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Critical Electricity Pricing IssuesCritical Electricity Pricing Issues

DME Portfolio Committee23 May 2007

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THE BRIEF

To address the committee on the following:

• Affordability, reliability and accesibility to electricity for all South Africans;

• The Eskom price increase of 18% - what informed this significant increase;

• The Eskom view on the pricing methodology developed by NERSA

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20000

22000

24000

26000

28000

30000

32000

34000

36000

38000

40000

42000

19

88

19

89

19

90

19

91

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92

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93

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94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

Year

Pe

ak

De

ma

nd

an

d C

ap

ac

ity

(M

W)

Peak Demand Expected Peak Demand

Installed Capacity (MW Sent-out) Operational Capacity (MW Sent-out)

Peak demand (MW)

Reserve margin = 25%

Reserve margin = 20%

Reserve margin = 16%

Reserve margin aspiration = 15%

Reserve margin

= 8-10%

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Capacity expansion - driven by long term demand forecast

Long term forecasts - national + foreign

30000

40000

50000

60000

70000

80000

90000

2005 2010 2015 2020 2025

MW

Position

Moderate Eskom position based on 4% growth electricity

growth supporting 6%economic growth

77960 MW

56710 MW

Eskom moderate position 2.3% electricity

growth basedeconomic growth of 4%

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Capital Expenditure - R150bn

72% Mothballed stations 2 Coal base load stations Hydro and gas options Nuclear plant Refurbishment 2%

14% Lines and cables Network improvements Refurbishment

12% Network strengthening Cater for growth Refurbishment

Generation

Transmission

Distribution

Corporate

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Research

PBMR

UCG

Concentrating Solar

CogenerationHydro

Nuclear

Gas

Coal

Solar

Transmission Renewables

* Red outer circle indicates – out of Borders project

OpportunityIdentification

New Coal Supply

Oscar Yankee

Discard Coal November

Victor

Gas 2

Zulu

Mike

Hwange

Coal 1 Hydro 1

CBM

Coal 2 Non EskomGeneration 1

Hydro 2 Whiskey

26 125 MW

Pre-feasibility

TangoSierra

Co-Gen 1

Foxtrot

HVDC 1

Golf

Nuclear n

22 650 MW

4500

35001600

1200

1775

1200

100 6000

500

400

500 1000

0

2000350

1000500

165

350

100

1150

1600

900

4500

0

4500

10000

Feasibility, Business Case, ContractConcluding

India

Lima

Papa Nuclear 1

EchoQuebec

Delta

Juliett

Kilo

Bravo

600 1500

2400 3000

1000 1050

2400

600

1300

4500

18 350 MW

Build

Renewable1

Ingula Komati

Camden Grootvlei

MedupiArnotP1&P2

Gas 1 OCGT

400kV 765kV

11 941 MW

100 1332 961

1520 1128

4500300

1050 1050

Capacity projects funnel

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Generation Major Projects Major Generation Projects

Project Type Project Approva

l R billion

MW Approval Date

1st Unit Project Completio

n   

Camden Coal 5.2 1 600 Dec-03 Jul-05 Mar-08

Grootvlei Coal 4.8 1 200 Dec-03 Sep-07 Oct-09

Komati Coal 6.1 1 000 Dec-04 Sep-08 Oct-11

Medupi Coal 78.6 4 500 Dec-05 Apr-11 Jan-15

Arnot Coal 1.0 300 Jun-05 Apr-06 Nov-10

Commercial wind Wind 1.1 100 Dec-06 Dec-09 Dec-10

Angerlik & Gourikwa (OCGT)

Gas 3.5 1 050 Jun-05 Jan-07 May-07

GAS 1 Gas 4.3 1 050 Aug-06 May-08 Sep-08

Ingula Pump storage

8.9 1 332 Mar-06 Mar-12 Dec-12

Kriel refurbishment Coal 1.6 - Dec-04 Nov-06 Nov-11

Matla refurbishment Coal 1.9 - Dec-06 Apr-09 Apr-14

Majuba Rail Railway 1.9 - Dec-04 N/A Dec-09

Bravo * Coal 84.8 5160 Mar-07 Mar-12 Dec-15

Total   203.6        

* Awaiting PFMA approval

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Transmission projects

BLOEMFONTEIN

DE AAR

KOMATIPOORT

RICHARD'S BAY

WITBANK

Namibia

Botswana

Mozambique

Swaziland

CAPE TOWN

DURBAN

EAST LONDON

PORT ELIZABETH

PRETORIA

DE AAR

Mercury

Perseus

Hydra

Gamma

Omega

Kudu

2009

2009

2009

2010

765 kV

400 kV

Matimba2009/10 for integration

of project Alpha

Marang

Dinaledi

Grassridge

Eros

Delphi

Neptune2010

2007

BEAUFORT WEST

Juno

Bloemfontein

2009

2009

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Transmission Major Projects

Major Transmission Projects

Project Type Project Approval R million

Approval Date Project Completion

Cape Strengthening WG 400kV line & substations 1100 Mar-04 Jun-07

Line reinsulation (Western & Southern Grid) Lines 192 Mar-06 Mar-08

Substation reinsulation (Western & Southern Grid)

