Nelson Mandela Bay Business Chamber NERSA Consultation

MYPD3

Presenters:A. Clark / B. van Vuuren

5 February 2013

Place heading here (Myriad Pro Light)

Contents

•Introduction •Overview•Nelson Mandela Bay Business Concerns•Cost Implications, Economic and Global Competiveness.•NERSA needs to consider Eskom MYPD 3 concerns •Recommendations & Conclusion

Introduction

The Nelson Mandela Bay Business Chamber, representing the interests of business in the Nelson Mandela Bay Metropolitan area, rejects

Eskom's proposed MYPD3 16% electricity tariff increase over the next five years

The proposed increase will have a significant adverseeconomic impact to the continued survival of the

manufacturing industry and commercial sector in this region. We will face a catastrophe based on the loss of jobs

and a downward spiral in the Eastern Cape economy

OverviewEskom’s opening statement:“We need an electricity price path which will ensure that Eskom and the industry remain financially viable

and sustainable, but which remains affordable, especially for the poor.”

• We agree with the statement, but cannot see where industry will remain viable with the proposed MYPD 3 increases for the next five years. Some sectors are already not viable.

• Eskom boasts that it is providing electricity at a cost competitive rate in comparison to global prices. However, the majority of industry in South Africa is not able to connect to Eskom wires and thus pay a premium Municipal Tariff.

• The cost to industry in NMB is one of the highest in the world and has reached a tipping point. Eskom and Municipalities see industry as “a milk cow”. The proposed increases will have a direct impact on all energy consuming businesses. These prohibitive costs will result in business closures, job losses and negatively affect investment decisions.

Overview• Prices already tripled with MYPD1 and MYPD2.

• The more a business depends on energy, the more it will be affected. The viability of Industry and business will come under further strain with the proposed MYPD 3 increases.

• Municipal mark-ups fund municipality budgets for matters unrelated to electricity. Local authorities in this country rely on between 25% and 60% of their income on profits made from electricity sales (8% to 10% from water sales).

• Municipal Mark-ups of between 50% and 100% for electricity are a catastrophic reality for industry and business. This is an unfair and unconstitutional taxation. Customers receiving an identical service from Government are taxed in a different manner.Municipal mark-ups will switch the lights off in South Africa.

• Approximately 50% of electricity users buy electricity through municipalities.

• Government has no strategy regarding energy prices for Business and Industry for the whole country, including municipal users.

Overview Continued

• The increase has considerable knock-on effects on the viability of businesses and the ability of industries to retain or even create jobs.

• In the global economy, demand conditions, the profile, competitiveness of similar trading partners, will have an impact on the competitiveness and output of many South African firms if the MYPD3 increases are allowed to go ahead.

• Energy Intensive Users are already at a point where jobs are being lost and investment has come to a halt.

Five energy intensive users in the NMB reported losses of 922 jobs in the FY2011/2012. (20% of total workforce lost)

Imports vs. Local Production NAAMSA

2006 2007 2008 2009 2010 2011 2012YTD Nov

Total imports 311 318 266 202 270 331 350Locally Produced Volume 392 357 266 192 223 247 236Import Share 44% 47% 50% 51% 55% 57% 61%Locally Produced Share 56% 53% 50% 48% 45% 43% 39%

44%47% 50%

51%55%

57%61%

56%53% 50%

48%45%

43%39%

0%

10%

20%

30%

40%

50%

60%

70%

0

50

100

150

200

250

300

350

400

450

Shar

e (%

)

Volu

me

('000

)

This is the effect of imports on local manufacturing in the motor industry . If the electricity increases are allowed to go ahead local manufacturing could be affected further

Implications of Increased Cost of doing business

The viability of doing business in Nelson Mandela Bay is impaired

Manufacturing facilities’ competitiveness deteriorates against

global counterparts where they compete for business.

Loss of volume results in

reduced shifts, closures and

job losses.

Companies in the Bay face certain

closure and potential massive

job losses in already

struggling areas

Reduction in disposable

income

The negative knock-on effect on the Eastern Cape economy will affect the

poor

Future business in the region and in the

Coega IDZ in jeopardy

Municipal income will reduce as a

result of closing businesses

Revenue Loss and negative Socio-economic domino effect with Lowered employment.

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

Vietnam India South Korea South Korea South Korea South Korea Russia Thailand Australia China China South Africa

$/kW.h 2012

$/kW.h 2018

Electricity US$ per kW.h costs, 2012 vs 2018, 16% annual increase for NMBM and 4.6% annual increase for the rest.

EIA projects global electricity prices to remain static, disregarding global inflation. The 4.6% therefore represents inflation.

