conversations with the media on the electricity industry...

1

1Nhlanhla Gumede

Full Time Member of the Regulator

Conversations with the Media on the Electricity

Industry and its Regulatory Approaches

2

Who is NERSA

2

• 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

3

Legislative Mandate

3

• 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)

4

Facilitation legislation

4

• 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)

5

Electricity Regulation Mandate

5


(‘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”

6

NERSA is a creature of stature and

accordingly governed

6

• National Energy Regulator Act, 2004 (Act No. 40 of

2004);



(‘ERA’)


• 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

7

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

8

The Prices in Red actually applied

The prices in Black were decisions which were superseded by another

application or an RCA decision

MYPD 1 Decision

Revision 1: 2008 price in

Dec 2007

Revision 2: 2008 price in

Mar 2008

I

n

t

e

r

i

m

MYPD 2 Decision

Revision: 2012 price Mar 2012

MYPD 3 Decision

MYPD 2

RCA

MYPD 3 RCA

2006 2007 2008 2008 2008 2009 2010 2011 2012 2012 2013 2014 2015 2015 2016 2017

Average Price Increase (%)

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

Average Price (c/kWh)

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

Current electricity price increases are not

sustainable

8

9

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

History of ESKOM tariff application vs

NERSA’s Decisions (excl. RCAs)

MYPD 1INTERI

MMYPD2 MYPD3 1 YEAR MYPD4

STC Application

20

06

/7

20

07

/8

20

08

/9

20

09

/10

20

10

/11

20

11

/12

20

12

/13

20

13

/14

20

14

/15

20

15

/16

20

16

/17

20

17

/18

20

18

/19

20

19

/20

20

20

/21

20

21

/22

Application % 5.9/18.7 6.2 / 60 34 35 35 35 / 16 16 16 16 16 16 19.9 15 15 15

Decision % 5.15.9

14.2

6.2

27.531.3 24.8 25.8

25.9

168 8 8 8 8 5.23 9.41 8.10 5.22

9

10

Translation of MYPD Revenue to

FY19/20 Individual Tariffs

Revenue

Requirement

Rm190 939 (excl. RCA)

Rm198 715 (incl. RCA)

Average Price

102.62c/kWh (excl. RCA)

106.80c/kWh (incl. RCA)

Municipal Tariff

SchedulesDifferent for each

Municipality

Municipal Retail

Tariff from Eskom

109.65c/kWh

ERTSA ProcessEskom Customer

Categories & Adjust for

FY difference to

Municipalities

NERSA

Municipal Tariff Guidelines &

Benchmarks

Municipality apply for

approval of tariffs

based upon based

upon

Municipal Tariff

Guidelines &

Benchmarks

NERSA Determines

NERSA Approves

11

As costs have been increasing, sales

have been declining

Source: D Form Data

0,00

10,00

20,00

30,00

40,00

50,00

60,00

70,00

80,00

90,00

100,00

185 000 000

190 000 000

195 000 000

200 000 000

205 000 000

210 000 000

215 000 000

2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19

Pri

ces (

c/k

Wh

)

Sale

s (

MW

h p

er

an

nu

m)

Eskom Sales MWh vs Price c/kWh

Sales MWh Price c/kWh

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

0,00 10,00 20,00 30,00 40,00 50,00 60,00 70,00

Agriculture

Metal Ores

Other Mining

Glass

Non Metal minerals

Basic Iron & Steel

Precious metals

Trade

Hotels and restaurants

Financial intermediation

Household

Sectoral cost drivers

% Electricity % Labour % Metal ores % Transport % Basic iron & Steel % Chemicals % Telecommunication % Coke oven products

Source: Statssa, Input – output tables 2014

13


2,06

6,14

2,14

6,00

2,04

4,45

5,09

0,65

1,14

0,29

2,56

9,44

7,97

11,24

3,49

6,26

4,30

1,82

4,35

4,17

0,50

6,34

9,63

3,25

2,88

0,36

1,46

0,48

0,13

0,48

0,74

0,08

2,52

0,00 5,00 10,00 15,00 20,00 25,00

Agriculture

Metal Ores

Other Mining

Glass

Non Metal minerals

Basic Iron & Steel

Precious metals

Trade

Hotels and restaurants

Financial intermediation

Household

Select sectoral cost drivers

% Electricity % Transport % Chemicals


Affecting some sectors more than

others

14

Electricity cost now a key driver in sectors

that were traditionally driven by labour

15

16

Resulting in SA exporting its

endowment and jobs

Many minerals processing companies are intending to close shop soon

primarily because of high electricity costs.-

1

17

Unfortunately one cannot nit-pick parts of

minerals processing value chain one likes

17

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

and fabrication without smelting

x

https://www.angloamericanplatinum.com/~/media/Files/A/Anglo-American-Platinum/investor-presentation/standardbankconference-anglo-american-platinum-processing-111114.pdf

Value realisation in the PGM sector

18



As a country, we need to make a choice, create or destroy value & jobs here

in South Africa. It’s a simple choice!


