Utility Sustainability- Business Essentials AFRICAN UTILITY WEEK 2009 At van der Merwe & Louis Fourie
BUSINESS IS LIKE THE WEATHER- EVERYONE TALKS ABOUT IT, BUT FEW UNDERSTAND WHERE IT COMES FROM
PRF 2 Road up to here. By 2006 3 80% of Sub Sahara Africa enacted a Power sector reform law 75% Experienced some Privatisation STOP 66% Corporatised their entities >50% establish a regulator >33% had IPP S
Content 1. Strategic Business Plan 2. Long Term Sustainability 3. Utility Business Model 4. Modeling Structure 5. Revenue requirements 6. Multiyear Tariffs 7. KPI s PRF 2
PRF 2 The Way Forward.
PRF 2 1) STRATEGIC BUSINESS PLAN
Key Forces impacting on Global Energy Industry Globalisation World bank/imf Investment priorities Competition Trading Commercialisation Core Competencies Outsourcing Trends impacting on Utility Customer Expectation Reliability <outages Power quality Governments expectations Supply/Demand Technology Pre Payment Gas/Wind Others 7
Utility Strategic Plan /Guidelines - Purpose Objectives - Environmental Analysis - Strategic Issues - Objectives/Targets - KPA s/kpi s CONTROL /REVIEW Identify Gaps Utility - Strategic Plan - Financial Plan - Incl budgets Divisional Strategic Guidelines - Purpose Objectives - Environmental Analysis - Strategic Guidelines Functional Strategic Guidelines - Purpose Objectives - Environmental Analysis - Strategic Guidelines Functional Plans Review Review Divisional Plans Preparing the Utility Plan Distribution/Generation Strategic Guidelines - Purpose Objectives - Environmental Analysis - Business Strategies - KPA s/kpi s A particular Process needs to be followed BU Business Planning - Objectives - Strategies - Action Plans - KPA s/kpi s Review BU Plan - Bu Business Plan - Budget CONTROL /REVIEW
THE BUSINESS PLAN Is a road map of intent, providing directions for the electricity utility to move forward and helps to ensure customer satisfaction on the road ahead. It needs to be flexible, offer alternatives to the supply and demand requirements and consider the risks of outages and inadequate supply against cost considerations for the customers. The plan must have ( several) cards up the sleeve. PRF 2
PRF 2 2) LONG TERM SUSTAINABILITY
Continuity Commercialisation Geographical nature Diversity Customer Mix Economy of scale Happy Customers are. Quality Quantity Cost
PRF 2 3) UTILITY BUSINESS MODEL
Typical Vertically Integrated Business Model Manage Governance Generation, Trading & Risk Management Transmission Distribution Customer Service Operational Shared Services (Fleet, Engineering/Design, System Planning, Supply Chain, etc.) Corporate Center (Human Resources, Information Technology, Finance, etc.) PRF 2
Utility Process Model and Supporting Business Process Model Manage governance Plan the business Manage Energy Purchase & Product Development 4 Develop business plan 4 Purchase 4 Monitor Energy business plan 4 Electricity performance Pricing 4 Manage utility 4 Develop regulatory Products relationship & compliance Provide Customer Manage requested Electrification construction (New Service Connections) 4 Provide new service 4 Relocate system assets 4 Planning 4 Contract management 4 Customer Education Provide & Service the network (Construct & Maintain) 4 Provide system capacity 4 Manage system assets 4 Acquire energy Operate the system 4Restore network to acceptable reliability levels 4Monitor system / network performance & accounting 4Plan & execute network/ system outages Manage Energy Revenue 4 Billing 4 Vending 4 Collect revenue 4 Manage fraud Manage customer interactions (Customer relationship management) 4 Develop customer performance standards 4 Manage corporate image Renew the Business 4 Develop growing value strategy 4 Ensure future business success 4 Develop business improvement methodology Provide support services 4Manage supply chain 4Manage IT 4Manage fleet 4Manage real estate 4Manage office services Manage Human Resources Manage Financial Resources Manage Safety and Risk PRF 2
PRF 2 4) MODELING STRUCTURE
Generic Business Model Wires Only Retail Only Asset company Hybrid company Customer company Combination of customer and asset company principles to ensure balanced hybrid full service entity PRF 2 16
