Eskom 2018/19 Revenue Application Closing remarks Nersa Public Hearing Midrand 20 November 2017
Content 1 System Performance and capacity 2 Adjustments being made in terms of MYPD methodology 3 Clarification of issues raised during public hearings 4 Analysis by external parties 5 Financial position, debt and rating agencies 6 Conclusion 1
System Operator's Day-Ahead Generation Scheduling Process Renewable Forecast Demand forecast Network constraints Cost of generation Day ahead contract Unconstrained schedule (Cheapest mix) Constrained schedule Operating reserve requirement
Nominal Capacity versus Peak demand Available Capacity Operating Reserves PCLF UCLF Peak Demand Installed Capacity 45000 7500 MW Breakdowns (UCLF) 6500 MW 40000 35000 30000 Average Planned Maintenance (PCLF) 6800 MW Operating Reserve 2000MW 25000 Peak Demand Available Capacity 20000 Nov Dec Jan Feb Mar 2017 2018 Production plan is optimised to ensure that required maintenance is executed and demand is met. Excess generation will then be placed into Cold Reserve 3
Maintenance is on track in line with 80:10:10 strategy Generation planned maintenance performance 1 FY2014 to FY2018 Percentage (%) 10,50 9,91 12,99 12,14 8,37 10,00 PCLF Target 10% Key Insights Current projections indicate a PCLF of 10% by year end PCLF is higher in FY2016 and FY2017 as Eskom conducted more maintenance to address to catch up with maintenance FY2014 FY2015 FY2016 FY2017 FY2018 YTD FY2018 Projection Source: Eskom Generation 4
Percentage of breakdowns after Outages is very low UCLF, % Key Insights 7,30 0,34 9,44 0,68 10,49 0,88 7,54 0,64 Post outage UCLF UCLF 8,86 0,55 11,68 11,88 0,44 0,64 9,60 0,60 The UCLF for FY2018 YTD (31 October 2017) is 8.27% Post Outage UCLF contributed only 0.6% to total UCLF 6,96 8,76 9,61 6,90 8,31 11,24 11,24 9,00 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Average SOURCE: GPSS
Threshold for operating stations is a function of economics The age based life expectancy used for long term planning (first & last units) Camden : 2020 & 2023 Hendrina : 2020 & 2027 Komati : 2024 & 2029 Grootvlei : 2025 & 2028 However, life of a station can be extended beyond this age based life expectancy if it is economically viable to do that Eskom has determined that it is not economically viable to extend the life of Hendrina, Komati Camden and Grootvlei beyond their age based life expectancy These plants are of an old design with a lower thermodynamic efficiency which will not improve above that of newer design even if the station is refurbished (these stations do not have reheaters whereas newer designs have reheaters) Moreover in FY2020, Hendrina, Komati & Grootvlei are not required to meet production and will not be dispatched (even before most units reach age based life expectancy) due to the fact that they have higher projected scheduling costs amongst stations that do not affect voltage stability of KZN Source: Eskom Generation 6
Extended cold reserve can be ringfenced One of the key inputs to conclusion on economic viability and Production Commercial Operation of new build (Medupi, Kusile, REIPP s) which lead to conclusion of excess capacity It is therefore advisable to put the plant in extended cold reserve as a risk mitigation against any future uncertainties cold reserve will result in massive savings in Opex and Capex because it is not operational e.g. Eskom stopped the replacement of Turbines at Hendrina at contract stage However, some preservation expenditure will be required for the stations in cold reserve Eskom will provide written feedback to NERSA on the costs of preservation as well as savings due to cold reserve per station Source: Eskom Generation 7
South Africa vs Australia Eskom + IPP 4,300 kilometres. Integrated report 31 March 2017 * Including imports 49 161 237 215 84 % 0.01 % *4.7 % 5 % Capacity (GW) 52 500 Energy (TWh) 197 723 77 % 9 % 7% 5 % NEM Total electricity generating capacity April 2017 NEM Fact Sheet National Electricity Market (NEM) & (SWIS) (94% of Demand) Both Operates on one of the World s Longest interconnected power systems around Coal 32,220 km of transmission lines and cables. No Market Electricity, Limited Gas & Coal Market s Gas Coal 5,000 kilometres. 40,000 km of transmission lines and cables. High developed Market s Electricity, Coal & Gas Gas NUCLEAR 1% 1 % 6 % 0% Although similar electrical Capacity & Energy Mix Australia Market driven with mature Electricity/Coal/Gas markets 8
Household Energy Price & Comparative price in other open markets Australian Chief Economist & ACCC has reported significant increases in Household energy price over the past 10 year in the Australia Electricity Market compared with the increase in wages and CPI ACCC Australia Competition & Consumer Commission South Africa Aus ($) 1 = R10.58 2.5 R/kWh = 24 Australian cents Australia residential electricity prices (May 2017 prices Australia, 2015 prices European Countries) Australian Household Energy Price high compared with Competitive markets in European Countries AEMO Australia Energy Market Operator Competitive market high renewable penetration 9 South Africa Household tariff remain lower than the Australian Household
Concerns about aging power plant Closed Coal Fired Power Plan and aging generation fleet in Australian is placing pressure on the stability of the grid. Conventional Capacity Closed Capacity (GW) Energy (TWh) Grid stability Conventional Plant provides multiple services Aging profile Conventional Capacity Replacing with Renewable generation provides dominantly energy Capacity (GW) OCGT, CCGT, Pump storage, batteries,, New Technologies, etc Energy (TWh) Renewables Grid stability Batteries, Flywheels, New Technologies, Smart Grid etc New energy from renewable source do not provide adequate capacity and system stability services. Acquire 2017/11/20 these service maybe required Additional 10 Markets which may increasing price pressures.
