BUSA presentation to NERSA on Eskom s RCA Application Multi Year Price Determination (MYPD3) Year 1 (2013/2014) 5 February 2016

Transcription

1 BUSA presentation to NERSA on Eskom s RCA Application Multi Year Price Determination (MYPD3) Year 1 (2013/2014) 5 February 2016 Martin Kingston Chair: BUSA Standing Committee on Economic & Trade Policy

2 BUSA submission BUSA would like to thank NERSA for this opportunity to present its views. BUSA has made a detailed submission to NERSA containing our views and recommendations. This presentation is a brief summary of our submission, in consideration of NERSA s timetable. The provision of more detailed information in the Eskom application would have enabled BUSA to present a more comprehensive submission. 2

3 BUSA BUSA is a confederation of business organisations including chambers of commerce and industry, professional associations, corporate associations and unisectorals. BUSA represents the views of its members in a number of national structures and bodies, both statutory and non-statutory. BUSA has encouraged its members to make their own specific submissions. The BUSA submission constitutes an overall business position. 3

4 Introduction BUSA has previously commented (November 2012) on the original MYPD3 application and raised the significant negative impacts on the economy of that application were it to be granted. BUSA has also undertaken further impact assessments as part of its review of the proposed Carbon Tax. The absence of a formally issued and up to date IRP is a fundamental challenge to an objective analysis of the energy needs of the country and associated pricing. Eskom s financial sustainability is inextricably linked to the financial well being of its customers, who require affordable electricity to remain viable. Eskom s customer base will be compromised if their viability is undermined by electricity which is not reliable, predictable and competitive. 4

5 Introduction (2) Approval of the MYPD3 RCA Application for 2013/2014 would result in a tariff significantly beyond that contemplated in the original application. Furthermore, it would render many businesses uncompetitive due to its unaffordability. BUSA is also concerned that the application was received so long after FY 2013/2014. BUSA recommends a shorter timeframe being imposed by NERSA for future applications. We have proceeded on the basis that where we have been unable to confirm the proposition from Eskom, because it has been inadequately substantiated, it should be disallowed. The remainder of this presentation will be in two parts: Part 1 deals with the methodology and underlying assumptions of the application. Part 2 deals with its potential economic impact. 5

6 Methodology and Assumptions (1): Price stability Eskom s rationale that a five-year decision on tariffs would lead to a smoother and predictable price path has not been achieved. This application would bring annual increases well above the original MYPD3 decision. No long term price certainty is being achieved. A review of the MYPD3 methodology should be considered to achieve that objective, as price certainty is a key requirement for business. 6

7 Methodology and Assumptions (2): Revenue variance The majority of the shortfall results from revenue variance, i.e. a material reduction from forecast. Much of this is due to economic growth being significantly less than was anticipated. There is no expectation that economic growth will pick up during the remainder of MYPD3. Electricity demand has regressed to 2007/8 levels, reflecting fewer business consumers. Consequently, customers will pay higher unit costs for electricity, leading to pressures on business and the prospect of further reduction in demand. This constitutes a vicious cycle that needs to be urgently arrested. Weak demand is likely to persist until 2018/19, resulting in similar variances in revenue and, therefore, the potential for ever increasing tariffs with this methodology. 7

8 Methodology and Assumptions (2): Revenue variance (continued) Revenue variance which is beyond Eskom s control should be allowed in respect of standard tariff customer sales. The revenue shortfall in respect of negotiated pricing agreement (NPA) sales is not sufficiently substantiated. The split between standard tariff, NPA and export customers needs to be reviewed to determine whether the below cost tariff of NPA customers should be permitted. The permitted variance may therefore require adjustment. Revenue losses due to load shedding should reflect that load shedding takes place during peak periods, and the calculations should reflect that accordingly. 8

9 Methodology and Assumptions (3): Primary Energy OCGT Fuel: Allowance for this in MYPD3 was premised on new generating capacity being in place. Greater use of OCGTs therefore resulted from operational inefficiencies and (as per MYPD2 RCA) this variance should not be allowed. Coal: Variances resulting from more expensive coal and coal handling as well as construction delays should not be considered prudent expenditure and should be disallowed accordingly. Oil & Gas: Costs attributable to construction delays and poor maintenance are not prudent expenditure, and should be excluded from RCA. Water treatment costs are not substantiated and should be excluded. 9