Value drivers in the PGM industry

19



Although smelting & refining costs are only 15% of total costs, 85% of value

is generated here


20

South Africa is de-industrialising

-

2

4

6

8

10

12

14

-

20

40

60

80

100

120

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Th

ou

sa

nd

s G

Wh

Th

ou

sa

nd

s G

Wh

Sectoral demand trend

Municipalities Industrial Mining International Residential Commercial Agriculture Traction

20Focusing electricity strategies on consumption sectors at the expense of

growth sectors makes little sense

Thick trend lines

Left vertical axis

Thin trend lines

Right vertical axis

21

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

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

23

Contribution of Renewable Energies to

grid stability

Daily contribution Annual contribution

Morning peak actual load MW 27 896 *

Evening peak actual load MW 30 201 *

Daily energy sent-out MWh 599773

Daily IPP energy sent-out MWh 1011 *#

Daily maximum SMP R/MWh 828

Daily MAPE % 2.0721

Daily PAPE % 1.1322

Annual Morning Peak YTD MW 30579

Annual Evening Peak YTD MW 33490

Peak Daily Energy YTD MWh 652025

* Indicates Unverified Meter Readings

# Indicates Centrally Dispatched IPPs only

24

In 2019 Renewable energy contributed 4.9% of the “Energy” in the

calendar year


grid stability

Wind and Solar contribute differently to

the grid

25

26

Renewable Energy is self dispatch and is not aligned with peak

demand or the load profile

Cal Year Indicator CSP PV Wind (Eskom+IPP) Total (Incl other REs)

Maximum 502.1 1 556.0 1 904.3 3 530.6

Max Date 24-Sep-2019 11:00 07-Apr-2020 12:00 25-May-2020 13:00 27-Oct-2019 13:00

Maximum 502.1 1 375.6 1 872.0 3 530.6

Max Date 24-Sep-2019 11:00 19-Jan-2019 12:00 14-Dec-2019 15:00 27-Oct-2019 13:00

Maximum 500.2 1 556.0 1 904.3 3 406.1

Max Date 27-Jan-2020 14:00 07-Apr-2020 12:00 25-May-2020 13:00 06-Apr-2020 13:00

Maximum Contribution (MW) - based on System Operator data (subject to metering verification)

All Time

2019

2020


grid stability

27


grid stability

• Self-dispatch generators

• Day-ahead output forecast outputs

submitted to the System Operator

– Reasonably accurate

• Challenges with variations

– Can exceed 2 coal unit capacity

– Requiring the call up of two units at short

notice

– Coal units require 24 hours to come fully

on line

– Once on need to stay on leading to

excess capacity and curtailment requests

– Problem most pronounced in the winter

period

Cal Year Indicator Total (Incl other REs)

Maximum 1 464

Max Date 05-Jul-2019 to 06-Jul-2019

Maximum 1 464

Max Date 05-Jul-2019 to 06-Jul-2019

Maximum 1 459

Max Date 24-May-2020 to 25-May-2020

Maximum Difference between Consecutive Evening Peaks (MW) -

based on System Operator data (subject to metering verification)

All Time

2019

2020

Self dispatching of RE raises questions

about their contribution to Eskom plant EAF

& efficiency

28

29

Renewable Energy makes a significant contribution to the electricity

price


electricity price

30

The tariff structures may have been

appropriate for a single player

environment Generation Customer

1

Demand

Load Losses

Network CapacityAuxiliary

Services

Admin &

Subsidy

Energy

EnergyCapacity

Network Capacity

2

2

2

2

1

3

3

Fixed cost

(R/kW/A)

Variable

cost (R/kWh)

Network Capacity

Auxiliary Services

Admin & Subsidy

Energy

Energy

Capacity

Both fix and variable cost

lumped into a single, volumetric

energy charge

~ 80%

3

30

Source: Eskom

31

1.0380% R/kWh

20%0.26

R/kWh

R/kWhR/kWh1.29

Cap

acit

yEn

ergy

50%

50%

1.29

Ancillary

Network Capacity

Admin & Subsidies

Fixed Cost

Variable CostEn

ergy

Non-

discretionary

sunk / fixed /

contractually

committed /

unavoidable cost

> 50%

Partly

discretionary

cost < 50%

Source: Eskom

The current tariff structures are clearly

way out of date

Tariff

Structures

The key objective is to achieve cost reflective tariffs

Fuel type

Average

fuel used Unit

Unit price

(Rand/unit)

Fuel cost

(Rand)

Deviation

from LPG as

%

Paraffin 0.037 kg 11.05 0.41 229%

LPG 0.023 kg 7.83 0.18 100%

Electricity 0.438 kWh 1.2 0.526 292%

Electricity* 0.438 kWh 3.5 1.533 851%

* based on real cost of electricity generated for thermal purposes

Fuel cost to heat 2 litres of water in an open aluminium pan

Thermal demand should not be met by

grid-based solutions

32

This load will shift from grid anyway when the price of electricity is high enough,

having done untold damage! Why not shift now?

