Draft Eskom 2018/19 Revenue Application

Transcription

1 Draft Eskom 2018/19 Revenue Application Nersa Public Hearings Durban 2 November 2017

2 Where we are coming from This revenue application is being made for the year 2018/19, after the Energy Regulator maintained its revenue decision made in 2013 for the 2017/18 year, where it approved total allowable revenue of R205 billion. The allowed revenue resulted in an average increase of 2.2% due to base adjustments made in preceding years following approved RCA balances for Eskom (12.69% for 2015/16 for MYPD2 and 9.4% for 2016/17 for first year of MYPD3). The 2.2% average increase resulted in consumers receiving an effective decrease in electricity prices, in a situation where costs to produce electricity are increasing. Eskom, in this revenue application for the 2018/19 year has applied the NERSA MYPD methodology of 2016, with a phasing-in of return on assets being applied Allowed revenue and price adjustments decisions will be applicable from 1 April 2018 This revenue application does not include any RCA applications for the MYPD 3 period. Eskom understands that NERSA will process RCAs for years 2, 3 and 4 of the MYPD 3 period at a later stage. The adjustments will be applicable from 1 April 2019 onwards in a phased manner 1

3 Eskom s revenue application is completed within the legislative and NERSA s regulatory framework Framework Electricity Pricing Policy (EPP) Electricity Regulation Act (ERA) Municipal Finance Management Act (MFMA) Multi-Year Price Determination (MYPD) Methodology Eskom Retail Tariff & Structural Adjustment (ERTSA) Methodology Requirements Provides guidelines to NERSA in approving prices and tariffs for the electricity supply industry Enable an efficient licensee to recover full cost of its licensed activities, including a reasonable margin Avoid undue discrimination between customer categories May permit cross subsidy of tariffs Only implement tariffs determined by NERSA Eskom consults with SALGA & National Treasury prior to submission to NERSA Municipal tariffs tabled in Parliament by 15 Mar for 1 July implementation Determines allowable revenue (AR) for efficient costs and fair return where AR = (RAB WACC)+E+PE+D+R&D+IDM±SQI+L&T±RCA RCA not included in this revenue application Allows for NERSA determined allowed revenue to be recovered by the assumed volume of sales for each year of the revenue period. Determines rate adjustments to tariffs applicable to customer groups and schedule of standard prices applicable to different Eskom tariffs Notes: Regulatory asset base (RAB); Primary energy (PE); Service Quality incentives (SQI); Expenditure (E); Levies & Taxes (L&T); Research & Development (R&D); Weighted Average Cost of Capital (WACC); Integrated Demand Management (IDM); Regulatory Clearing Account (RCA) 2

4 The MYPD methodology through the allowable revenue formula was applied AR= (RAB WACC)+E+PE+D+R&D+IDM±SQI+L&T±RCA Primary Energy (incl imports and DMP) IPPs Operating expenditure (incl R &D) Integrated Demand Management Depreciation Return on Assets Tax & Levies Revenue = Return on assets = % cost of capital allowed X depreciated replacement asset value 3

5 Based on the MYPD Methodology the total allowable revenue is R219.5 billion for FY2018/19 Allowable Revenue (AR) Fx Application FY2018/19 (R m) Regulated Asset Base WACC (%) Returns RAB ROA % Absolute Revenue increase of R14.3 bn (7%) from previous Nersa decision Expenditure Primary energy IPPs (local) E PE PE Standard tariff customers contribute to 3.6% increase in allowed revenue International purchases Depreciation IDM Research & development Levies and taxes RCA PE D I R&D L&T RCA Export and NPA revenues account for 3.4% increase in allowed revenue About 15% of allowed revenue related to IPP costs Total Allowable Revenue

6 Rand billions Application of the NERSA Allowable Revenue formula indicates a revenue growth of R14.3 billion R13.2b R1.0b R2.8b R0b R11.2b -R12b -R1.8b R219.5 R205.2b Revenue requirement grows by R14.3 bn MYPD3 Revenue 2017/18 IPPs Operating Cost Primary Energy International Purchases Depreciation Returns Evironmental levy Total Allowable Revenue 2018/19 Increases in allowed revenue when compared to MYPD 3 (2017/18) decision mainly due to: Increases in IPP costs due to additional IPP programmes; marginal increase in other PE costs Increases in operating costs (compared to previous MYPD decision close to inflation increases for actuals Change in MYPD methodology in treatment of cost of imports (with concomitant increase in import revenue) Decrease in allowed revenue when compared to MYPD 3(2017/18) decision mainly due to : Further sacrifice in return on assets Decrease in environmental levy due to lower energy sent out 5

