coss tariff review obserations

7/29/2019 CoSS Tariff Review Obserations

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ZERA Cost of Service Study (CoSS) for

Zimbabwe Electricity Supply Industry (ESI)

Stakeholder Workshop, Harare, 15 February 2013

Cost of Supply Study Tariff Review


2/25

Tariff Review Presentation Overview

Context & Key Tariff Design Principles

Tariff Structure Review

Regional Tariff Comparison

Questions

15 February 2013 2


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Context and Tariff Design Principles


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Key Tariff Design Principles

15 February 2013 4

Expectations Tariff Objectives Description

Customer 1. AffordableLeast cost options (price should exclude

inefficiencies)

2. Non discriminatoryTariffs should be applicable to all customers

on an equal and fair basis

3. Predictable & StableCustomers should be kept informed and real

price adjustments should be gradual

4. TransparentEasy to read and apply, and contains no

hidden costs

Utility 5. Cost Reflective

Cover the costs of the business plus a

return (profit) component

6. Encourage efficient useAppropriate price signals that will stimulate

efficient use of electricity

7. Implementation costImplementation and transaction costs

should be low

Government 8. Social SupportTariff levels and structures should

accommodate social programmes

9. Self sufficiency in

generation capacity

Expansion through development of own

resources

10. SOEs to be self funding

ESI should not rely on Government for

funding

11. Shareholder expectations Appropriate taxation & dividends

Tariff design andtariff determinationmust strike adelicate balance

between the (oftenconflicting)requirements ofdifferent

stakeholders ZERA has the

tough task offinding the

balance andmanaging theinevitable tensionbetweencustomers,

ZPC/ZETDC andGovernment


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Tariff Code Pricing Objectives

Electricity pricing levels to recover the approvedrevenue requirements of service providers

Predictable prices over time to customers

Pricing signals to reflect the cost structure of theservice provided

Optimal asset utilisation by licensed entities

Fair and reasonable return to licensees

Incentives for the continued improvement of thetechnical and economic efficiency of licensees

Customers to be protected and informed of thecost of consumption

Phasing out or reducing of cross-subsidies

15 February 2013 5

Robust tariff methodologyin place

COSS & LRMC

Tariff structure review

Non-productive assetsreview (& removal)

WACC? - To secureinvestment funding

To be improved(continuously)

Cost-reflectivity promotes

economic efficiency


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Tariff Structure Review

15 February 2013 6


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Tariff Structure - Overview

Tariff structuring is a vital aspect of pursuing cost-reflectivity and drivingeconomic efficiency

Seeks to balance true cost-reflectivity (i.e. specific tariff for each individualcustomer) with simplicity (i.e. easy to understand and administer)

4 key aspects of tariff structuring

a) Functional split to match market structure (i.e. Generation, Transmission, Distribution,Supply)

b) Cost components to be recovered (fixed and variable)

c) Tariff/charge Components (linked to cost drivers)

d) Basis for charge differentiation (to promote efficiency)

Trend away from structuring tariffs according to customer type (andinstead differentiate by voltage level and/or distance)

Tariff structures need to additionally take account of metering and billingtechnology and capability

15 February 2013 7


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Tariff Structure Charge Components

Typical Electr icity Charge Components

Fixed (monthly) charges (e.g. Basic Charge, Fixed Charge, Ampere

Charge, Service and Administration Charge)

Capacity/demand charges (e.g. kW or kVA demand charges)

Energy charges (e.g. kWh charges) Connection charges

15 February 2013 8


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Tariff Structure ReviewTypical Tariff Structure breakdown

15 February 2013 9

Tarif f Elements Fixed MonthlyCharge

CapacityCharge

EnergyCharge*

In place ?

Energy

No TOU TOU 1 TOU 2 TOU 3

Network

Voltage 1 (132kV) Voltage 2 (88kV) Voltage 3 (66kV)

Voltage 4 (33kV) Voltage 5 (11kV) Voltage 6 (Low)

Retail/Supply

Prepayment Small Customer MediumCustomer Large Customer

Levies/surcharges

e.g. Rural Subsidy * Energy Charges at Network level relate to recovering the cost o f losses


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Tariff Structure Functional Split

15 February 2013 10

BulkSupply

(SingleBuyer)

Tx

network

NGSC Transmission DISCO (regions)

Hwange

Kariba(South)

SmallThermals

ExportsImports

CaptiveCustomers

IPPs

ZPC

Dxnetwork

DxRetail

System &

MarketOper.