Municipal and Eskom

Contribution

R 16 788 404 R 16 373 627

R 21 246 181

R 25 503 430

R 32 782 524R 35 469 700

R 39 654 760

R 47 050 373

R 55 848 793

R 66 376 290

R 78 994 423

R 0

R 5 000 000

R 10 000 000

R 15 000 000

R 20 000 000

R 25 000 000

R 30 000 000

R 35 000 000

R 40 000 000

R 45 000 000

R 50 000 000

R 55 000 000

R 60 000 000

R 65 000 000

R 70 000 000

R 75 000 000

R 80 000 000

R 85 000 000

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

One of the Top 20 users Of electricity in NMBM’s Cost Per Annum

Large Foundry and Glass Manufacturing have

indicated the input cost of electricity is forcing

them to close.

% 19.01

% 13.26

% 18.65

% 18.70

% 18.85

Costs will double in five years. Where does one find 43 Million to offset these costs from today’s

pricing?

Projected CostDomestic Challenges

Small Business ChallengesSmall businesses with high electrical input costs would not be able to afford the increase along with high rentals, and would simply have to close down. Examples of these are Small Foundry Industry, Hair Dressing Salons, Laundromats, Fast Food outlets.

Disposable income will be reduced and have a knock on effect on municipal revenue collection. NERSA needs to review the IBT and cross subsidisation

DOMESTIC 750 kW.h/MONTH HOUSEHOLD (VAT INCLUDED)2013 R 895.55 2014 R 963.58 2015 R 1,143.29 2016 R 1,357.08 2017 R 1,612.90 2018 R 1,919.51

MEDIUM BUSINESS 400V 42 MW.h/MONTH (EXCL VAT)2013 R 48,228.10 2014 R 51,891.98 2015 R 61,569.84 2016 R 73,083.40 2017 R 86,859.62 2018 R 103,371.63

R 0.55

R 0.11

R 0.50

R 0.74

R 0.36

R 0.54

R 0.74

R 0.57 R 0.60

R 0.48

0

0.2

0.4

0.6

0.8

1

1.2

1.4

Tarrif Eskom Megaflex

Large Business

NMBM ATTP Tarrif

A

NMBM ATTP Tarrif

B

NMBM ATTP Tarrif

C

NMBM ATTP Tarrif

D

NMBM Non ATTP Tarrif

A

NMBM Non ATTP Tarrif

B

NMBM Non ATTP Tarrif

C

NMBM Small

Business

NMBM Medium Business

NMBM Large

Business

Electricity Tarff comparison, incl. demand charges, excl. VAT.

NMBM PortionMegaflex

BusinessMunicipality Domestic

Simple analogy of doubling revenue.16% R0.55 = 8.8c Municipality16% R108 = 17.28 Industry16% R129 = 20.64 Domestic

If Eskom increase is 10%, Municipal tariffs should increase by < 5% to achieve the same revenue.

Place heading here (Myriad Pro Light)

Issues concerning members of the Nelson Mandela Business Chamber

Parts of the city are supporting commerce and industry at high risk

Substation infrastructure has failed and only runs on back up Increases vulnerability to an extend outage

NMBM profit on electricity

Not being used on funding the electrical directorate as per guidelines.

Electricity department profit must be “ring fenced” to improve deteriorating infrastructure

Non-existent spend on infrastructure - Poor service delivery

Lack of improvement and the deterioration of quality of supply affects future investment within the city and adds a cost burden to existing business over and above the cost per unit with no money to remedy the situation

General Remarks on Eskom Revenue application document

Crucial information to judge MYPD3 is not available

– Existing generation capacity information is missing.– Information regarding existing capacity versus asset life is missing.– Cost-to-serve data are not provided to evaluate cost reflectiveness of tariffs.– Procurement pricing information detail not available.– Many general statements in application with no back-up.

The Public consultation process is commendable but required data for proper evaluation are not available

What Nersa needs to consider (Answers to stakeholder questions as per Nersa consultation paper)

– Eskom’s sales volume forecast (Q27)– IPP’s (Q17) – IDM ( Q19)– Eskom’s planned investments and existing capacity (Q 8) – Return on Equity and valuation of assets (Q6)– Eskom Operating Costs (Q12)– Primary energy procurement (Q13,14)– Eskom Tariff for Municipalities and cost reflectiveness (Q 26)

Eskom’s sales volume forecast(Stakeholder Question #27)

• Eskom forecast: sales volume growth of 1.9% on average for MYPD3

• Sales volumes have been static over the last six years

• Sales volume forecast in MYPD3 is unrealistic, given the doubling of prices over the period. Sales volumes will drop.