Electricity Supply Business Chain Industry Energy Sources Generation mix Tariff structures Capacity/availability charges Network Requirements Network Operations Residential Customer mix Diversity Cust Demand Customer care Geographical spacing Business Profit Loss Customer mix Diversity Cust Demand Customer care Geographical spacing Governance / Regulatory
Financial Planning Process The financial structure needs to be based on the following: Utility s Business plan requirements and objectives Generation plan taking into account gas infra structure, gas availability and possible coal based generation The cost of current and future generation Transmission and supply requirements Other support measures Focus on cash flow requirements Tariff structures and levels, including fuel/renewable levies Results are tested in long term financial model, Profit and loss statements, Sources and application of funds, Balance sheet and Financial ratio PRF 2
Methodology in developing the FMP Demand forecast TX & DX requirements Utility OPEX TANESCO LTD GRID SYSTEM DAILY LOAD CURVES 550 500 450 400 POWER (MW) 350 300 250 200 150 100 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 TIME (HOURS) TANESCO Accumulated Cashflow Forecast 5 % annual Tariff Increase (2006 as from Jul, 2007-2010 as from Jan) Generation plan Investments 400,000 300,000 10% Fuel Surcharge as from Jul 06 (the 2006 Fuel surcharge added as tariff increase) to Dec 2010 IPTL Bought by Jan 2007 200,000 TSHS m 100,000 0 Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10-100,000-200,000-300,000 Note: Only 2006 Capital included NET Cash Balance After Operational Activities NET Cash Balance After Committed Capital Net Cash Balance after funding Assumptions Deliverables Fuel FMP 19
Business Economic Model In Summary Report Data Analyses and Monitor
PRF 2 5) REVENUE REQUIREMENTS
Revenue requirements Operating Expenses - USc/kWh Generation Cost Triggers 12.0 10.0 PPA cost IPP vs. own plant Cost of fuel Renewable Cost of off grid gen Dispatching plan Spinning Reserve 8.0 6.0 4.0 2.0-2002 2003 2004 2005 2006 2007 2008 2009 2010 Operating Expenses (USc/kWh): Grid Generation and Transmission Costs Off Grid Generation Costs Distribution Costs 5% and index to inflation 10% and index to inflation 15% and index to inflation 20% and index to inflation 25% and index to inflation TANESCO Utility Cash flow Requirements Cash Flow Scenario 4 90000 80000 70000 60000 50000 40000 30000 20000 10000 0 Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Tshm Operating Expenses Energy Purchases Funding Investments&Capital Total Revenue Net Cash required after Subsidies
Utility cash requirements Important elements to focus on before tariffs are opted for PRF 2
Revenue Requirements in the Financial Planning Process Determine all assumptions affecting cash flows Load forecast Forecast customers per customer group Determine consumption per customer per forecast group Determine forecast per customer group Revenues Tariff per customer group Consumption per customer group Sales per customer group Collection levels Revenue Expenses Energy purchases Generation plan (taking into account gas restrictions in the short term) Fixed and variable cost per generation source (incl PPA variables) Units dispatched per power source Cost of generation Other operating expenses TX and Dx operating requirements Cash flow from operations Net cash flow from operations: Revenue minus expenses Cash resources to fund liabilities and Investment Investment Capital investment plan Funding plan Liabilities Restructured debt New debt (operational and investment) Net cash is derived as Cash from operations minus Investment minus liabilities Net Cash shortfall adjusted by lastly by adjusting tariffs
Balancing Cash with Revenue Load Forecast Customers per customer group Customer per forecast group Forecast per customer group Revenue from Sales Tariff per customer group Consumption per customer group Sales per customer group Collection levels Cash Flow from Operations GX Expenses TX DX Net Cash from Ops To fund liabilities & Investment Determining Assumptions Investment Plan Capital Funding Liabilities Net Cash Tariff Options
