 0 0 0 200 0 100 100 0 0 0 0 0 0 300 0 0 1,003

2013 101 722 0 333 1,020 0 300 0 25 0 0 0 0 0 0 0 300 0 0 2,801

2014 0 722 0 999 0 0 0 100 0 0 0 500 0 0 0 400 300 0 0 3,021

2015 0 1,444 0 0 0 0 0 100 0 0 (180) 500 0 0 0 400 300 0 0 2,564

2016 0 722 0 0 0 0 0 0 0 0 (90) 0 0 0 0 400 300 100 0 1,432

2017 0 722 1,446 0 0 0 0 0 0 0 0 0 0 0 0 400 300 100 0 2,968

2018 0 0 723 0 0 0 0 0 0 0 0 0 0 0 0 400 300 100 0 1,523

2019 0 0 1,446 0 0 0 0 0 0 0 0 250 237 0 0 400 300 100 0 2,733

2020 0 0 723 0 0 0 0 0 0 0 0 250 237 0 0 400 300 100 0 2,010

2021 0 0 0 0 0 0 0 0 0 0 (75) 250 237 0 0 400 300 100 0 1,212

2022 0 0 0 0 0 0 0 0 0 0 (1,870) 250 0 805 1,143 400 300 100 0 1,128

2023 0 0 0 0 0 0 0 0 0 0 (2,280) 250 0 805 1,183 400 300 100 1,600 2,358

2024 0 0 0 0 0 0 0 0 0 0 (909) 250 0 0 283 800 300 100 1,600 2,424

2025 0 0 0 0 0 0 0 0 0 0 (1,520) 250 0 805 0 1,600 1,000 100 1,600 3,835

2026 0 0 0 0 0 0 0 0 0 0 0 1,000 0 0 0 400 500 0 1,600 3,500

2027 0 0 0 0 0 0 0 0 0 0 0 250 0 0 0 1,600 500 0 0 2,350

2028 0 0 0 0 0 0 0 0 0 0 (2,850) 1,000 474 690 0 0 500 0 1,600 1,414

2029 0 0 0 0 0 0 0 0 0 0 (1,128) 250 237 805 0 0 1,000 0 1,600 2,764

2030 0 0 0 0 0 0 0 0 0 0 0 1,000 948 0 0 0 1,000 0 0 2,948

1,463 4,332 4,338 1,332 1,020 390 700 200 125 100 (10,902) 6,250 2,370 3,910 2,609 8,400 8,400 1,000 9,600 45,637

Committed Build New Build Options

2025-203036.8%

2020-202420.0%

2010-201418.6%

2015-201924.6%

Planned New Generation Mix 2030(1)

Time Schedule New Power Generation Building

Nuclear17.0%

Solar PV14.9%

Gas12.9%

CSP2.1%

Coal29.7%

Hydro7.2%

Wind16.3%

Electricity Generation: Policy Position (IRP2010)

National Energy Regulator of South Africa

National Energy Regulator of South Africa

Legislative Regime: Procurement of New Generation Capacity

• In terms of section 34 of the ERA, the Minister may determine the following:– Generation capacity required;– Buyer of electricity and seller of electricity;– Type of energy source to be used for electricity generation– Provide for private sector participation

• Section 34’s determination is only legally binding once NERSA has concurred to it.

• All new generation procurement (from August 2009) shall comply with section 34 of ERA. (current RE-IPP programme is undertaken in line with s 34).

• S 34 is guided by Government policy position (IRP2010)

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Legislative Regime: Feed-In Tariff vs Bidding Tariff

• Feed-In Tariff.– Tariff at which power is sold to the grid is prescribed before bid stage.– Determination of such tariff is based largely on theoretical assessment.– If tariff too low market will not be responsive.– If tariff too high consumer overpays.– NERSA does not have a legislative mandate to prescribe tariffs upfront.

(can only make a ruling on a tariff proposal by the electricity supplier (being it Eskom or an IPP).

• Bidding Tariff.– Tariff at which power is sold to the grid is determined through a

competitive bidding process.– RSA set tariff caps per technology.– Tariff caps based on “market-sounding, Request for Proposals”– NERSA issues individual generation license based on proposed funding

model which determines tariff output.– If individual tariff too high individual bid might not be selected.– Adopted RSA model.

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Electricity Pricing Regime

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National Energy

Regulator

National Energy Regulator (NERSA) regulates the South African electricity industry

NERSA licences electricity generation, transmission, distribution and trading activities in South Africa

NERSA sets tariffs based on its Multi-Year Price Determination Methodology (MYPD)

– Annual revenues are set for a three year period currently from 1 April 2010 to 31 March 2013

Electricity Pricing Policy

In November 2008, the Government approved the Energy Pricing Policy (EPP) which sets the determination of regulated revenues going forward

– Future regulated revenues will be based on the replacement value of its assets

– Ensures long-term sustainability of the industry to fund future capacity expansion requirements

EPP aims to reach cost-reflective tariffs that will reflect the full economic cost of supplying electricity to a customer

– EPP determines a 5 year transition period that will end in FY2015 to reach cost-reflective tariffs

Department of Energy

Department of Energy is mainly responsible for electricity generation planning via Integrated Resource Plan (IRP), which determines electricity generation capacity expansion requirements in South Africa

– Objective is to develop a sustainable electricity generation capacity over the next 20 years

____________________Source: DoE website, NERSA website

NERSA- DoE Role in electricity price setting

Thank You