The New Build Programme is at an advanced stage In the event that part of or all of the works are suspended at Medupi & Kusile there would be significant contractual and commercial implications Although expenditure would be temporarily deferred, the net result would be that the projects would incur significant additional costs when it came to restarting and completing the remaining construction and commissioning Works. Most contract packages are placed and committed for Medupi and Kusile. Medupi Considering construction progress, it will not be feasible to suspend all or part of the works at Medupi. Kusile In the case of Kusile, based on the assumption that the suspension would be implemented with immediate effect it would result in significant additional cost. In addition the decision to cease construction would have a tremendous social and economic impact on in excess of 22,000 people currently directly employed on the Project Site and a further undetermined number of people and business s indirectly employed in the surrounding communities providing support and services to the Project.
Eskom has made significant progress in implementing Medupi new build project 84.70% overall project completion Unit 6: 99.72% Unit 5: 99.67% Unit 4: 88.43% Unit 3: 87.95% Unit 2: 68.71% Unit 1: 63.67%
Eskom has made significant progress in implementing Kusile new build project 82.60% overall project completion Unit 1: 99.02% Unit 2: 93.12% Unit 3: 75.27% Unit 4: 61.83% Unit 5: 53% Unit 6: 46%
Kusile Unit 5: Progress in Pictures CRT Tank Assembly and Installation Unit 5 Overall Progress: 53% (A) vs. 48% (P) Unit Transformer Foundation Construction
Kusile Unit 5: Progress in Pictures Installation of Burners Refractory Rings FGD Pump House ACC Top Steam Header Installation Progress on Aux Bay Rooms (Brick works and Fire proofing)
Kusile Unit 5: Progress in Pictures FGD Absorber Tank ACC Main Exhaust Ducts Unit 5 Turbine Hall ID Fans Installation
Kusile Unit 6: Progress in Pictures Generator Rotor Installation Unit 6 Overall Progress: 46% (A) vs. 41% (P) Turbine Piping Installation
Kusile Unit 6: Progress in Pictures ACC Top steam headers installed 2 Bunkers Delivered to Site Welding Connecting Tubes to Headers Turbine Piping Installation
Kusile Unit 6: Progress in Pictures Unit 6 Turbine Hall Primary Air Ducts PJFF Support Structure Installation Units Over view
Adjustments being made to Eskom s application in accordance with MYPD methodology Sales Changes in sales volume projections (GWh) for 2018/19 year, with a reduction in standard tariffs sales volumes of 4 871GWh Standard Tariff Sales 188 082 NPA Sales 9 750 Export Sales 13 634 Total Sales 211 466 6,305 IPPs 13,634 Drop in 6 305 GWh of energy to be secured from IPPs Drop in R7 080m for costs of IPPs 4,871 Coal Costs Coal costs increase to address drop in energy that was to be secured from IPPs Net increase in coal costs following drop in sales volumes and reduced IPPs of R450m 20
Update of Revenue Requirement and Price increase after reducing IPPs by R7bn and accounting for the latest sales forecasts with reflects a 5TWh decline Allowable Revenue (AR) Regulated Asset Base WACC (%) Returns Expenditure Primary energy IPPs (local) International purchases Depreciation IDM Research & development Levies and taxes RCA Total Allowable Revenue RAB ROA E PE PE PE D I R&D L&T RCA Recovered from non standard tariff customers Standard tariff customers Standard tariff sales volumes Standard tariff price Standard tariff price adjustments R m GWh c/kwh % Fx + + + + + + + + + Application FY2018/19 (R m) 763 589 2.97% 22 690 62 221 59 340 34 209 3 216 29 140 511 193 7 994-219 514 13 309 206 2015 192 953 106.87 19.90% Adjustments to Application 2.97% 0 0 450-7 080 0 0 0 0 0 - -6 630 244-6 840-4 871 Revised Application FY2018/19 (R m) 763 589 2.97% 22 690 62 221 59 790 27 129 3 216 29 140 511 193 7 994-212 884 13 553 199 331 188 082 105.98 18.91% Revenue requirement drops by R6630m with 18.9% average price increase & 26.9% for Munics from 1 July 2018
In order to achieve a CPI price increase in 2018/19 will require a revenue reduction of R22 billion Scenario Allowable Revenue (AR) Regulated Asset Base WACC (%) Returns Expenditure Primary energy IPPs (local) International purchases Depreciation IDM Research & development Levies and taxes RCA Total Allowable Revenue RAB ROA E PE PE PE D I R&D L&T RCA Recovered from non standard tariff customers Standard tariff customers Standard tariff sales volumes Standard tariff price Standard tariff price adjustments R m GWh c/kwh % Fx + + + + + + + + + Application FY2018/19 (R m) 763 589 2.97% 22 690 62 221 59 340 34 209 3 216 29 140 511 193 7 994-219 514 13 309 206 2015 192 953 106.87 19.90% Adjustments to Application 2.97% 0-22 000 450-7 080 0 0 0 0 0 - -28 630 244-28 874-4 871 Revised Application FY2018/19 (R m) 763 589 2.97% 22 690 40 221 59 790 27 129 3 216 29 140 511 193 7 994-190 884 13 553 177 331 188 082 94.28 5.78% Revenue requirement drops to R191bn which is R14bn lower than R205 billion allowed in 2017/18