Substation 212 Apr-06 Apr-10

Camden HV Yard Substation 70 Apr-04 Sep-07

Komati HV Yard Substation 145 May-06 Apr-09

Gourikwa HV Yard 400kV line & substation 166 Jul-05 May-07

Ankerlig HV Yard 400kV line & Substations 170 Jul-05 May-07

Grootvlei HV Yard Substation 123 Oct-05 Apr-08

Eros Substation 81 Sep-05 Dec-07

Majuba Umfolozi 765kV line & substations 775 Jan-07 Dec-09

Tabor Spencer 275kV line 400kV line & substations 463 Jul-05 Jun-07

Apollo Refurbishment HVDC substation 440 Jul-05 May-08

Shunt Caps (Beta, Hydra & Perseus) Substations 99 Jan-06 Dec-07

Duvha Leseding 400kV Line 400kV line & substations 289 Aug-06 Nov-08

Platinum Basin 400kV line & substations 1300 Jun-03 Jun-06

Lowveld Transformation Capacity 400kV line & substations 150 Jul-06 Jul-08

Witkop 3rd Trf Substation 82 Sep-04 Mar-08

Tabor Spencer 275kV line 275kV line & substations 182 Jun-06 Oct-08

Medupi HV Yard Integration 765kV & 400kV lines & substations 2000 Oct-06 Dec-09

Zeus Hydra 765kV line & substations 3000 Aug-06 Jun-09

Hydra Omega 765kV line & substations 3300 Aug-06 Jun-09

Dedisa 400kV line & substations 427 Jan-07 Dec-09

GAS 1 HV Yard Substations 335 Oct-06 Dec-08

JBH North Upgrade Substations 408 Dec-06 Dec-08

Total 15509

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50% from retained earnings

50% from debt of which

At least 25% from the domestic market

Long tenors (matches our assets), best value, no currency risk

Up to 25% from international markets

Various instruments - Export Credit Agency, Bonds, Private placements

Funding strategy

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Rating Status Moody’s S&P Fitch

Foreign Currency

Local Currency

Domestic Long-term

Domestic Short-term

Outlook

A2

A1

-

-

Stable Stable Stable

BBB+

A-

AA+

A1

-

A

AAA

A1+

Eskom’s credit rating

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Investment Grade

• Investors require (per Rating Agencies):

1. Predictable regulatory framework with tariffs for efficient cost recovery

2. Asset security for loans:

3. Control over cash flows from an effective customer base

4. Confidence in the sustainability of critical capabilities:

• Methods to protect all national capabilities – capital build, electrification, demand side management

5. Continuity of successful management: • Assurance of business continuity through

competence & planned succession

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Demand-side management

Targets: 8 000 MW by 2025

Investment of R10 billion planned by 2012, 3000MW Focus areas

Installation of an energy saving culture Adoption of energy efficient technologies e.g..

lighting Tariff reform, particularly for households Dynamic market pricing for industrial customers

(DMP) Use of renewable energy with households – Solar

Water Heating Approach to be followed

Aggressive roll-out planned nationally, with emphasis on areas with network constraints

Partnership between government, local authorities and Eskom

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Our competitive advantage will continue into the future

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4

6

8

10

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16D

enm

ark

Ital

y

UK

Net

her

lan

ds

Fra

nce

Bel

giu

m

Ger

man

y

Sp

ain

US

A

Fin

lan

d

Sw

eden

Can

ada

Au

stra

lia

So

uth

Afr

ica

US

cen

ts p

er k

Wh

Source NUS April 2006

Restricted and Confidential

South Africa 30% cheaper than Australia

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Mining cost: Unpredictable cost inflation…

Most recent data from Stats SA

SA mining costs have increased by 25,7% since Oct. 2005.

SA coal costs (for SA consumption) have increased by 18,2% since Oct. 2005.

Stats SA’s coal cost index was increasing at only 3,3% (year on year) at the time Eskom lodged its revenue application to the NER in 2005.

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

PPI Mining &Quarrying*

PPI Coal only

* Includes coal, metal ores, and other minerals

25.7%

18.2%

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Price of Electricity in real c/kWh new

31

24

28

18 1821

19

24

18 18

23

20

0

5

10

15

20

25

30

35

'2006/7 '2007/8 '2008/9 '2009/10 '2010/11 '2011/12

cen

ts/k

Wh

New Entrance Gx New Entrance Total GTD

NERSA (no change) MYPD Rule Change

Restricted and Confidential

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Real price increases are not uncommon - Benchmarking

Some recent price increases seen globally• Brazil – The Brazilian regulator Aneel has allowed a increase of domestic

tariffs by 13%, and industrial tariffs by 18% primarily due to rising fuel costs.• Chile – The Chilean regulator INE has increased prices paid to generators by

11% in the central grid and 14% in the northern grid which will be passed through to customers.

• Ireland – the Irish regulator CER has allowed for an increase in ESB’s end use prices by almost 20% in the New Year primarily driven by high fuel costs.

• Portugal – The Portuguese regulator ERSE has provided an initial proposal to allow for a 15.7% increase to average tariff levels.

• China - East China's Shandong Province, Huaneng Power recently raised tariffs by 7.3 per cent to 381.4 Yuan (US$47.03) per megawatt-hour (MWh), while in South China's Guangdong Province, the company raised prices by 6.2 per cent to 497.71 Yuan (US$61.37) per MWh.

• Austria – The Austrian regulator E-Control has allowed price increases of about 5%, driven by an increase in the energy component of some 10%.

• Ontario – where since cost reflective prices have been established starting in 2003, tariffs have increased by roughly 100%.

Restricted and Confidential

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Key Strategic Issues

•Affordability•Industry viability•Internationally competitive prices

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Conclusion Achievement of the capacity expansion programme objectives is non negotiable Eskom plan cater for higher economic growth Eskom always ensure a long term view of the industry Maintain our position of being the world’s lowest cost producer South Africa to remain an attractive investment destination for energy intensive industry

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Restricted and Confidential

Thank YouThank You