– Energy intensive users are closing and/or reducing consumption– Alternatives to electricity from Eskom/Municipalities are being found Coal and Gas

The tipping point has already been reached. Eskom and the municipalities have priced themselves out of the marketFurther price increases will make the situation worse for Eskom and the negative pricing spiral will continue.

Recommendation to NERSA is not to accept big price increases so growth can be a reality, not a dream

0,24%

Independent Power producers (Stakeholder Question #17)

• Power from IPP’s costs fundamentally more, adding 16% for the MYPD3 period.

• Renewable energy in particular is much more expensive than Eskom power. ( The range 125c /KWh to 232 c/KWh ) Coal costs 23c/KWh growing to 30c/KWh. 773% more expensive.

• IPP’s costs are higher than Eskom’s new capacity.

• Unclear where IPP’s capacity will be used as MYPD3 does not provide an overview of available overall generation capacity available in SA

• What if demand is lower? Eskom still buys expensive power from IPP’s and shuts own plants?

• The rationale for the IPP’s is neither explained nor justified.

• What is the rationale of having IPP’s in a regulated environment?

• Our recommendation is to split Eskom to create a competitive environment.

Why not Subsidise Eskom from Environmental Levies and VAT paid on Electricity?

VAT on Electricity sales out of Eskom is approximately 17.388 Billion for 2011/12

TheVAT on Municipal sales at double the price, using 50 % of the country's consumption, is another substantial amount of money

Our taxed portion is more than the Eskom increase and we believe Government and NERSA should take this into consideration to offset IPP’S and Build

Environmental Tax

VAT

Integrated Demand Management (Stakeholder Question #19)

• IDM projects should save money to Eskom (reduced investment, reduced expensive peak costs)

• Eskom lists IDM as a cost, not as a benefit.

• Unclear how IDM fits into plan as Eskom has not provided an overview of overall capacity.

• Cost for MYPD3 for IDM is R1.7/KWh, which is very high.

• Industry nevertheless fully supports IDM initiatives, though benefit must be clear.

Our recommendation is to expand IDM, particularly around peak usage (ripple control as an example)

Eskom’s Operating Costs (Stakeholder Question #12)

• Eskom and local government face little pressure to reduce costs to competitive levels. This point is reinforced by Eskom’s uncertain record in achieving operating cost efficiencies over both the MYPD1 and MYPD2 periods.

• Given the disastrous rise in past costs, Eskom should be capable of reducing its cost rather than providing for increases beyond inflation.

• Eskom must be a very important contributor to inflation in this country due to its lack of cost control.

ppi

2007 9.45 6.26 1.002008 11.35 6.38 1.102009 15.16 8.59 1.212010 17.39 8.14 1.242011 16.7 12.07 1.312012 20.13 15.21 1.44

Employee costs (R bio) Other Operating costs (R Bio)

increase 2007-2012 113% 142% 44%

Primary energy procurement (Stakeholder Question #13,14)

• Coal cost allowed to increase well above inflation.

• Coal contract information is not available.

• Coal is considered as a single cost centre without differentiating between the various sources.

• Non-transparent situation.

• Unclear whether consumers’ interests are protected and coal is being procured at competitive prices.

Eskom’s planned investments and existing capacity (Stakeholder Question #8)

– The MYPD3 application section 5 does not provide an overview of Eskom assets and its useful life.

– Eskom does not provide a plan showing needed capacity in GW versus available capacity in GW for the period.

– Requirement for capital investment is unexplained in MYPD3.

– Options to extend useful life of existing capacity are not explored in the MYPD3 document

– Eskom does not provide data and uses scare tactics of shortages to get big price increases

Return on Equity and valuation of assets (Stakeholder Question #6)

• Writing up assets to depreciated replacement value is method applied by Eskom in MYPD3

—This method inflates the required rate of return.

—Customers are paying for the increased depreciation.

—This method increases the tariffs for all customers in the short term.

We recommend assets to be valued at historical cost less depreciation and for Eskom to borrow more capital if required.

MYPD3 Tariff for Municipalities (Stakeholder Question #26)

• MYPD3 documentation does not provide any data regarding cost reflectiveness.

• Cost reflectiveness of tariffs for Municipalities is doubtful: Tariff remains too high in relation to other customers:– Restructuring of tariffs insufficiently reflected in tariff proposals.– Municipalities pay very similar tariff compared to much smaller Eskom Direct customer. – Municipalities get above average increase over MYPD3 period.– Municipalities still contribute to Eskom internal subsidies (Electrification and rural

subsidies, low voltage subsidies)– Winter peak charges for TOU to be reduced more. Tariffs are at a level where intensive

energy users come to a standstill during peak at very high costs (1/8 rule still too high)– Demand charges are escalated in the municipal sector ranging from 700% to 100%

• Evening and morning peak not caused by industry but industry pays through high demand charges and peak TOU tariff

Conclusion and Recommendations

• SA requires a national strategy regarding energy pricing for Industry and Businesses. Discrimination between Eskom Direct customers and Municipal customers must stop.