Modeling Examples under different Utility cash requirements 0 TANESCO Accumulated Cashflow Utility- Forecast 2006-2010 No Tariff Increases Generation Option 1 Option1 Utility Option2-100,000 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10-200,000-300,000 TSHS m $m $m -400,000-500,000-600,000-700,000-800,000 NET Cash Balance After Operational Activities NET Cash Balance After Committed Capital Net Cash Balance after funding Utility Option 3 Note: Only 2006 Capital included $m $m TSHS m 400,000 300,000 200,000 100,000 0 Jan-06 TANESCO Accumulated Cashflow Forecast 5 % annual Tariff Increase (2006 as from Jul, 2007-2010 as from Jan) 10% Fuel Surcharge as from Jul Option 06 (the 2006 Fuel 4 surcharge added as tariff increase) to Dec 2010 IPTL Bought by Jan 2007 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Utility Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10-100,000-200,000-300,000 Note: Only 2006 Capital included NET Cash Balance After Operational Activities NET Cash Balance After Committed Capital Net Cash Balance after funding
PRF 2 6) MULTI -YEAR TARIFFS
Annual Price Increase Immediate Revenue Requirement Average price levels Tariff structures & Cost reflectivity Long term phasing approach Structures of individual tariffs Tariff levels relative to each other
Tariff Scenarios for Financial Analysis Base Case Tariff Increase Mar-06 0% 0% 0% 0% 0% Interim Tariff increase May-06 0% Scenario 1 Tariff Increase Mar-06 5% 5% 5% 5% 5% Interim Tariff increase May-06 15% Scenario 2 Tariff Increase Mar-06 0% 5% 5% 5% 5% Interim Tariff increase May-06 0% Scenario 3 Tariff Increase Mar-06 0% 5% 5% 5% 5% Gvernment Subsidies Tsh Bn 38,060 Scenario 4 Tariff Increase Mar-06 5% 10% 10% 10% 10% Interim Tariff increase Sep-06 15% Example of Typical Phasing
Proposed Roadmap towards cost reflectivity in tariffs Phase 1 Revenue requirements 1. Revenue increase based on FMP price increase Before yearend 2. Commencement of COS study Completion year n Phase 2 Tariff rebalancing 1. Completion of COS study 1. Cost reflectivity of all tariffs for revenue neutrality 2. Tariff structure analysis 2. Phasing plan with milestones 3. Implementation strategy Utility subsidy independent but capital dependent Year 0 Year 1 Year 2 Current tariffs COS tariffs Phasing in approach Commercially viable Year n & beyond Current tariffs structure Non cost reflective T1yr1 T2yr1 T3yr1 T4yr1.. T1yr2 T2yr2 T3yr2 T4yr2.. Revenue neutrality Cost reflectivity
PRF 2 7) KPA S & KPI S
Goals / Behaviour changes KPI's Definition Unit Network Planning Network Creation Network Maintenance Network Operation Accurate demand and capacity forecast to define network needs Demand forecast accuracy (% error vs. Actual) % Accomplish Electrification and FBE supply goals New connections # New FBE connections # Improve interruptions frequency SAIFI /1 Improve interruptions duration SAIDI /1 Improve technical losses Technical losses % Accomplish These Electrification are and FBE the supply specific goals Performance New connections areas to be # measured New FBE connections C Complete CAPEX construction according to network planning CAPEX finished vs. CAPEX planned % Technical CAPEX costs finished vs. planned % Optimise costs of detail Financial eng and construction Average cost per type of network R / unit Optimise time of detail eng and construction Average time per type of network days / unit Improve interruptions Commercial frequency SAIFI /1 Improve interruptions duration SAIDI /1 Improve system outages NR and duration of grid and partial grid failures # Improve failure rate per network component Average failure rate per component Failure / year Key Performance area s (KPA s) Accomplish Preventative Maintenance Plan Key Performance Indicator s Maintenance finished vs. planned Planned vs unplanned maintenance Nr and duration of planned and forced outages % % Nr/Hr's Reduce technical losses Technical losses % Indicators that would measure a specific area, like Live line maintenance Work done by life line teams % Reduce average Turnover, OPEX cost per Losses, voltage level Collections Opex/km etc R / km Develop capability for quick response to outages Customer satisfaction index % of positive answers Average restoration time hours Claims and request average response time days Improve safety for employees and society OSHA Rate % Lost Time Accidents % Accidents per voltage level #
Conclusion To model is to build understanding of the utility Understanding brings opportunity Opportunity leads to: Efficiencies Sustainability in long run Happy Customers. PRF 2
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