Specific reasons for drop in sales in industrial sector provided by Eskom customers Customers having improved co-gen capacity Mines affected by worked out resources, uneconomical existing shafts, safety incidents and high running costs Ageing plant, decline in world commodities (post commodities boom) and importing of cheaper products Customer exposed to depleting feedstock Customers having liquidated or applied for business rescue due to financial vulnerability and low competitiveness Struggling to compete with international sister plants due to production costs, with production allocated to most cost effective plants by the parent company Shutting down operations and relocated to Asia due to incentives offered Voluntary contribution to the Energy Conservation Scheme Decline in world commodities, reduced competitiveness Opting to export un-beneficiated ore The price of electricity alone is unlikely to reverse the deterioration in the economy; it would require a holistic approach 23
It is common practice in most countries to provide incentives for certain sectors of economy (1) Nearly all countries have policies to protect certain sectors of the economy and society. The State is significantly involved in determining sectors and type of support that is needed with short and long term incentives including tax breaks In South Africa the following is done to support the different sectors: Residential Sector Facilitation of access to electricity through government national electrification program. Social grants provided directly to customers through Free Basic Electricity of 50 kwh per household per month by national government to the indigent through the Equitable Share Fund. Eskom provides FBE to customers in their area of supply as an agent for the municipalities For the MYPD3 period the increase on the Homelight 20A customers (lifeline tariff) was lower than the average increase. Subsidised by direct Eskom large urban customers (affordability subsidy) Agricultural Sector A challenge is the cost of the large networks to be built to provide supply to farmers causing high fixed network costs Agricultural customers are subsidized by large high voltage urban customers around 32% through a Low Voltage Subsidy 24
Minimal impact to Eskom poor residential customers Of the approximately 6 million Eskom customers the majority are on Eskom Homelight 20A tariff For 350kWh monthly electricity consumption, on the Homelight 20A tariff, customers would pay an additional R57 per month The average usage for Homelight 20A customers is around 100 kwh/customer/month The majority of Eskom residential customers will pay around R16 per month more for electricity Rand Increase 2017/18 tariff 1,712 274 827 130 1,438 55 47 8 165 25 140 384 57 327 697 50kWH 150kWH 350kWh 700kWh 1400kWh Consumption per month 25
It is common practice in most countries to provide incentives for certain sectors of economy (2) Short Term Special Incentive Products to increase current sales Industrial Sector Government is in process of developing framework Short Term Pricing Incentive Framework to retain customers and sales DOE is developing a Short-term Electricity Incentive Programme to provide opportunities to retain existing businesses that have closed down or are at serious risk of failure owing to their inability to compete in markets Purpose is to provide incentives to encourage large consumers to increase their offtake of electrical energy to fully utilise existing production capacity to support sustained and increasing economic activity Proposed tariffs for electricity-intensive industry consumers To stabilise and increase sales to electricity intensive industrial consumers with very high load factors It is critical that National Government plays a significant role in - determining which sectors of society and the economy require support, - ensuring there is a level playing field between customers of Eskom and municipalities; - ensuring that incentives are provided to contribute to economy 26
