Electricity Distribution Industry (EDI) Electricity Distribution Industry (EDI) South Africa South Africa

Presentation to the Joint Parliamentary Portfolio Committees of ENERGY and COOPERATIVE GOVERNANCE AND

TRADITIONAL AFFAIRS

26 July 2012

Co-prepared by Dr Willie de Beer, Former COO EDI Holdings and Mr Deon Louw, Former General Manager RED ONE EDI

Holdings

presented

by

Deon Louw1

Presentation ContentPresentation Content

OverviewChallengesPrognosisOptionsConclusion

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Abbreviations UsedAbbreviations Used ADAM - Approach to Distribution Asset Management EDI - Electricity Distribution Industry ESI - Electricity Supply Industry NIRP - National Integrated Resource Plan Rbn - Billion Rand

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Current ESI StructureCurrent ESI Structure

4Metering & Billing

Currently, South Africa operates in the traditional mode of vertical integration with financial and physical flows following the same path

Municipalities

Municipalities

ES

KO

ME

SK

OM

GenerationGeneration DistributionDistribution Industry

Business

Residential

TransmissionTransmission

= Physical Energy Flow

= Financial Flow

EDIEDI

OverviewOverviewBased on EDI Holdings 2008 Report ValuesBased on EDI Holdings 2008 Report Values

The EDI is an asset intensive business

◦ Asset base replacement value ~ R260 billion

◦ Distribution overhead lines >400 000 km

◦ Distribution underground cables >210 000 km

◦ Average age of asset base ~45 yrs

Customer centric business

◦ Serving ~9.2 million customers

Large employer

◦ ~31 000 people employed in the EDI

◦ On average 26% of electricity staff are 50 and older, 62% are between 31 & 50 and 12% are under 30

◦ Average age of electricity staff in critical technical positions >50 years

◦ 35% average vacancy rate

Significant player in the economy of South Africa5

ChallengesChallenges

Despite pockets of good performance the EDI infrastructure shows that reliability and asset management needs urgent investment

Current practices in the EDI are no guarantee for business sustainability and economic growth

Evidence of significant under investment in people development, infrastructure and asset management

Deterioration of electricity service delivery in many areas in the country

Supply interruptions cost the Economy ~ R2.9bn to R 8.6bn p.a (2006)*

The EDI Holdings infrastructure assessment (2008) and the development of the Approach to Distribution Asset Management (ADAM), revealed that:

◦ The maintenance, refurbishment and strengthening backlog ~R27,4 billion (2008)

◦ The backlog is growing at a rate of ~R2.5bn per annum

Note: *Cost to the economy of unplanned system outages, based on the NIRP 2006 guidelines (NERSA, NIRP report 17January 2006)6

Maintenance, Refurbishment Maintenance, Refurbishment & Replacements& Replacements

Average Electricity Distribution Network life span is 50 years

With proper maintenance, refurbishment and replacement the remaining life of the network should be kept at an average of 25 years to generally keep expenditure even over years and at a minimum.

This means that generally 2% of the network should be replaced yearly together with appropriate maintenance and refurbishment.

Current value of 2% replacement is approx R6.5bn. We estimate a shortfall of nearly R35bn in 2011 terms Under current circumstances the average remaining life

of the network is therefore aging with another year after every two years of operation.

It was estimated that the network average age was 45years in 2008. It would therefore be 47 Years currently

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Book Value vs Network Book Value vs Network AgeAge

320288

256224

192160

12896

6432

50

50

100

150

200

250

300

350

New 5 10 15 20 25 30 35 40 45 50

Network Book Value

Current Value

Rbn

Age (Years) 8

Typical Asset Maintenance Typical Asset Maintenance CostCost

Asset Life - Years

Cos

t

Teething Problems

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Problems Facing the Problems Facing the Distribution IndustryDistribution Industry

Stop the ageing of the infrastructure

Reduce maintenance cost by pulling out of the upward curve of the bathtub asset cycle

Compounded operation cost due to:

◦ Huge tariff hike due to generation capacity increase

◦ Additional funds needed to drastically increase the replacement and refurbishment of assets

◦ Huge network expansion due to electrification at lower affordable tariffs but not balanced out with cross subsidisation of sufficient industry growth

Training of sufficient electrical staff

Financial, Maintenance and Network Support Technology vs Skills of Operational Staff

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PrognosisPrognosis

While there is a plan in place to address the generation related

challenges, there is no integrated strategy/plan in place to address the

distribution related challenges

Currently the public perceives any electricity outages as Eskom

Generation related, whereas many are related to distribution network

related failures

Current performance of the EDI-side will not be able to underpin the

projected economic growth or create sustainable jobs

Performance of the EDI-side is deteriorating at a rapid rate and service

delivery is going to become an even bigger challenge going forward

If we are serious about a sustainable solution to the electricity challenges

of South Africa; the EDI and the electricity supply industry (ESI) as a

whole, requires an integrated and holistic approach, with support; from

government, all industry players, business and citizens of this country11

OptionsOptions

To ensure amongst others the sustainability of the EDI, to support the required economic growth and create job opportunities in South Africa , it is essential that:

◦ Staff recruitment, training/development and retention be addressed

◦ Technology be leveraged to enhance service delivery and to improve amongst others customer service, revenue management & network performance

Update the ADAM plan, adopt it and roll it out as an integrated multi year plan to address the current electricity distribution infrastructure related challenges

Identify the entities and institutions with capacity to provide assistance/consolidation to bring about improvement in the areas where the biggest challenges are

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ConclusionConclusion

Visible and committed strategic leadership/sponsorship and firm decisions are required to bring about the desired change in the EDI

The support of every participant in the EDI will be required to bring about the desired change

From a technology deployment perspective it is essential to move away from the business as usual approach and pursue appropriate technology solutions and create a more intelligent grid which will improve service delivery

For an EDI infrastructure turnaround strategy ito of governance and finance, It would be advisable to consider a similar approach as what is used in respect of the national electrification program

It is essential that the infrastructure funding allocation be defined and that the investment of the money earmarked for infrastructure is correctly applied

The infrastructure investment must be monitored to ensure that the refurbishment and replacement backlog shrinks

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THANK YOUTHANK YOU

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