Electricity Pricing Policy and Impact of Multi-Year Price Determination: briefing by Department of Energy and National Energy Regulator of South Africa (NERSA)

Energy

31 July 2012
Chairperson: Mr KA Moloto (ANC)
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Meeting Summary

The Department of Energy spoke on the background, the electricity pricing policy mandate, the electricity pricing policy principles, funding the Integrated Resource Plan, protecting the poor and the challenges and status of the Multi-Year Price Determination. The Department explained that addressing affordability was a major issue during periods of high price increase. The measures which had been introduced to protect the poor included facilitating access to electricity through government subsidized electrification, free basic electricity to the indigent, free connections provided to Eskom’s low consumption residential customers, and lower price increases applied to low consumption domestic customers via the inclining block tariff which was being implemented by municipalities..

After providing details on the rationale and concept of the Multi-Year Price Determination, the National Energy Regulator of South Africa explained what had happened to price increases for MYPD 1 and 2. MYPD3 was still with National Treasury and the South African Local Government Association and finalisation of the application would be made known in February 2013. Consultation with the public would begin at the end of August 2012. The current Electricity Pricing Policy stands for price increases that promote economic growth. There is going to be public consultation on both the application and changes in the rules.

Members asked if there was a pricing policy for MYPD3 and what was the possibility of an inflation related pricing policy? What was going to be the effect of the re-evaluation of the assets of Eskom? How NERSA made its forecasts? Were they based on assumptions or calculations of GDP numbers? Was the re-opening of the MYPD done at the request of Eskom or was it the initiative of NERSA?

Meeting report

Department of Energy (DoE) briefing
Mr Matthews Bantsijang, DoE Head: Electricity Policy, looked at the background, the electricity pricing policy mandate and principles, funding the Integrated Resource Plan, protecting the poor and the challenges and status of the Multi-Year Price Determination (MYPD).

The regulation of electricity prices started after the National Electricity Regulator was established in 1995. In 2005, there was the move to the MYPD for Eskom covering the period April 2006 to March 2007. The MYPD allowed for price stability and provided for massive capital investments in new generation capacity. In February 2006, the first MYPD price review was decided on by NERSA granting Eskom a price increase. The DoE published the South African Electricity Pricing Policy (EPP) in December 2008 and in May 2009, Eskom applied for a 34% price increase. Despite the large nominal increase in Eskom’s prices, in real terms, it was still below the price level experience during the generation expansion in the 1970s.

On the EPP mandate, the structuring of tariffs was guided by the Electricity Regulation Act (ERA) of 2006 and the EPP of the DoE. Various regulatory methodologies were used by the regulator to ensure that the allowed revenues, charges and tariffs complied with the requirements of the ERA. The approved 2008 EEP principles provided guidelines and were being implemented by NERSA. The principles included:
• Improved social equity by addressing needs of the poor;
• Enhanced efficiency and competitiveness to provide low cost and high quality inputs to all sectors;
• Environmentally sustainable short and long term usage of natural resources;
• Open non-discriminatory access to the transmission system;
• Private sector participation in the industry;
• Universal access to electricity;
• Investment in infrastructure to ensure sustainability;
• Poverty net for the indigent; and
• More renewable energy generation in the energy mix.

Mr Bantsijang said that the funding of the Integrated Resource Plan (IRP) 2010 – 2030 was the biggest driver of tariffs. He outlined the IRP programme in terms of committed capacity, the affordability of electricity prices and alternative price paths. The main issues from the current regulatory model were: the electricity price path could be reduced (with a lower weighted average cost of capital) and the trade-off between placing additional funding burden on electricity consumers or on tax-payers (through government support of Eskom and the electricity industry).

In protecting the poor, Mr Bantsijang said that addressing affordability was a major issue during periods of high price increase. The measures which had been introduced to protect the poor included: facilitating access to electricity through government subsidized electrification, free basic electricity to the indigent, free connections provided to Eskom’s low consumption residential customers, and lower price increases applied to low consumption domestic customers via the inclining block tariff which was being implemented by municipalities. In terms of the EPP, qualifying customers were to be subsidized through the application of a life line tariff. This was a single energy rate with no fixed charge and limited in capacity to 20 Amps with a nominal connection fee. The further options that could be implemented included increasing the free basic electricity volume, making low consumption domestic tariffs VAT free and promoting energy efficient housing. The principles of cost of supply and cross subsidies needed further policy refinement for equitable tariff structures and tariff levels.

The DoE constantly reviewed policy when there was a necessity to incorporate new developments and poverty alleviation was an important challenge for the country. The links between poverty and energy were clear, and the EPP introduced mitigation for the protection and the uplifting of the poor.

