cost of service a tariff overview
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Cost of Service A Tariff Overview. A presentation by Eskom April 2010. Purpose of the presentation. Provide a background on the Eskom standard tariffs Background and context of industry Strategic pricing direction & tariff design principles Steps to determine tariffs - PowerPoint PPT PresentationTRANSCRIPT
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Cost of ServiceA Tariff Overview
A presentation by EskomApril 2010
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Purpose of the presentation
Provide a background on the Eskom standard tariffs
Background and context of industry
Strategic pricing direction & tariff design principles
Steps to determine tariffs
Cross-subsidies in the Eskom tariffs
Eskom standard tariff options
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Background and Context
Electricity GenerationElectricity Generation
Transmission Transmission Lines Lines
(400/275 kV)
Distribution LinesDistribution Lines
ResidentialResidential
Reticulation HV LineReticulation HV Line(11 & 22kV)(11 & 22kV)
ReticulationReticulationLV LineLV Line
(380/220V)(380/220V)
Distribution SubstationDistribution Substation
Transmission SubstationTransmission Substation
The Electricity Supply Chain
POWER STATIONSPOWER STATIONS
Industry, Mining & Large Metros
Commercial/Small industry/Farming/Small Munics
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The cost of electricity
R. Electricity generation Assets, auxiliary consumption, returns, opex and technical losses +R. Transmission at high voltages Assets, ancillary services, lines, returns, opex and technical losses+R. Distribution to supplies at medium to lower voltages Assets, lines, returns, opex and technical losses +R. Administration and billing (service)R. NERSA approved revenue for recovery from tariffs
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The NERSA allowed average electricity costs 2009/10 break-down
24.3c/kWh Generation
Transmission networks0.7c/kWh
Distribution networks5.3c/kWh
Environmental levy1.8c/kWh
Service0.4c/kWh
0.1c/kWhConnection charges
33c/kWh Total average
Notes: • Update to 2010/11 once the NERSA allowed revenue splits by division are
obtained.• Levy at 1.8c/kWh as this is annual average. Levy only effective as of 1 July
i.e. 9 months of financial year.
Total41.6c/kWh in
2010/11
75%
6%
2%
16%
1%
0.3%
100%
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Electricity consumption Percentage of sales in kilowatt-hours by consumers
served
Of the total Eskom electricity sales, Residential
consumers represent 5%.
Commercial4%
Agriculture3%
Traction2%
Residential5%
Mining17%
Industrial24%
Public Lighting0.1%
Directly supplied by
Eskom55%
To Municipalities
45%
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Strategic Pricing Direction &
Tariff Design Principles
Objectives of pricing
Cost reflectiveness vs Affordability Subsidies
Appropriate Structure vs Simplicity Metering costs Customer Comprehension
Cost based signal vs. Elasticity of Demand
These objectives are in conflict and it requires an optimisation process to balance the objectives
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Strategic pricing direction for tariff structures
OBJECTIVES Economic efficiency and sustainability: tariffs will contain cost-reflective signals that promote
economic efficiency and sustainability.
Revenue recovery: tariff structures will not expose Eskom to unacceptable revenue risk and provide the means for adequate revenue recovery to ensure reliability of supply.
Fairness and equity: tariffs will be designed to be as non-discriminatory as possible by taking into account the needs of all customers on a fair and equitable basis.
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How does Eskom design tariffs?
Based on the cost of supply
Design the structures to reflect cost drivers
Includes approved cross-subsidies
Has to submit changes to NERSA for approval
Has to comply with the requirements of the MFMA to make changes to municipal tariffs
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Electricity pricing Electricity pricing
Structures of individual tariffs
Tariff levels relative to each other
Standard tariffs
Standard tariffs framework
Revenue Requirement
Corporate FinanceCorporate Finance Multi-year Price Determination (MYPD)
Average price levels
Local NPAs
Cross-Subsidies Simplicity
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Cost of supply studyMethodology
Methodology that allocates the approved revenue requirement (costs) into different and unbundled cost categories.
Use of the most appropriate cost driver for a particular cost i.e. R/customer/month or R/customer/day charge - typically for customer service and administration costs; R/kVA - typically for network costs; R/kW - typically for network or some energy related costs; Energy loss factors for energy loss costs.
Costs segmented into appropriate categories and allocated to customers in that category.
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Cost of supply
Costs below derived from the NERSA approved revenue requirement including allowed return on assets (may not therefore reflect true cost)
Cost of supply impacted by ……..
Load profile and voltage
Transmission zoneand capacity
Voltage and capacity
Size of the customer
• Energy cost
• Cost of generating electricity, including the costs of the power station, the fuel and water
• This will include Eskom generation and any energy purchased by Eskom
• Transmission costs• Cost of Eskom Transmission Division, including costs of
network > 132 kV including the costs of capital, operations, maintenance, refurbishment and ancillary services
• Distribution costs• Cost of Eskom Distribution division split between
network and retail (customer service and administration) costs.
• The network costs include capital, operations, maintenance and refurbishment.
• Retail costs cover the cost of metering, billing, administration and customer services.
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What is cost reflective tariffs?
Each customer class pays a tariff that is closely aligned with the cost of providing supply to that particular customer class.
(network capital & support)
• Generation• Transmission• Distribution• Losses
Tariff structure
Ran
dsp
er
mo
nth
Consumption kWh per month
Supply costsSupply costs
Fixed costs
Variable costs
In the ideal tariff the tariff structure should follow the cost curvecost curve closely.
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Designing tariffs
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Tariff structures in electricityA cost reflective tariff structure to recover electricity costs will typically contain:
A signal to reflect time and seasonal variance of the cost of energy.
The network costs.