Eskom response to Governance challenges and Corruption Eskom is mindful that actions in dealing with governance issues, are a test and a determiner of future success. The following has already been implemented Strengthening general internal ethics and fraud framework Implementing independent audits on leadership Terminating all irregular supplier contracts and work: McKinsey contract was terminated in July 2017. Contract with Impulse International has been suspended, pending outcome of forensic investigation There are no dealings with Trillian contractually or otherwise Independent audits on Tegeta contracts have been clarified as being within range of other similar contracts and all control gaps have since been tightened Enhancing the internal commercial governance process Instituting disciplinary charges and taking legal action when required Suspended eight members of leadership who have allegedly been involved in governance irregularities. Four of whom are from Executive team Have instituted criminal charges against certain Eskom management in this regard 27
Clarifications of certain points raised during public hearing The NERSA decision for the last year of the MYPD 3 period (2017/18) was a nominal increase of 2.2% from the previous year s tariff. This is experienced as an effective decrease in real terms by consumers Difference in accounting and regulatory rules for capacity charges for DOE Peakers results in difference in IPP costs reflected in Eskom s Annual Financial statements and Eskom s revenue application Avon and Dedisa are two contracts that are classified as finance lease according to IFRIC 4 for Financial Accounting purposes. MYPD methodology: Purchases or procurement of energy and capacity from IPPs, including capacity payments, energy payments and any other payments as set out in the PPA, will be allowed as a full pass-through cost. Eskom is required to undertake Generation build projects when determined by the Minister of Energy in accordance with the IRP and the ERA The IRP 2010 included Sere, Ingula, Medupi and Kusile Eskom is not in a position to undertake further renewable build projects unless determined by the Minister of Energy
Staff complement has escalated over last 10 years with a reduction reflected in over the next few years Distribution headcount growth of 4300 over the 10 year period due to: Increase in electrification numbers 1.75million more end customers Increase of 54 Customer Network Centers to improve response time and to reduce outages 900 Temporary Employment Agency workers absorbed due to change in legislation Significant focus to restore and improve network performance and manage customer risk on service delivery. Generation headcount growth of 2482 over the 10 year period due to: Majuba P/S that moved away from two shifting to running base load - 150 RTS (Camden, Grootvlei, Komati ) plus Medupi and Kusile - 1605 Peaking resource capacitation for Ankerlig, Gourikwa & Ingula - 237 Nuclear New build preparation additional - 490 Learners of 4308 and bursar intake of 1058 over 10 year period (some of these are included in the Generation and Distribution staff complements) Eskom s application reflects drop of 4454 from 43640 (2015/16) to 39186 (2018/19) 29
What has Eskom done to contribute to easing burden on the consumer and fiscus Eskom has reduced its costs by R47bn for the first four years of the MYPD 3 period The total target for the 5 year MYPD 3 period is R60bn this is by March 2018 The application made for the 2018/19 year has already taken these into account The areas where these savings against budget were realised include Employee benefit costs Primary energy costs Reprioritising of capital expenditure to the extent possible within the legislative requirements Eskom has significantly rephased recovery of allowed ROA Processes to recover debt from Municipalities and Soweto customers Municipality debt recovery is complex due to Municipalities not being able to recover from their own customers is a challenge that COGTA, NT and SALGA are also addressing Eskom has submitted rationalisation of Municipal tariffs to NERSA Eskom is making every effort to manage the Soweto challenge installing split metering Have increased cut-off level with increased cut-off this financial year majority of which were not reconnected 30
How has Eskom s costs moved from FY2017 to FY2019 Coal burn costs have increased by 10,2% over a 2 year period, averaging 5.1% Staff costs have increased by 1,6% over a 2 year period, averaging 0.8% Other Operating costs have decreased by -11,9% over a 2 year period, averaging -6% Maintenance costs have increased by 25.4% over a 2 year period, averaging 12.7% Generation own PE costs (excl Coal usage and Coal provision) have increased by 23.3% over 2 year period, averaging 11.62% IPP costs have increased by 25% (after reducing R7bn) over 2 year period, averaging 12.5% Capital expenditure have increased by 30.5% over 2 year period, averaging 15.2% Item 2016/17 2017/18 2018/19 % growth FY19 FY17 source Coal usage costs 44 164 45 642 48 687 10.2% Table 23 IPPs 21 720 24 450 34 209-7080 =27 129 25% Table 23 Generation own PE (excl coal usage and coal provision costs) 7 582 8 794 9 349 23.3% Table 23 Staff costs 27 902 28 213 28 363 1.6% Table 30 Other Opex costs 17 938 15 385 15 796-11.9% Table 30 Maintenance costs 14 087 15 610 17 665 25.4% Table 30 Capital Expenditure 58 923 65 783 76 941 30.5% Table 22 31
