1

Presentation - July 2011

Comment on : Regulatory rules on network charges for third-party transportation of energy

Policy and Regulation timeline

• The discussion document released by NERSA, addresses more than the issue of 3rd party network charges – and it is to be applauded as another step forward towards ensuring security and quality of electricity supply.

2

1987 1995 1998 2000 2001 2002 2003 2004 2005 2006 2007 2008 2011

The Electricity

Act 1987

NER

Established

1995

White Paper on

Energy Policy

1998

Eskom

Conversion Bill

2000

Eskom

Conversion Act

2001

Blueprint for

EDI

Govt : 30%

IPPs,

70% Eskom

Cabinet decision for

single energy

regulator

NERSA Established

2005

National Energy

Regulation Act

2004

Electricity

Regulatory Act

2006

Cabinet

approves 6

REDs

NERT & SACC

Established 2008

Electricity

Pricing Policy

2008

3rd Party

Access

ISMO Bill

Contents

• General Comment

• Five key areas to re-examine

– Cost Reflectivity

– Subsidisation

– Transmission Charges Methodology and Trajectory

– Distribution Charges Methodology

– Wheeling and Third Party Access

• Conclusion

3

General Comment

• The document appears to be written from both a neutral perspective and from an Eskom perspective

• The EIUG recognises the legacy and on-going value that Eskom provides

• However as a cornerstone to the introduction of IPPs and bilateral trading, the rules for 3rd party access should be written from a neutral perspective i.e. for all future stakeholders

• There are various sections within the NERSA document which were not formally queried, but which are not adequate and need to be addressed (for further comment please see the EIUG detailed submission)

4

Recommendation: All existing methodologies for cost allocation should be updated and reviewed

Five Key Areas : 1. Cost Reflectivity

• South Africa’s tariffs for generation, transmission and distribution arenot cost reflective and this needs to be addressed.

• This is a key principle to ensure:

– Economic efficiency

– Transparency and a level playing field for all

– On-going investment throughout the value chain (and a clear ROI for investors)

– The right signals encouraging the right behaviour (consumption & location)

• For example:

– In terms of price level: Network costs must be ring-fenced from other operations.

– In terms of structure: Network operations and loss charges calculated according to geographic differentiation of 0%-3% are not perceived as cost-reflective

5

Five Key Areas : 2. Subsidisation

• There are currently numerous subsidies (transparent and hidden) in the electricity industry, for example:

– Cross subsidies to rural and certain residential customers

– Subsidies for electrification

– Municipal “surcharges”

– Environmental levy

• While this approach is tolerable in a vertically integrated industry it creates challenges when introducing 3rd party transportation of energy (wheeling).

• To avoid “cherry picking” and market participants escaping their subsidy obligations it is recommended that a Subsidy Framework is introduced.

6

Five Key Areas : 2. Subsidisation (Contd…)

• Such framework will address all decisions regarding the creation and application of subsidies can be debated and agreed by all Stakeholders including NERSA and National Treasury.

• Subsidies should be explicitly developed and regulated and not left to the discretion of licensees.

7

Recommendation: It is proposed that NERSA leads the development and implementation of an appropriate subsidy framework.

Five Key Areas : 3. Transmission Charges

• Eskom Transmission costs must be ring-fenced from other Eskom costs including Generation and Distribution.

• This will prevent cross-subsidisation of other Eskom costs

• Connection Charges– A definite preference for “shallow” connection charges

– The NERSA document is incomplete in addressing all the critical issues

– Ensure alignment with other documents on the topic

• It is concurred that TUOS, reliability and losses charges will be split 50/50 between generators and loads

• TUOS charges to loads– 0% to 3% approach does not resemble the underlying cost of supply. Consider

same approach (6 zones) as TUOS charges to generators

– Consider separate network and access charges (alignment with distribution network approach)

8

Five Key Areas : 3. Transmission Charges (Contd…)

• TUOS charges to generators– It is assumed 6 zones adequately reflect underlying cost of supply

– Agree a price trajectory with generators to promote certainty (and bankability). Deviations to absorbed by loads

– Same charges to all generators

– Negative charges to be avoided

– Demand to be measured during coincident peak or average energy produced

• Losses– To be based on cost of losses not 0% to 3%

– Cost reflective loss factor for each TOU period (for loads and generators).

– Loss factors must be updated periodically (e.g. annually)

– Loss factors should preferably be based on marginal losses

• Reliability Charges– Each generator’s reliability should be measured and proportionally charged

– Charges to loads should be based on c/kWh

• Subsidies– Any deviations from the cost of supply must be dealt with in accordance with an

approved subsidy framework

9

Five Key Areas : 4. Distribution Charges

• No network, reliability and service charges should be allocated to embedded generators. This position is consistent with the EPP and section 1.5 (3rd last paragraph) of the NERSA position paper which argues that 100% of distribution network costs should be allocated to loads

• However, connection and losses charges are applicable to embedded generators.

• Connection charges– Same comments as for transmission connections

• Losses – Same comments as for transmission losses

10

Recommendation: Given the complexity of trying to calculate and implement generators charges at distribution level and considering the marginal benefits and huge resource

requirement of such complexity it is suggested that NERSA should stick with the EPP recommendations of not imposing any network charges on embedded

generators except for Connection and Losses charges.

Five Key Areas : 5. 3rd Party Access

“The network owners (Distribution Network Owners and Transmission Network Owners) will not be liable for the effects arising from the failure of their networks to deliver energy contracted under power

purchase agreements between consumers and generators. The standard liability for direct damages will apply. “

11

• The failure of the network owner to provide some security around service levels for energy delivery, is a significant impediment to bilateral trading and wheeling for own consumption

Recommendations:

1. Introduce a minimum performance limit on n and n-1 network arrangements

2. Down to this limit the generator will absorb network unavailability risk

3. If network performance drops below this limit the network company will beexpected to compensate the generator for loss of revenue at the prevailingWEPS rate (or equivalent)

Five Key Areas : 5. 3rd Party Access (Contd…)

12

• It is unclear why NERSA proposes the 300 MW rule - It seems arbitrary at best

• Presumably the 300 MW cap is to limit the impact of imbalances on the system

• Even a simple balancing mechanism will remove the need to introduce an artificial limit on wheeling transactions

• This will negate the need for the proposed “standby rate” charge

Recommendations:

1. NERSA and consultation with ISMO must develop and implement a balancingmechanism (even a basic one) to deal with bilateral transactions that are notin balance

2. Remove the 300 MW criteria as soon as the balancing mechanism isimplemented

Conclusion

• This is a very important document in allowing the market to attract much needed private sector investment in generation

• Any network charges (Transmission or Distribution) must be cost reflective, consistent and transparent

• To support the entry of IPPs it is recommended that:

– Transmission charges (TUOS and service) to generators are fixed and agreed to promote certainty (and bankability)

– Embedded generators are exempt from DUOS, reliability and service charges

– The network operator commit to appropriate service levels and must accept some risk in not matching these

– A balancing mechanism is introduced to deal with bilateral imbalances

• Subsidies must be clearly indicated and implemented within a framework agreed by NERSA and National Treasury – not arbitrarily introduced and applied by licensees

• The NERSA paper should be rewritten from a neutral point of view and should address all relevant detailed issues.

13

14

Thank you