7 Electricity price impact in 2018/19 Standard tariff revenue has increased by R7 251 million which equates to revenue increase of 3.6% from NERSA s decision for the 2017/18 year. As the revenue is recouped from a lower sales volume, the overall price increase required is 19.9% for 2018/19. The 19.9% average increase translates to a 1 July 2018 local-authority tariff increase of 27.5% to municipalities. Municipalities continue to pay at the 2017/18 rates for the period 1 April 2018 to 30 June This is due to the Municipal Finance Management Act (MFMA) requiring Municipal tariff changes to be made only from 1 July each year. Standard tariff Unit 2017/ /19 Standard tariff revenue R m Standard tariff sales volumes Standard tariff price GWh c/kwh Standard tariff price adjustment % 2.2% % 6

8 Price Impact % Factors influencing the overall price increase 7.0% 0.5% 23.8% -6.0% 5.5% 1.4% 16.3% 2.1% 19.9% 9.4% Adjustments Operating costs Depr, Returns, SPAs & Exports Sales volumes rebasing IPPs International Purchases Price before operating costs changes Opex Generation own PE costs Price after operating costs Depr & Returns SPAs & Exports Overall Price Increase With average 2.2% increase in 2017/18 and 19.9% proposed average increase in 2018/19 Average for two years is 11% 7

9 Conservative assumption have been used for RAB, migration of ROA towards WACC, and depreciation AR= (RAB WACC)+E+PE+D+R&D+IDM±SQI+L&T±RCA Regulatory Asset Base (R m) Return on Assets (R m) Depreciation (R m) Assets Ave RAB Generation Working capital & WUC Return on Assets (ROA) 8.4% Transmission Eskom RAB Returns Distribution Generation Phased in ROA 2.97% Total Depreciation Transmission Phased in Returns Distribution Returns sacrificed Opening RAB balance for FY2019 is based on the MYPD 3 decision which is then adjusted for the latest capital expenditure forecasts for the period FY2014 to FY2018. Eskom will revalue the RAB for subsequent revenue application in accordance with Nersa condonation decision MYPD methodology allows for ROA as proxy for interest costs, tax and equity return to the shareholder In accordance with Nersa decision migration of ROA towards full WACC is phased over a longer period. NERSA MYPD 3 decision of 4,7% for FY2017/18 is reduced to 2.97% for FY2018/19 revenue application. In accordance with the MYPD methodology, depreciation is computed by dividing RAB over remaining life of respective assets. Therefore depreciation amounts have remained relatively similar to 2017/18 as a similar RAB value is used for the FY2018/19 revenue application 8

10 R m Primary energy costs reflects CAGR 8.5% p.a. but the position improves when local IPPs are excluded AR= (RAB WACC)+E+PE+D+R&D+IDM±SQI+L&T±RCA Between 2013/14 to 2018/19, primary energy costs escalate with CAGR of 1.5% p.a. Primary energy costs peaked during FY2015 & FY2016 when OCGTs were utilised to minimise load shedding IPPs played vital role during supply challenges however under the current environment the growth in IPPs are displacing Eskom power stations Total primary energy costs reflects CAGR of 8.7% p.a. once local IPPs are incorporated IPPs Gx Primary Energy +8.7% 1.5% 2012/ / / / / / /19 9

11 R m Operating Costs increase by average of 7.3% over the period AR= (RAB WACC)+E+PE+D+R&D+IDM±SQI+L&T±RCA Employee benefits- CAGR of 4.9% p.a. from 2013/14 to 2018/19 on back of a declining staff complement O&M costs escalate by CAGR of 7.3% after normalising for once off transactions 2019 Opex Employee benefit of R28.3bn (46%); Maintenance of R17.7bn (29%); Other opex of R15.8bn (25%) Operations & Maintenance Employee benefits 7.3% 4.9% 2012/ / / / / / /19 10

12 Further in- depth details to be shared at this public hearing Generation Performance Overview Economic Impact Studies 11

13 Generation Performance Overview Energy availability (EAF) has increased significantly Generation performance 1 EAF actual EAF target Percentage (%) Key Insights Availability has improved significantly in the last 2 years. This is primarily due to a significant improvement (decrease) in unplanned breakdowns. Also results in low diesel load factors FY2015 FY2016 FY2017 FY FY2019 FY2020 FY2021 FY Excluding Duvha U3 2. YTD End September Source: Eskom Generation 12