National Energy Regulator of South Africa (NERSA) briefing
Mr Thembani Bukula, Regulator Member – Electricity Regulation, said the rationale for the MYPD was that the annual price determination was a cumbersome process that did not enable efficiency extraction and there was no forward view for the planning process. This created high uncertainty levels for business and investors. There was also the need for the replacement and refurbishing of generation, transmission and distribution infrastructure. Additional capacity was therefore required. In terms of the funding of the additional capacity, there was the need to strengthen the balance sheet to enable borrowing.

On the concept of the MYPD, the determination of revenue required an average price from the projected costs and the anticipated sales. This was for a three-year period, targeting five to seven years when matured. The MYPD ran for the determined period unless the thresholds and limits set for reviewing were breached. This was also the concept that applied to the MYPD1. Other MYPD1 factors included the Electricity Regulation Act, additional capacity allocation, funding of additional capacity and claw back.

The changes to the MYPD1 were that in April 2007, Eskom applied for a revision of the 5.9% increase to 18.7% in 2007/08. NERSA approved an increase of 14.2% in December 2007. In March 2007, Eskom further applied for a revision of the 14.2% average increase to 60% increase. In June 2008, NERSA approved a 27.5% average increase.

The MYPD2 started with an annual 45% average increase application for the period April 2010 to March 2013. After consultation with National Treasury and the South African Local Government Association (SALGA), the application was revised to an annual average increase of 35% over the three-year period. The MYPD2 drivers included capital expenditure of R302 billion, primary energy costs, asset re-evaluation, the inclining block tariff and cost reflective tariffs in five years.

The MYPD3 application was still with National Treasury and SALGA. The EPP phased re-evaluation of assets, the inclining block tariffs as determined, cost reflectivity in 5 years and price increases that promote economic growth. There were going to be public consultations on both the application and the changes in the rules.

Discussion
Mr D Ross (DA) asked if there was a pricing policy for MYPD3 and what was happening with the pricing policy. Was there a possibility of an inflation related pricing policy? What was going to be the effect of the re-evaluation of the assets of Eskom? What was the Eskom methodology for its operation?

Mr Bukula replied that the objective was that price increases were to be inflation related. However, the pricing policy was regulated by the ERA. It was important to link the method of operation to the objective and goal. An asset evaluation method was meant to enable Eskom to recover the costs and funds to enable it continue with its build programme. What matters was the objective and goal.

Mr Ross said that it was good that Eskom had international funding bonds and alternative measures for funding. This was good as it reduced the burden on the consumer. Was there any further progress in terms of alternative funding models?

Mr Bukula replied that the operation of NERSA and the other related institutions were regulated by statutes and the law regulated the use of alternative funding models.

Mr L Greyling (ID) asked what NERSA was doing in terms of containing or having oversight of the escalating cost of new generation capacity. Did NERSA get a progress report from Eskom on the cost of the building of the Medupi and Kusile power stations. And what could NERSA do to ensure that the actual costing was kept below what the initial costing had indicated.

Mr Bukula replied that NERSA got reports Eskom and Eskom had to prove to NERSA that they had been efficient in their operations. The ERA also regulated the process. It was true that the costs had escalated but where Eskom was inefficient, the cost was not paid for by the consumer. These costs were under control. There were monthly and quarterly reports and explanations were always submitted.

Mr S Radebe (ANC) asked for alternative measures which could be taken from the scenario of the trade-off between placing additional funding burden on electricity consumers or taxpayers. What were the assumptions based on the current status of the economy with regards to future electricity supplies.

Mr Bantsijang replied that the real cost of the price of electricity could also impact in terms of investments in the sector. Keeping the electricity price very low could lead to a problem of funding and getting investors in the future. It was important to consider if the country wanted to move to the “real cost of electricity” as it was still low in South Africa. There was the need to make it a bit higher to ensure funding and sustainability. 

Mr Bukula said that the process of forecasting supply and sales was done by Eskom and NERSA with the interest of the consumer in mind. This was done by modeling and other sophisticated methods with the use of statistics.

The Acting Chairperson asked how NERSA made its forecasts. Were they based on assumptions or calculation of GDP numbers? Was the re-opening of the MYPD done at the request of Eskom or was it the initiative of NERSA?

Mr Bukula replied, on the reopening of the MYPD, the system and the MYPD had its own rule of how it was reopened. However, the law allowed Eskom to make an application any time for the re-opening. The application, approval and implementation were regulated by the MYPD rules which Eskom was bound by.

The Acting Chairperson asked that when Eskom transported coal some years ago, it was responsible for the maintenance of the roads. Was Eskom compensated for the work done on the roads?

Mr Bukula replied that the process of repairing the roads was that in the first year, Eskom was going to continue repairing the roads. From the second year, Eskom was going to pay the money to National Treasury to cater for the roads.

The meeting was adjourned.


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