PPA

Dx

network

DxRetail

Dx

network

DxRetail

Dxnetwork

DxRetail

Dxnetwork

DxRetail

Eligible

Customers

C

IPPsIPPs

PPA

A

Connection & TUOSC

B

D

PSA

Tariffs & Charges

A - ZPC PPA Charges

B - Bulk Supply charges (wholesale energy)

C - Connection & Transmission Use Of System charges (TUOS) including C* for imports and exports

D - Distribution Tariffs (incorporating Distribution Use Of System (DUOS) and Supply charges)

C*

Standard Bulk Supply or

Special Pricing Agreement


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Tariff Structure ZPC Generation Charge

Components and differentiation

PPA between ZPC and ZETDC

Capacity and Energy Charges setout individually per power station

Manages risk for ZPC, whileestablishing a basis forperformance efficiencyimprovements

Already in place to be refined Not renewed for 2013 (Amendment

2 was valid to 31/12/12)

PPA to be amended to vestbetween ZPC and Single Buyer(ZEDC)

PPA rates to be adjusted based onCoSS and tariff determination

15 February 2013 11

A ZPC PPA Charges

Power Station Capacity rateUS$/kW/month

Energy RateUSc/kWh

Hwange

Kariba

Harare

Bulawayo

Munyati

Payable onAvailable Monthly

Capacity

Payable onMetered Energy

Generation ChargesTariff Component Units Included? Differentiation

Geographic Voltage Time-of-Use

Capacity/Demand USD/kW/month Energy USc/kWh


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Tariff Structure Bulk Supply

Charge Components and differentiation

Energy only charges for Bulk Supply(i.e. no capacity/demand charges)

Unlike network capacity, generationcapacity can easily be diverted for

use by other customers - reducesthe chance of under-utilised (orstranded) capacity

Customer peak and network peak

may occur at different times hencedemand charge may not be costreflective.

Generation demand charges willcause unreasonably high tariffs for

low load factor customers

Not presently in place - to beestablished between Single Buyer andDistributors (transparent transfer pricing

arrangement)

15 February 2013 12

B


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Tariff Structure NGSC (Transmission) Charges

Charge Components and Differentiation

15 February 2013 13

C

Connection Charge Approach

Approach Advantages Disadvantages

No connection charge Simple and benefits

local generators whowish to export

Not cost reflective

Shallow connection charge Assign easilyidentifiable part ofconnection capex tocustomer

Not fully costreflective

Deep Connection charge More cost ref lective and

stronger locational pricesignal

Complex to

determine & dif ficultto justify

Use of System and Losses Charges

Explicit TUOS charges in place?Published tariff schedule needed

Facilitates revenue recovery by NGSCunder proposed new industry structure

Transmission losses need to beunbundled

Proper transmission charges are vital tosupport bilateral transactions betweenIPPs and eligible/ contestable customers

Connection Charges

Connection Charge Approach to beformalised


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Tariff Structure ZEDC Network and Supply

Charge Components and differentiation

15 February 2013 14

Distribution Network Differentiation

Charge Charge Basis(Units)Geographic

(region)Voltage Time-of-Use

DUOS Capacity Charges Capacity(USD/kVA/mo)

DUOS Energy Charges (NetworkLosses)

Energy

(USc/kWh)

Network Connection Charges Once-off(USD/event)

Customerspecific Customerspecific Customerspecific

D Use of System and Losses Charges

Demand charges have resulted inexcessive customer bills due to loadshedding reduced by 20% by ZERAfrom 1 J an 2013

Fixed charges currently set to zero reinstatement to be considered as partof CoSS to ensure greater cost-reflectivity

Distribution losses need to beunbundled

Connection Charges

Connection Charge Approach to beformalised


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Tariff Structure Summary

The tariff structure in place within ZETDC is largely in line with bestpractice, needing only some minor changes

Need for separate published transmission charges

Demand charges need to be unbundled for transmission and distributionrespectively

Network Losses need to be unbundled for transmission and distributionrespectively

Network Losses need to be differentiated by voltage level

It would be prudent to introduce a Reliability Services Charge to recoverthe costs incurred by the NGSC (System Operator) for ancillary services

14 February 2013 15


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Tariff structure under current reality

Load shedding (supply availability) versus Demand Charge

Temporary deviation from cost reflective tariff structure by reducing demandcharges and by increasing energy charges

Timeframe needs careful consideration (when is normal supply restored?)with agreed review dates

Load shedding (supply availability) versus Fixed Charge

Temporary deviation from cost reflective tariff structure by reducing fixedcharges and by increasing energy charges

Timeframe needs careful consideration (when is normal supply restored?)with agreed review dates

Potential implications (of allowing temporary deviation) Higher revenue volatility need for a reconciliation approach to deal with

variations

Non cost reflective tariff structure undermines economic signals and efficiency

Deterioration of power factors

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Special tariff arrangements

Commodity-linked pricing agreements Aims to promote economic development but transfers commodity risk to power

sector (not sustainable in long term)

Existing agreements need to be honoured (although renegotiation may be anoption?)