14 Risks mitigation and management of uncertainty by placing generation units in cold reserve With regards to the revenue application for the 2018/19 year Eskom has not removed any generation units from operational status As a result of the present excess operational capacity, Eskom switches off some units and place them on cold reserve The dispatch of units (hence units in cold reserve) is based on NERSA scheduling and dispatch rules (least cost dispatch, system security, grid stability and technical capability of units) Units placed in cold reserve will serve as a risk mitigation against supply uncertainties to avoid load shedding Furthermore, they will serve as a back-up for renewables Minimal Capex and Opex will be spent on units in Cold Reserve since they can be called back if System Dynamics change 13

15 Economic Impact Studies Contributors to SA economy has evolved since 1975 to % 18.0% 19.0% 5.0% 13.0% 5.0% 15.0% 5.0% 2.0% 16.0% 5.0% 14.0% 6.0% 14.0% 3.0% 3.0% 16.0% 20.0% 18.0% 6.0% 15.0% 7.0% 14.0% 3.0% 3.0% 16.0% 6.0% 19.0% 9.0% 15.0% 3.0% 3.0% 15.0% 15.0% 11.0% 3.0% 3.0% 2.0% 3.0% 15.0% 17.0% 6.0% 22.0% 9.0% 15.0% 4.0% 2.0% 14.0% 15% 8.0% 2.0% Over the past 30 years, the South African economy has continued to transition away from its historical reliance on the relatively energyintensive mining and manufacturing sectors towards a more diverse range of servicesoriented activity. Now there is a large and well-developed services sector which accounted for just over two thirds (67%) of GDP in 2015, while mining, manufacturing and construction contribute the bulk of the remaining third. General Government Services Personal Services Financial & Business 11% Services 8% Transport Wholesale & Retail Trade 2% Construction Electricity & Water Manufacturing Mining & Quarrying Agriculture, Forestry & Fishing

16 Manufacturing and mining form a large portion of electricity usage Other (Industry) 15% Mining and Quarrying 16% Residential 20% Wood and Wood Products 0% Machinery 0% Textile and Leather 0% Transport Equipment 0% Food and Tobacco 0% Paper Pulp and Print 1% Non-Metallic Minerals 1% Transport Sector 2% Agriculture 3% Data compiled by the DoE on SA s national energy balances shows that mining and manufacturing are responsible for just under two-thirds of SA s total electricity consumption (62% in 2012) The trend in electricity consumption by a relatively small group of energyintensive manufacturing and mining industries therefore has a large bearing on the overall trend in electricity demand in South Africa. Commerce and Public Services 15% Iron and Steel 11% Non-Ferrous Metals 9% Chemical and Petrochemical 6%

17 Estimates of electricity intensity of selected sectors, 2012 % total Basic nonferrous metals Other (industry) Iron and steel Chemical and Petrochemical Mining and Quarrying Paper Pulp and Print Agriculture Transport Sector Commerce and Public Services Textiles and Leather Food and Tabacco Transport Equipment Construction kwh/r GDP (2012) Share of Value Add (2012 SAM) 50 Share of Electricity Use (DOE 2012) Electricity Intensity (R/kWh) The electricity intensity of a sector can be defined as the amount of electricity consumed (e.g. in kwh) to produce a given unit of output (e.g. GDP in R) The non-ferrous metals industry is by far the most electricity intensive consuming 4kWh of electricity for every unit of GVA generated in Other sectors/industries that emerge as relatively electricityintensive include other types of manufacturing, iron and steel, chemicals and mining

18 There is an overall positive correlation between GDP and electricity consumption in SA *FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY The determinants of electricity demand suggest that in the long run, economic activity (or national income) is usually the dominant driver of electricity demand and that electricity demand is generally more responsive to income than to price The relationship between GDP and electricity sales growth indicates a very strong positive correlation between GDP and electricity consumption in South Africa Real GDP growth (y/y%) Growth in Eskom SA electricity sales (GWh) y/y% Electricity sales interpolated In recent years and particularly since FY2012, growth in Eskom s local electricity sales has been much lower than growth in GDP