33

Estimation of medium to high income household electricity demand

ApplianceNo. of units

in household

Rating per

unit (W)

kWh per

month

consumed Monthly %

Cost per

month @

R1.20 per

kWh

Lighting 6 60 54 6% R 65

Cooking 1 5000 300 36% R 360

Space heating 2 3000 120 14% R 144

Water heating 1 1500 135 16% R 162

Washing machine 1 512 10.24 1% R 12

Washing dryer 1 2700 54 6% R 65

Air conditioning 0 1900 0 0% R 0

Fridge 1 150 22.5 3% R 27

Ironing 1 1000 16 2% R 19

Computers 2 65 19.5 2% R 23

TV 2 150 27 3% R 32

Pool 1 1300 78 9% R 94

Electric fence 1 10 7.2 1% R 9

Total electricity consumption 843.44 100% R 1 012

Estimation of medium to high income household electricity demand

Appliance

No. of units

in household

Rating per

unit (W)

kWh per

month

consumed Monthly %

Cost per

month @

R1.20 per

kWh

Lighting 6 60 54 6% R 65

Cooking 0 5000 0 0% R 0

Space heating 0 3000 0 0% R 0

Water heating 0 1500 0 0% R 0

Washing machine 1 512 10.24 1% R 12

Washing dryer 1 2700 54 6% R 65

Air conditioning 0 1900 0 0% R 0

Fridge 1 150 22.5 3% R 27

Ironing 1 1000 16 2% R 19

Computers 2 65 19.5 2% R 23

TV 2 150 27 3% R 32

Pool 1 1300 78 9% R 94

Electric fence 1 10 7.2 1% R 9

Total electricity consumption 288.44 34% R 346

The potential savings in electricity cost for a typical middle income household for

migrating all thermal applications to gas is 66%

SA does not have an electricity

challenge, we have an energy challenge

33

34

Base load issues & possible solutions (Load pattern A)

– 24 x 7 Steady state demand

– Cost to serve R0.30 to R0.50 per kWh

Day load issues & solutions (Load pattern B

– Cost to serve R1.25 - R4.00 per kWh

Peak power issues & solutions (Load pattern C)

– Flexibility & quick start up fundamental

– Cost to serve R4 per kWh

Peak

Mid-Merit

Base-Load

Load B

Load C

Load A

06h00 12h00 18h00 24h00

Appropriate solutions for appropriate

energy services

-

3

35

Use of alternative and renewable

energy sources

(8 000MW load shifted)

Alternative and innovative

funding options for new

electricity generation capacity

Shifting the thermal load to gas

(6 000MW load shifted)

New generation capacity

“Consumer own power” “Thermal load”

2

3

1

Appropriate energy solutions for

appropriate energy challenges

Peak

Mid-Merit

Base-Load

06h00 12h00 18h00

24h00

35

Energy demand

sectors

Energy supply

& resources

Infrastructure

Resources

Planning

Macro economy

Choice

optimisation

&

Integration

Price

Availability

Volume

Households

Industry

Commerce

Transport

Coal

Gas

Uranium

Water

Solar

Energy crops

Other REs

Refineries

Power stations

Appliances

Machinery

Alternative uses of

energy resources

Tradables

Price impacts on

supply

Price impacts on

demand

Goods &

Services

Price

Availability

Volume

Unfortunately energy conversation has

been reduced to a “supply infrastructure”

conversation

36

37

Inefficiencies are hidden in averages

38

We need to determine the appropriate

fleet for our energy needs and utilise our

existing fleet optimally

• Baseload should be supplied with

baseload type power plants

• Mid-merit load should be supplied

through appropriate mid merit plants

• Peaking and ad hoc loads should

be met by associated energy

technologies

• The fact that a service can be

provided by a particular inappropriate

technology does not mean that it

should

• Use of an incorrect technology will

invariably result in very high

equipment failure

• It doesn’t mean that increased

maintenance will be a cure for

incorrect use equipment

Low and deteriorating EAF of our fleet

is because of how its treated

39Source: Eskom

Recent low Eskom fleet performance is

linked to demand profile & plant treatment

40

41

THANK YOU

Website: www.nersa.org.za

Tel: 012 401 4600

Fax: 012 401 4700

Email: [email protected]

@NERSAZA

@NERSA_ZA

41

mailto:[email protected]

conversations with the media on the electricity industry...

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