ESKOM’s applications for MYPD4 and MYPD3 RCA Y5

Vaal Triangle Services Forum Brits Industrial Association

The Harrismith Business Forum

Overview

• Our business associations

• Why we reject the MYPD4 application

• Our Recommendations

Who we represent

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• Nine Regional Business Associations from seven provinces

• Business and industry in metros and some smaller towns

• More than 7000 members from SMMEs to large corporations

• More than 850,000 people employed

• Business subjected to municipal tariffs:

– Municipalities are Eskom biggest customer at 41%

– ‘Municipal’ Business consumes above 25% of Eskom’s total

Why are we present as a group of Business Chambers

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• The MYPD4 application is alarming

• Chambers stand together to offer solutions to current disaster

• Chambers can add particular value at municipal level

Municipalities contribute significantly to Eskom’s death spiral:

– Unlawfully inflated tariffs choke electricity usage

– Accumulation of debt at an alarming rate

– Dysfunctional municipalities cause security of supply issues

The effects of the application

If approved

Eskom and South Africa’s economy will collapse

Electricity usage will decline

Tariffs will need to increase further

Economic implosion, SA will shrink

Investment will reduce further

Rich go solar, poor are forced to return to paraffin

Utility Death Spiral in full motion

The Business Chambers strongly reject the application

Eskom’s MYPD4 application is a proven failure

Eskom expects the electricity user to pay for its many inefficiencies

No leadership

No vision

No ideas

No solutions

No hope

Insanity is doing the same thing over and over and expecting a different result

Albert Einstein

The application provides

We commend Nersa’s most recent tariff decisions

• 2018/19 Eskom tariff: 19.9% request - 5.2% decision

• Eskom RCA’s Year 2, 3 and 4 were halved

Eskom and its shareholders were held accountable for Eskom’s inefficiencies:

• Corruption and mismanagement and political interference

• Eskom’s inability to supply sufficient electricity

• Delayed and overspent projects

• Impact of Eskom’s price increases on the economy and Eskom’s sales

• Higher increases not serving the public interest and not required

Nersa’s recent decisions are the base for an efficient Eskom

The Chambers’ recommendations take into account that Nersa’s future decisions will be in line with their recent decisions

Business Chambers’ recommendations

1. Eskom’s tariff must reflect the costs of an efficient utility

2. Reduce Eskom Spending

3. Further measures to increase sales

4. Involve key stakeholders in the solutions

MYPD4 sales forecast repeats the mistakes from MYPD3

In line with Deloitte’s report:

Proposed increases will reduce sales at least 3% per annum - Utility Death Cycle

MYPD4 sales forecast might be achieved given inflation increase only

Below inflation increases can create growth

Actual sales

MYPD3 sales forecast

MYPD4 sales forecast

Our sales forecast given Eskom proposal

What we need

Chambers’ recommendations Eskom tariffs to reflect the costs of an efficient utility

Allowed revenue must only include efficient cost (ERA)

RAB must exclude inefficient capital equipment

Eskom spent R 530 Billion on capex since 2009 and has less available capacity

-old capacity breaking down (ineffective maintenance)

-new capacity is not performing (project failure)

Electricity user must not pay for unaffordable 20 year IPP contracts

IPPs add 13.5% to the electricity tariffs for 6% of total KWh

IPP DOE Peakers and REIPP will cost the user R 88 Billion for the MYPD4 period

IPP’s negative influence on Eskom sales could be as high as 6.5% (Deloitte)

Chambers’ recommendations Reduce Eskom spending

• Enforce a culture of accountability: an apology is not enough

What is Eskom doing to prevent re-occurrence?

• Eskom to implement efficiencies in line with Nersa decisions

Eskom coal spend to get in line with recent Nersa decisions

Eskom is ignoring Nersa’s 2018/19 decision

• Stop Eskom’s and IPP’s reckless capital spending

60,000 MW capacity for 35,000 MW peak

SA cannot afford reckless capital spending

MYPD4 includes further capital spending of 230 Billion (Eskom and IPP)

A fool and his money are soon parted

Sales drop,but CAPITAL INVESTMENT continues unabated…

Current capital plan is reckless given reduced sales

Chambers’ recommendations Increase Eskom sales

- Municipal tariffs to reflect the cost of efficient distributors

- Promote re-opening of large industrial users

- Review tariff structures to stimulate sales growth

Municipal Tariffs to reflect the costs of efficient distributors

• Tariffs unlawfully used as revenue raising mechanism by municipalities

• Tariffs allow gross inefficiencies in the municipal distribution

• Munics significantly contribute to Eskom sales decline (Deloitte report)

Industrial tariff comparison 2018

7 MVA; 6380 KW; 40546MWh/annum 3 shift scenario

Madibeng 1.46

Cape Town medium voltage <66KV 1.33

Ekurhuleni 11KV 1.31

Tswhane 11KV 1.22

Durban 11KV 1.16

Cape Town Investment incentive medium voltage 1.13

NMBM TOU tariff 1.13

Eskom Direct Megaflex 11KV NMB 1.02

Eskom Supply to the NMBM 132 KV 0.90

R/Kwh

We cannot tolerate this situation to continue

Stop municipal mark-ups on electricity

Chambers’ recommendations:

• Nersa must instil the same diligence for municipal tariff determinations as it has done for Eskom tariff determinations

• Municipal tariffs must reduce to Eskom Direct Tariff level

Municipal tariffs must reflect the costs of efficient municipal distributors

Eskom sales will be stimulated if this error is corrected

Total Eskom GWh sales could increase as much as 2.5% through a 10% price reduction in municipal tariffs (deduction from Deloitte’s report) or

Act on the culture of non-payment

The culture of non-payment promotes lawlessness and dysfunctionality

Municipalities are the main culprits

No discernible corrective measures despite long standing dysfunction

Chambers’ recommendations:

• Nersa must fulfil its duties and disempower non-complying licensees (municipalities)

• Eskom must be empowered to implement solutions

Business offers to be part of the solution

Stimulate large industrial users

• Eskom’s largest industrial and mining users consume over 35% of Eskom’s power but shrinking fast : industry -20%

• Smelters and other high energy users closed plant in SA during capacity shortage area and increasing tariffs

Business Chambers’ recommendation:

Promote restitution of large users and allow Eskom and industry to grow

Review tariff structures to enable growth

- Tariff structures are old and do not reflect current overcapacity

- Peak tariff structure are detrimental for large users and distributors

- Current Tariff structures (standard tariff) promote self generation

Business Chamber’s recommendation:

• Review destructive tariff structures such as excessive winter peak

• Review tariff structures to compete with changing market conditions

Problem is bigger than Eskom…

Eskom

DPE

NERSA

DOE

COGTA

Treasury

Municipalities and Salga

South Africa needs a comprehensive solution including all the major role players

EIUGMunicipal UsersOther users

Business Chambers’ recommendations

Tariffs must reflect the costs of an efficient utility– Efficient cost only

– Customers must not pay for Eskom’s recklessly incurred capital

– Customers must not pay for expensive IPP contracts

Reduce Eskom Costs and Spending– Enforce a culture of accountability

– Stop Eskom’s and IPP’s reckless capital spending

– Fix Eskom’s inefficiencies and coal spend

Increase Sales- Municipal tariffs to reflect efficient distributors

- Instil a culture of payment in the customer base

- Stimulate large industrial users to allow industry and Eskom to grow

- Review tariff structures to stimulate sales growth

Engage with Stakeholders

THANK YOU

Vaal Triangle Services Forum Brits Industrial Association

The Harrismith Business Forum