Differentiation to take into account: The voltage of the supply.
The electrical (technical) losses.
Reactive energy support.
The density of the network to which customers are connected.
The load factor/profile.
Retail charges that reflect the size of the supply and the services being provided to the customer.
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Cross-subsidies in the Eskom tariffs
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Not all tariffs can be cost reflective!
Once a cost reflective tariff is calculated, tariff simplicity and affordability considerations are to be taken into account for the design of the final tariff to be applied
Subsidies in electricity tariffs affect the tariff applied.
Have inter-tariff subsidies where one tariff subsidises another tariff
Based on socio-economic considerations driven by Government
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Tariffs should recover Total Cost to Supply including Regulated Return
To
tal
Esk
om
Tar
iff
Inco
me
Rev
enu
e
Rev
enu
e
Rev
enu
e
Rev
enu
e
Rev
enu
e
Rev
enu
e
To
tal
Esk
om
Co
st t
o S
up
ply
(All
ow
ed R
even
ue)
Tariff 1 Tariff 2 Tariff 3 Tariff 4 Tariff 5 Tariff x
Co
st
Co
st
Co
st
Co
st Co
st
Co
st
Su
bsi
dy
Lev
y
Lev
y
Su
bs
Total Eskom Tariff Income = Total Eskom Cost to Supply
Individual Tariff Income ≠ Individual Tariff Costbut
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2009/10 Electricity price subsidies Per sector averages (irrespective of tariff used)
-40
-20
-
20
40
60
80
100
Cost c/kWh 84 28 38 26 27 82 35 63 33
Price c/kWh 63 31 39 29 30 61 38 42 33
Subsidy received c/kWh -21 -21 -22
Subsidy contribution c/kWh 2 0 3 3 3
Agriculture Municipalities Commercial Industrial Mining Residential TractionPublic
LightingGrand Total
1. Industrial and Mining supplies contribute 3c/kWh subsidy to residential
consumers.
2. Residential, Agricultural consumers directly supplied by Eskom receive
21c/kWh discount in the tariffs i.e. R3billion for 2009/10 mainly paid for by
industrial and mining consumers.
3. Larger Municipalities contribute 2c/kWh to smaller and rural municipalities
through their Eskom tariffs.
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Cross-subsidies in the Non-Local Authority tariffs, 2010/11.
Two types of NERSA approved subsidies i.e. network subsidy and price increase subsidy:
• Network subsidies paid for by the local authority and non-local authority tariffs.
• Price increase subsidy i.e. past lower increases residential tariffs and from implementing the inclining block rates.
26.141.3
28.3
-40
-30
-20
-10
0
10
20
30
40
50
Price increase subsidy 1.4 0 -15.4
Network subsidy 3.1 -15.6 -15
Tariff charges 26.1 41.3 28.3
Urban tariffs Rural Tariffs Residential tariffs
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Eskom Standard tariff options
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Eskom tariffs
• The Eskom tariffs are cost reflective; the tariff charges are calculated to demonstrate the level and how costs are incurred in delivering electricity to end-customers.
• The level of the tariff charges are determined by the NERSA as they only recover the NERSA approved costs.
• The price paid by consumers is determined by:– the amount of electricity consumed (per kilowatt-hour);– the cost of transporting it (network lines and transformation assets); and – services to avail the electricity to the consumer (customer services). – Therefore, the sector in which a consumer belongs is not used to determine the
price paid for electricity.
• The NERSA can determine a lower price for tariffs used by particular sectors e.g. lower increase to Homelight tariffs (residential) in 2008/9 and 2009/10.
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Urban tariff Urban tariff categories:categories:
Eskom’s standard tariffs
Rural tariff Rural tariff categories:categories:
Residential tariff categories: Residential tariff categories:
Urban
Rural
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NERSA determined inclining block rate tariff
Meet diverse customer needs.
Cost-Reflectiveness
Complexity vs. Metering costs
Different objectives for different customer groups
Pricing signal to change behaviour.
Allowing for certain customer categories to be subsidised
Optimisation/ Balance
Why so many tariffs?
What balance do we try to achieve ? International precedents Cost reflectiveness Fairness to customers Implementable and sustainable
Complexity Administrative burden
Pricing signal for efficiency Customer response
Affordability Stimulate growth Competitiveness with other energies
Revenue impact to utility Consistency across tariffs/customers
Selection of Tariffs
No option is right or wrong Each has its own implications, advantages & disadvantages
Final selection Judgement Best compromise
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Tariff options structures
RuraflexTOU1.3%
Minif lexTOU1.4%
Transflex 2TOU0.3%
Transflex 1TOU1.2%
NightsaveOff-peak rates
8.1%Nightsave RuralOff-peak rates
2%
Inclining block tarif fsSingle energy rate
4.5%
PublicliteSingle energy rate
0.1%
LandrateSingle energyrate
2.3%
BusinessrateSingle energy rate
0.5%
MegaflexTOU78%
Most of the electricity sales
from tariffs on the Time-of-use (TOU)
structures
International Price Comparison of Industrial Tariffs (Indicative)
Source : Recent NUS Survey Analysis assumes R/$ exchange rate remains constant and electricity prices of other countries do not increase in real terms Despite the steep tariff adjustments South Africa will remain competitive.
0
5
10
15
20
25
30
So
uth
Afr
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Fra
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Ca
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No
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Ko
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US
A
Ne
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RS
A
20
12
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Gre
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Ch
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Ma
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Ind
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Me
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Sw
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Fin
lan
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De
nm
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Tu
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Ge
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Sin
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Sp
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Bra
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Po
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Jap
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UK
Cze
ch R
ep
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Ire
lan
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Hu
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Ita
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US
cen
ts/ k
Wh
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The End