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NERSA CEO: Smunda Mokoena

24 August 2010

Presentation to Select Committee on Economic Development

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AGENDAMandate of the Energy RegulatorCurrent structure of the ESIObjects of the Electricity Regulation ActExtract from the RE white paper of 2003REFITs I and IIFacilitatorsConclusion

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MANDATE1.1. NERSA was established in terms of the National NERSA was established in terms of the National

Energy Regulator Act, 2004 (Act No. 40 of 2004)Energy Regulator Act, 2004 (Act No. 40 of 2004)2. Mandated by the Electricity Regulation Act, 2006(Act

No. 4 of 2006) (“the Act”) to regulate the Electricity Supply industry in South Africa.

3. s4 (a) (iv) of the Act states “The Regulator must issue rules designed to implement the national government’s electricity policy framework, the integrated resource plan and this Act.”

Current structure of the ESI

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Eskom Transmission

Eskom Distribution

Customers bCustomers a Customers n

Eskom Generation

Large Power Users

D1 D3D2 Dn

Imports /Exports

IPPs

Municipal Generators

Local Authority Distributors

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Objects of the ActThese are listed in s2 of the Act and the relevant ones for this presentation are to:

(c) facilitate investment in the Electricity Supply Industry

(e) promote the use of diverse energy sources and energy efficiency

Renewable Energy Policy

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The RENEWABLE ENERGY WHITE PAPER of 2003 states:

In order to meet the long-term goal of a sustainable renewable energy industry, Government has set the following 10-year target for renewable energy:

 10 000 GWh (0.8 Mtoe) renewable energy contribution to final energy

consumption by 2013, to be produced mainly from biomass, wind, solar and small-scale hydro. The renewable energy is to be utilised for power generation and non-electric technologies such as solar water heating and bio-fuels. This is approximately 4% (1667 MW) of the estimated electricity demand (41539 MW) by 2013.

 

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Renewable Feed-In Tariffs (REFITs)

1. Based on the above requirements NERSA introduced a REFIT framework in two phases.

2. A REFIT is a pre-approved tariff for a specific Renewable Energy generation technology eg., wind

3. By nature REFITs include a premium above tariffs for conventional generation mainly to attract investors and developers

REFIT FINANCIAL ASSUMPTIONS

Financial parameter Unit IPP REFIT

Debt % 70

Equity % 30

Nominal cost of debt % 14.9

Inflation % 8

Real cost of debt after tax % 6.39

Tax rate % 29

Real return on Equity ROE after tax % 17

Weighted Average Cost of Capital (WACC)

% 12

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REFIT PHASE I

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Renewable Energy Feed – in Tariffs approved March 2009

This is largely aligned with the technologies mentioned in the REWP of 2003.

REFIT PHASE II

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Renewable Energy Feed – in Tariffs approved October 2009

Important features of the REFIT

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The REFITs will be escalated by CPI annually.

A full tariff review will take place every year for the first five year period of implementation and every three years thereafter.

The term of the Power Purchase Agreement (PPA) is twenty (20) years.

The carbon revenue from the Clean Development Mechanism (CDM) was not included in the REFIT.

Independent Power Producers (IPPs) may apply for CDM revenues separately.

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Way Forward

1. The NewGen regulations of 5 August 2009 require that NERSA issues rules on selection criteria for the REFIT programme.

2. NERSA is currently finalising the rules and the standard REFIT PPA after a lengthy public consultation process

3. Once the rules are finalised they will be forwarded to the System Operator or the Buyer.

4. The Buyer will then kick start the process by issuing a Request for Qualification (RfQ) and a Request for Proposals (RfP).

FACILITATORS

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Rules for Power Purchase Cost Recovery

1. Regulation 10 of the NewGen regulations requires that NERSA passes rules for the purpose of cost recovery by the system operator and the buyer.

2. In response to this NERSA gazetted rules on Power Purchase Cost Recovery (CRM) after a public consultation process.

3. The CRM basically addresses:1. Check of whether the proposed IPP will be affordable2. The allocation of risk between the buyer and the IPP3. Process to be followed by the buyer in seeking approval of pass through costs4. A list of recoverable/pass through costs

Integrated Resource Plan 1 (IRP 1)gazetted on 29 January 2010

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Med

upi

Kusile

DoE

OCG

T IP

P

Ingu

la

MTP

PP

REFI

T W

ind

REFI

T Oth

er

Sere

Oth

er cap

acity

and

De

com

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ing

Net n

ew cap

acity

Total c

apac

ity

Dem

and

Fore

cast o

rigin

al M

YPD

DSM

Net p

eak de

man

d (afte

r DSM

), MW

Annu

al ene

rgy ne

t sen

t out

DSM

Annu

al ene

rgy ne

t sen

t out

afte

r DSM

YEAR MW MW MW MW MW MW MW MW MW MW MW MW MW MW GWh GWh GWh2009 772 0 0 0 0 0 0 0 0 772 44157 37845 432 37413 248517 426 2480912010 683 0 0 0 168 0 175 100 30 1419 46393 39432 923 38509 258706 1864 2568422011 404 0 1020 0 168 200 150 0 55 2355 47380 40914 1343 39571 267771 3453 2643182012 0 0 0 0 84 200 0 0 0 1146 48082 42373 2118 40255 276705 6561 2701442013 0 723 0 666 0 0 300 0 0 2127 50809 44238 3056 41182 288066 10642 277424

Multi-Year Price Determination 2 (MYPD 2)

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SUMMARY OF ALLOWED REVENUE 2010/11 2011/12 2012/13

 R’m R’m  R’m 

Eskom’s own primary energy cost 36 464 40 486 45 351

IPP and Co-generation 2 304 4 299 5 819

Operating Expenditure 32 611 34 727 36 847

Depreciation 9 356 12 812 17 880

Return on assets 3 039 15 936 33 163

Demand Side Management 1 406 1 688 2 351

  85 180 109 948 141 411

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In Conclusion1.1. The Energy Regulator believes that:The Energy Regulator believes that:

– all perceived regulatory risks have been mitigated.all perceived regulatory risks have been mitigated.

– once the rules on selection criteria for the REFIT once the rules on selection criteria for the REFIT Programme have been finalised the Buyer will be in Programme have been finalised the Buyer will be in a position to invite interested parties to bid before a position to invite interested parties to bid before the end of 2010.the end of 2010.

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THANK YOUwww.nersa.org.za