The utility financial death spiral for Eskom should not be artificially created through subsidies or through price premiums (costs reflected for illustrative purposes only) c/kwh True gap to the potential start of utility financial death spiral 117 230 180 70 82 82 50 35 35 Eskom cost Self generation cost Eskom cost Off grid/own generation Munic cost and surcharges Transmission and Distribution cost Self grid storage, back-up etc For illustrative purposes only 187 Average selling price of Munic Gap as perceived by many municipal customers, to start of financial death spiral. Financial death spiral is actually another term for demand reaching a relatively price elastic zone. It could potentially commence when the substitutes and alternatives become economically viable, compared to grid electricity. Subsidies to reduce the perceived cost of such substitutes and alternatives, or premiums to the cost of grid electricity, could artificially narrow the gap. Indications are that Eskom s current average price, and also the price reflective of prudent and efficient cost is well below the cost of substitutes and alternatives. This might not be the case with many municipalities due to surcharges, cross-subsidies, etc. Inappropriate decisions around the pricing of electricity could potentially have significant consequences: - 42% of Eskom volumes are sold to municipalities. If this volume is reduced due to artificial mechanisms it could create stranded assets and unrecovered sunk costs, for Eskom as well as municipalities. - Customers more able to afford own generation could defect off-grid faster. Even if due to artificial price signals, once off-grid it is likely to remain offgrid. - Policy decisions needed on subsidies and surcharges
Illustration of financial effects of price reduction and volume increase Various studies of price elasticity of demand for electricity have estimated electricity demand as relative inelastic e.g. textiles and clothing -0.23, manufacturing -0.3, metals -0.31, ferro-alloys commodities 0.89. Thus, at -0.3 a real increase in price of 10% would cause a volume reduction of 3% This dynamic would however mostly be observed once electricity prices reach a level that is close to the cost of viable alternatives The simple calculation shows however that a 10% general price reduction would require a 16.9% volume increase merely to break-even financially (and assuming that primary energy increases at the average cost of Primary Energy per kwh) 33
What BUSA and EIUG saw as a balanced price for 2017/18 year EIUG analysis indicates that tariff increases in the range of 10% to 13% are sufficient to support Eskom s viability and fundability over the MYPD3 period. Corresponds to 97.69c to 111.76c by 2017/18 BUSA in MYPD 3 decision would be 101.7c/kWh by the 2017/18 year Entity Year Proposal for price (KWh) EIUG during MYPD 3 hearings 2017/18 Range of 98 to 112c BUSA during MYPD 3 hearings 2017/18 102c 34
35 World bank Report 2016 summary of inefficient (hidden) costs The World bank study defined certain parameters that reflect efficient operations. Any deviation from these norms are seen to be inefficient and defined as hidden costs The norms are - Transmission & distribution losses (both technical and commercial) should be <10% of dispatched electricity - 100% bill collection - Same staffing level as in well-performing, comparable utilities in Latin America The graph below illustrates the factors that contribute to hidden costs Breakdown of hidden costs in Africa Under-pricing is the main contributor of Eskom s hidden costs This is different from other African countries Eskom losses are not reflected in the graph as they are within the norm
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Government debt to GDP (%) Chamber of Mines agree that country should guard against the impact on Government debt Macroeconomic impacts of alternative scenarios to meet Eskom s five-year revenue requirement The impact of the 5 scenarios on Government Debt were modelled and the outcomes are illustrated below 120% 104% 100% 100% 88% 80% 68% 60% 67% 55% 1A: 13%, debt 40% 1B: 19%, tariff BAU2: 8%, downgrade 20% 3A: 8%, VAT BAU1: 8%, debt 0% 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 Significant changes are seen in Government debt to GDP levels Concerns on impact of price increases were also raised Addressing generating capacity was raised This is being done will be after this revenue cycle. 36