• De-regulate Eskom and split it up

• Eskom’s costs must be put under severe pressure to become cost competitive.

• Eskom’s return requirements must be reduced.

• Cost reflectiveness of tariffs must be driven through to end discrimination of large users.

• Expand energy demand management to reduce peak cost

We believe that the requested average tariff for Eskom must be lower –maximum 10% instead of 16% - in line with EIUG and BUSA

recommendations. The municipal increase should be half of the approved increase for Eskom and be in the region of 5% based on

revenue

A Way Forward

We need an electricity price path which will ensure that South African business remains financially viable, create

investment opportunities which attracts investors. One of these catalysts is to provide a sustainable utility, with good

quality of supply that remains affordable for all South Africans, especially for the poor.

Additional Recommendations

• More focus should be placed on Demand Side Management, Energy Efficiency Saving Tax benefit, and Demand Market participation.

• Electrical load savings using these tools, should be marketed aggressively and where possible identified projects implemented

Demand Side management

• Introduce a voluntary domestic time of use tariff in the metro. This would encourage this group of customers to be more aware of their consumption and even change their load pattern. TOU Tariff

• Ripple control should be considered to regulate demand across the country. This technology is proven, and large loads can be removed from the grid at short notice. Ripple control can be used to regulate the peak. The ripple system in Nelson Mandela Bay can be measured as far as Grahamstown.

Energy Reduction Technologies

Additional Recommendations

•NERSA need to investigate if the allocation of funds is adequate for the capital projects supporting infrastructure and reinforcement in the metro.

•Less emphasis on global credit rating institutions. Eskom should consider local conditions and economyAllocation of funds

•Leads to revenue loss and maintenance costs.•Request improved legislation on metal merchants who are creating a market for conductor theft.

•Implement a task force to combat this crime which is costing South Africa Billions of Rand

Conductor and Electricity Theft

•Prohibit the import of inefficient energy appliances, fixtures and lighting.•Introduce the regulated costs for coal used within SA and a free market for exports.

Import Restrictions and Regulated Costs

•Consider speeding up the process where incentives are given to reduce and remove non-productive, wasteful and inefficient energy consumption from the grid.

•Government to provide subsidies or tax relief for the manufacture of energy efficient technology.

Incentives

Additional Recommendations

•Investigate the margin made to fund the City budget and reduce the reliance on electricity to support city’s expenditure.

•Municipal electricity revenue must be “ring fenced” and the cross subsidisation of 1:1.25 be reduced to enable the grid to be stabilized.

•This fund allocation needs to be addressed when NERSA approves Municipal increases as a result of the MYPD3

•Municipal increases to only increase to the revenue required and not double

Investigate tariff policy in the Metro

•Municipal demand charge must be reduced drastically for the Metered Demand and TOU tariff in the municipal tariff approval for 2013/14

The maximum demand charge

• Manufacturing facilities where energy is a high percentage of the input cost of the manufactured unit are going out of business (e.g. where furnaces are used for casting, melting and injection moulding.) A special tariff should be introduced to protect these industries. In addition commerce and industry receive minimal increases.

Minimal increases for commerce and industry

• Use ripple control to interrupt non-essential loads within the city and not limit this to Geysers as is the current practice.

• Engage with customers to shed at times of the peak. • Use an automated ripple control to limit Metro Demand Charge.

Reducing the demand charge to the Metro

Additional Recommendations

• Introduce Time of Use tariff for all metered customers in South Africa. It is an exceptionally complex task and could start with a select group. It has been started for >1000Kw users but needs to be rolled out to municipalities and lower energy based users.

•Introduce ripple control throughout South Africa.

Reduce the peak demand in South Africa

•Reduction of structural costs across all sectors of the organisation by setting targets and looking at global bench marking.

•The unaccounted portion of the margin on electricity should be reduced to less than 8% in municipal controlled areas.

•Improve on revenue collection

Efficiency of Eskom and Municipal structures

•Government to legislate energy efficient practices in the building industry to reduce the burden when new infrastructure is connected to the grid.

•The margins made on electricity environmental levies and VAT to be used to offset the additional cost of IPP renewable energy.

Government subsidy of Eskom build programme

•Assist Metro in raising awareness on energy efficiency and participate in decision making on infrastructure and load planning

•Make general public aware of cost saving initiatives and enforce these in new building regulations.Awareness