No new agreements should be entertained

Prepayment by mining customers

Term loans by customers to ZETDC (to pay trade debt)

Principal and interest payments offset against electricity bill

Are financing arrangements accounted for so as not to distort collections?

Power Supply Security Scheme

Ring-fenced reliable supply at premium tariff

Short-term solution only should be phased out (risk of discrimination)

14 February 2013 17


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Considerations

The Consultants initial review points to aspects pulling existing tariffs indifferent directions

WACC (if applied correctly) will in particular have a negative impact whileapproach to Generation asset valuation will point in a different direction

Addressing current concerns about Demand and Fixed charges being unfairwill be important but must clearly be understood as temporary measures

Customer willingness to pay for significantly underuti lised assets and

poor collection / revenue management impacts ESI financial viability inthe short term

Some restructuring process noise may occur while Governments ESIrestructuring policy and implementation plans are being finalised

Handling of legacy debt must be clarified

Treatment of Single Buyer needs clarification, including framework to allowBilateral Trading arrangements between willing buyers willing sellers

New framework is needed to allow Imports to play a real role in medium term

14 February 2013 18


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Regional Tariff Level Comparison

15 February 2013 19


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Regional Tariff Level ComparisonResidential Customers

ZETDC tariffs for residential customers appear relatively well aligned withregional peers (excluding Namibia and Zambia)

15 February 2013 20

Sample ResidentialCustomer

230V 14 kVA supply

5% Load Factor(~500 kWh per month)

9.9

9.8

10.6

10.1

17.0

7.4

5.0 10.0 15.0 20.0

RSA(CityPower)

RSA(Eskom)

Zimbabwe(ZETDC)

Mozambique(EDM)

Namibia(Windhoek)

Zambia(ZESCO)

USc/kWh

Country/Utility

SampleCustomerEffectiveElectricityCosts2013

Note:- Eskom has requested 16%

p.a. increase for next 5

years- NamPower has requested

18% p.a. increase for next5 years


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Regional Tariff Level ComparisonCommercial Customers

ZETDC tariffs are average for regional commercial customer tariffs (notingwide spreads, indicating different degree of cross-subsidisation)

15 February 2013 21

Sample CommercialCustomer

2.2 kV 100 kVA supply

40% Load Factor(~30 MWh per month)





17.2

9.3

12.7

12.6

15.4

5.2

5.0 10.0 15.0 20.0

RSA(CityPower)

RSA(Eskom)

Zimbabwe(ZETDC)

Mozambique(EDM)

Namibia(Windhoek)

Zambia(ZESCO)

USc/kWh

Country/Utilit

y



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Regional Tariff Level ComparisonLarge (Industrial) Customers

For Industrial Customers, ZETDC tariffs are slightly above average for the

region (and more so in terms of special arrangements for large customers)

15 February 2013 22

Sample Industrial Customer

11kV 10 MVA supply

80% Load Factor

(~6,000 MWh per month)





8.8

6.4

9.3

5.6

13.2

4.4

2.0 4.0 6.0 8.0 10.0 12.0 14.0

RSA(CityPower)

RSA(Eskom)

Zimbabwe(ZETDC)

Mozambique(EDM)

Namibia(Windhoek)

Zambia(ZESCO)

USc/kWh

Country/Utility



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Conclusion Tariff Principles

Revisited


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Tariff Principles revisited

15 February 2013 24

Expectations Tariff Objectives Addressed?

Customer 1. AffordableUndermined by poor supply

security/availability

2. Non discriminatory SPAs undermine this

3. Predictable & Stable 4. Transparent

Partly only(no prescriptive tariff structure)

Utility 5. Cost Reflective Fixed and Demand Charges

6. Encourage efficient use To be confirmed

7. Implementation cost Government 8. Social Support

9. Self suff iciency in generationcapacity

Barriers to securing investmentcapital

10. SOEs to be self funding Tariffs to reflect CoS

11. Shareholder expectations Need clarification


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Thank You!

coss tariff review obserations

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