Financial Implications : Cash from operations over MYPD3 covered debt service commitments but did not allow for a build up of cash reserves in the balance sheet 50,000 40,000 30,000 Cash from operations (CFO) 20,000 10,000 0 (10,000) CFO after Interest repayments (20,000) CFO after debt repayments (30,000) FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 Note: In FY2016 and FY2017 the MYPD 2 and FY2014 RCA s were liquidated which improved the cash from operations 37
Full cost recovery would have required ave price of 120c/kWh in 2019, on reduced DRC asset values as per application (and 129c/kWh on historical asset values thus even higher) c/kwh Gap represents R59bn revenue p.a. Revised revenue application for R213bn / 101c/kWh Gap represents R42bn revenue p.a. Applied-for price in 2018/19 not yet cost-reflective Gap in 2018/19 approx. 20c/kWh Revenue shortfall approx. R42bn in 2018/19 This shortfall cannot be closed with efficiencies / cost-cutting as it would imply eliminating 66% of total O&M Eskom has been raising debt to fund the cash gap caused by revenue shortfall This has been the situation since 2008 and is not sustainable (for Revenue Application FY2018-19 the revenue and price on DHC is higher than on DRC due to low RAB value on DRC) 38
Eskom has sacrificed Returns in an effort to reduce impact on consumer Eskom has reduced the ROA % from 4.7% (2017/18) to 2.97% (2018/19) Returns of R22 690 million does not cover interest costs Net interest costs paid in 2016/17 was R26 560 million Thus the equity returns in the application is negative Price increase is minimal and remains in base electricity price until full RCA is recovered over longer period Item 2018/19 Returns on Asset Net Interest costs R22 690m R36 200m Return on Equity (R13 510m) Eskom cannot be financially sustainable if it must borrow to pay for interest In this application the depreciation component contributes towards covering interest 39
Regulatory Clearing Accounts (RCAs) BUSA, EIUG and other stakeholders have called for a waiver of the outstanding RCAs Eskom rejects this proposal on the following basis: Contravenes the Electricity Regulation Act, MYPD Methodology utility must be allowed to recover efficient costs and earn fair return SALGA have confirmed that RCAs will allow Eskom to earned the Revenue which was awarded Outstanding RCAs (Year2, 3 and 4) total R66billion with revenue variance contributing R45 billion Eskom expects the trend of approximately R20bn for RCA 2017/18 (year5) to continue During selective reopener stakeholders criticised Eskom for not complying with MYPD Methodology, while now they expect Eskom and NERSA to contravene MYPD Methodology Eskom does acknowledge the impact that RCAs will have on the electricity and affordability 40
Recommendation on outstanding RCAs Eskom s cost base grows by inflation between FY2017 to FY2019 RCAs will be processed together with MYPD4 decision RCAs will be liquidated from April 2019 on phased in basis Example Assume that of the R66bn NERSA decides that R42bn is allowed to be recovered over a period Price increase is minimal and remains in base electricity price until full RCA is recovered over longer period Item 2019 2020 2021 2022 2023 Revenue allowed R200bn RCA Price adjustment 1.0% 1.0% 1.0% 0% 0% RCA Revenue impact R2bn R4bn R6bn R6bn R6bn Benefits : Allows Eskom to address the affordability of consumers Use the RCA decision to refinance debt and raise loans (confidence to investors & rating agencies) Provide auditors with further certainty around revenue generation to address going concern 41
Fitch Ratings puts Eskom on Rating Watch Negative extract from 17 Nov 2017 42
In conclusion Eskom appreciates the robust Nersa process and comments and criticism received during the last 3 weeks endeavor to address issues in the future As a SOE Eskom business model is determined by policy We don t have the latitude to pursue only profitable customers or stop supplying non-paying customers The impact of the reduced IPP costs plus the updated lower sales forecasts makes a minimal impact on the price increase Fitch Ratings have indicated the importance of this price decision and certainty around the outstanding RCAs Eskom s cost base has escalated by inflationary levels from FY2017 have sacrificed returns to reduce impact on customers However debt service commitments are escalating by more than inflation Eskom is not financially sustainable with a CPI price increase as this would imply an average price increase of 4% (2.2% in 2017/18 + 6% in 2018/19) over the 2 years 43