10 Methodology and Assumptions (4): Environmental Levy The adjustment in the application for the over-recovery of the levy is welcomed. However, this should not be included in allowable revenue. Inclusion of the levy in Eskom s published tariffs ignores the fact that this is a tax on customers that should be reflected separately. BUSA calls on NERSA to address this through: Adjudicating and publishing electricity prices without the levy; Ensuring adequate annual accounting of the funds collected with appropriate reconciliation of projected generation from non-renewable technology against actual on an annual basis; Requiring licensees to reflect the levy separately on customer invoices; and Ensuring separation between allowable revenue for the generation, transmission and distribution of electricity on the one hand and tax collection for the fiscus on the other. 10

11 Methodology and Assumptions (5): Expenditure MYPD3 requires expenditure to be incurred prudently. However, the application reveals that many of the costs claimed were incurred as a result of policy direction from the shareholder. The methodology makes no distinction between Eskom s operational decisions and those arising from interventions by the shareholder. The impact of such interventions should not be borne directly by the customer. 11

12 Methodology and Assumptions (6): Renewable Energy The premium paid for renewable energy is currently passed on to customers as Eskom has no control over pricing. The integration of the cost of the contracts into the tariff requires revisiting given the impact on customers. The annual update of the Integrated Resource Plan (IRP) has not taken place. Consequently, additional sources of supply are pursued without considering the ongoing reduction in demand or the most effective manner of implementation and associated pricing implications. 12

13 Methodology and Assumptions (7): Reduction in demand There are several reasons for the reduction in electricity demand, including the steep rises in the electricity price, compounded by lack of reliability and predictability. There are significant structural changes taking place in the economy with a shift from energy intensive primary and secondary sectors to the tertiary sector. There is also significantly improved energy efficiency by intensive users. 13

14 Figure 1: Trends in energy intensity and electricity sent out (EIUG, 2013) Improvements in energy intensity are leading to reduced energy demand per unit of economic output. 14

15 Methodology and Assumptions (8): Prudent Expenditure New plant delays and other factors under Eskom s control have resulted in certain of the revenue impairments. Cost recovery is critical to Eskom s financial viability, and we acknowledge the need to demonstrate that Eskom has a robust financial outlook. However, not all expenditure can be considered to have been incurred prudently. For any variance to be considered, let alone approved, NERSA needs to be provided with unambiguous motivation. An RCA application is not the appropriate context within which to determine Eskom s viability against the benchmarks in the original MYPD3 decision. If a revision is needed, this should not be done as part of the RCA application. 15

16 Part 2: Economic Impact (1) Average electricity tariffs have increased by a cumulative 70.18% between 2010/11 and 2014/15. MYPD2 & MYPD3 decisions were to increase the annual tariff by 11.51% p.a. between 2010/11 and 2017/18, and 8% p.a. for the MYPD3 period (65.51 c/kwh to c/kwh). In the period from FY 2010/11 to 2017/18, the cumulative increase is already % (41.57 c/kwh to c/kwh). In the 10 year period between 2007/8 2017/18, the electricity price is set to increase by 16.18% p.a. or a cumulative 348% 16

17 Economic Impact (2) The current re-opener application would impact severely on the viability of businesses and result in SA having one of the highest rates globally removing SA s historical competitive advantage of low electricity prices. According to the South African Reserve Bank (SARB), commenting prior to this application, the direct and indirect effects of such an increase could increase average inflation by around 0.5 percentage points over a year. This is in a context of increasing interest rates, thereby further impacting on businesses sustainability. Businesses have, with great difficulty, accommodated large tariff increases in the past. They simply cannot plan their investment, operations and long term strategy without adequate warning of tariffs increases. The magnitude of such an increase amplifies business uncertainty. 17

18 Economic Impact (3) The electricity price increases are not the only constraint on SA business. The current adverse global economic conditions significantly impact on business in SA, exacerbated by electricity price increases. The proposed increase does not take into account further increases arising from any additional taxes and levies on electricity sales by municipalities. Tariffs are not the only instrument to address Eskom s financial constraints and may divert attention from the need for a comprehensive debate on Eskom s long term structure and associated sustainability. 18

19 Conclusion We reiterate the need for a formally issued and up to date IRP, as its absence constitutes a fundamental challenge to an objective analysis of the country s energy needs and associated pricing. BUSA recognises that those elements of this application that comply with the methodology rules should be favourably considered. However there are, in a number of cases, insufficient motivation to justify the increase or the element is not included in the methodology and should therefore not be considered. The concept of prudent appears to be much more widely interpreted than BUSA believes should be the case and a clear view as to what constitutes prudent should be set out in the decision. 19

20 Conclusion (2) BUSA acknowledges the need for a sustainable financial trajectory for Eskom. However, this cannot be pursued without considering the consequences of approving this increase on the already fragile economy and the financial burdens faced by business at large. BUSA believes that precedent should be set where appropriate motivation is made in strict compliance with methodology. 20

21 Thank you