19 Price elasticity of electricity demand is relatively inelastic, industrial sectors became more responsive to changes in the price of electricity Electricity Price Elasticities Before and After Agriculture Non-significant Coal Mining Non-significant Commercial Non-significant Gold and Platinum Mining Iron and Steel Non-significant Liquid Fuels Non-significant Non-ferrous Metals Rest of Chemicals Non-significant Rest of Manufacturing Non-significant Rest of Mining Transport Non-significant The implication for Eskom sales forecasters and policymakers is that when real electricity price increases are significant (as they were post-2008), consumers are likely to respond to price and reduce electricity consumption

20 Significant variation in the standard residential active charge tariff (R/kWh) 1 levied by selected municipalities and Eskom, 2015/16 A comparison of the standard residential electricity tariffs charged by selected municipalities including six of South Africa s eight metropolitan municipalities, shows large discrepancies in the price of electricity levied by municipalities to equivalent customer groups Note: 1) Exclusive of VAT; 2) Based on the assumption that all municipalities have the same payment structure with Eskom; 3) Used Eskom Home Power tariff across all consumption blocks to calculate average Eskom tariff; 4) All metropolitans except for Mbombela; 5) Tariff plans selected on the Notified Maximum Demand (NMD) and consumption blocks;

21 International comparison of the price of electricity delivered in June 2015, NUS Survey South Africa has the 9th lowest tariff of the 18 countries, there was less than 0.5 US cents per kilowatt hour separating 4th placed Czech Republic and South Africa in 9th place. South Africa s electricity tariffs as measured by the NUS in 2015 were in line with those reported by Australia which is also heavily reliant on coal in electricity generation.

22 Deloitte undertook macro-economic studies using 3 tariff scenarios average increases over 5-year period of 8%, 13% and 19% Macroeconomic impacts of the various options available to meet Eskom s revenue requirement include 1) Increasing the tariff alone 2) a combination of low tariff increases and raising government debt and 3) a combination of low tariff increases and tax hikes. The price increase cannot be seen in isolation. If Eskom does not receive the required revenue through the tariff it impacts the fiscus and taxpayer someone needs to pay thus the VAT, debt and downgrade impact

23 Electricity price path assumed for various scenarios annual increase (y/y%) 19.9 Electricity Prices (1B/4B:19%) Electricity Prices (1A/4A:13%) Electricity Prices (BAU1/BAU/3A: 8%) CPI inflation (BAU1)

24 y/y% Impact on real GDP growth Average annual growth % 2017 to 2021 Real GDP growth 2022 to 2030 BAU1: 8%, debt 1,2% 1,5% 1A: 13%, debt 1B: 19%, tariff BAU2: 8%, downgrade 3A: 8%, VAT BAU1: 8%, debt Average annual deviation from baseline (percentage points) 2017 to to 2030 Average annual deviation from baseline in ('000s of jobs) 2017 to to A: 13%, debt 1,1% 1,5% -0,1 0, B: 19%, tariff 0,9% 1,5% -0,3 0, Annual tariff increase of 19% is expected to have a slightly negative impact on GDP growth relative to baseline scenario (8%) and government borrows shortfall. For example, under the 19% tariff scenario (1B), GDP is forecast to expand at an average rate of 2.0% y/y, which is 0.3 percentage points lower than the 2.3% y/y growth forecast in the baseline (BAU1). These results are consistent with those NERSA (2013) obtained when it presented the economic impact of similar tariff scenarios in its reason for decision on Eskom s MYPD3 tariff application. BAU2: 8%, downgrade 1,0% 1,5% , A: 8%, VAT 0,8% 1,6% -0,4 0,

25 Total employment (Jobs in millions) Growth in total employment (y/y%) Impact of scenarios on employment growth 1.8% 1.6% 1.4% 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0.0% BAU1: 8%, debt 1A: 13%, debt 1B: 19%, tariff BAU2: 8%, downgrade Impact on trend in employment growth 3A: 8%, VAT Impact on total employment (jobs in millions) An annual tariff increase of 19% is expected to have a slightly negative impact on employment growth relative to the baseline scenario (8% increase and government borrows shortfall). For example, under the 19% tariff scenario (1B), Total employment is expected to grow at an average rate of 0.9% y/y under a 19% tariff increase compared to 1.2% y/y in BAU1. This implies that under a 19% tariff increase scenario, fewer jobs will be created and sustained annually over the period 2017 to 2021, relative to BAU1. These results are consistent with those NERSA (2013) obtained when it presented the economic impact of similar tariff scenarios in its reason for decision on Eskom s MYPD3 tariff application.

26 Government debt to GDP (%) Impact of scenarios on Government to Debt ratio 120% 100% 104% 100% 80% 88% 68% 60% 40% 55% 1A: 13%, debt 1B: 19%, tariff 67% BAU2: 8%, downgrade 20% 3A: 8%, VAT 0% BAU1: 8%, debt 19% annual tariff increase results in much lower government debt-to-gdp ratios and greatly reduces the risk that a rise in Eskom-related-debt will trigger a S-IG sovereign credit ratings downgrade. The 8% tariff baseline scenario (BAU1) by contrast, is associated with a steady deterioration in government s budget balance and with debt-to-gdp ratio expected to reach 75% by 2021 and 104% by 2030, there is a substantial risk in our view that the downgrade scenario (BAU2) would materialise.

27 Change in South Africa and Eskom s metrics from 2008 to 2017 Credit metric South Africa's long-term foreign-currency rating Eskom's long-term, local currency, corporate bond rating 2008 (May-08) 2017 (Apr-17) 2017 (change in notches) S&P Lowermedium BBB+ (stable) BB+ -3 Fitch grade BBB+ (positive) Speculative BB+ -3 Lowermedium Moody's Baa1 (positive) Baa2 (negative) -1 S&P Uppermedium A+, stable Highly specula B+ -10 Moody's A1 Speculative Ba1- (review down -7 grade Fitch A Speculative BB Change (2008 to 2017) Net loan debt as % GDP 22.6% 2008/9 47% 2017/18 up to almost 50% of GDP Net loan debt, provisions and contingent liabilities as % GDP 34.4% Mar-08 67% 2016/17 now over 60% of GDP Debt service cost as % GDP 2.4% 2008/9 3.4% 2017/18 up 1 percentage point Debt service cost as % general government revenue 8.9% 2008/9 11.5% 2017/18 up 2.6 percentage points Government guarantees Eskom -exposure (Rbn) / / Government guarantees IPPs - exposure (Rbn) / / Government guarantees (Rbn) / / Electricity sector as % of total govt. guarantees 40% 2007/8 77% 2016/17 37 percentage points higher

28 Potential macroeconomic, environmental, and social consequences of energy subsidies Energy subsidies crowd-out growth-enhancing or pro-poor public spending. such as on social welfare, health, and education) and place an unnecessary burden on public finances. Energy subsidies (unless specifically targeted) are a poor instrument for distributing wealth relative to other types of public spending. Energy subsidies discourage investment in the energy sector and can precipitate supply- crises. Energy subsidies artificially depress the price of energy which results in lower profits for producers or outright loses. This makes it difficult for state-owned enterprises to sustainably expand production and removes the incentive for private sector investment. The result is often an underinvestment in energy capacity by both the public and private sector that results in an energy supply crisis which in turn hampers economic growth. These effects have been felt in SA. Energy subsidies create harmful market distortions. By keeping the cost of energy artificially low, they promote investment in capital-intensive and energy-intensive industries at the expense of more labourintensive and employment generating sectors. Energy subsidies stimulate demand, encourage the inefficient use of energy and unnecessary pollution. Subsidies on the consumption of energy derived from fossil fuels leads to the wasteful consumption of energy and generate unnecessary pollution. Subsidies on fossil-fuel derived energy also reduces the incentive for firms and households to invest in alternative more sustainable forms of energy. Energy subsidies have distributional impacts. Energy subsidies tend to disproportionately benefit higher-income households who consume far more energy than lower income groups. Energy subsidies directed at large industrial consumers of energy benefit the shareholders of these firms at the expense of the average citizen. 27

29 In conclusion, Eskom will supply electricity which comes at a cost that needs be recovered Eskom has delivered R47billion of savings over the first 4 years of MYPD3 We have continuously been striving to improve operations, commission new capacity as soon as possible and aim to extract cost efficiencies over the period Our business contains a substantial element of fixed costs that are not easily reduced in the short term. This will require a balance of socio economic factors which must be considered before making a final decision Eskom s debt commitments have increased significantly over the last few years with a major portion that has been guaranteed by Government. Our debt maturities reflect a step change in the near term that requires a strong balance sheet to cover these commitments Eskom, believes that this revenue application has taking these factors into account in aiming to keep cost escalations close to inflation and phasing in of returns to mitigate impact on the customer 28

30 Thank you