This presentation will argue: The price impact is worse that it seems - The question of affordability - An example of the financial impact - Environmental levy not applicable - Costs claimed result from Eskom’s own failings - Claims grossly overstated and neglect offset costs - Recalculation taking offset costs into account - Inadequate disclosure - Alternatives to a price increase

1. Submission in response to
Eskom’s application to NERSA
by Chris Yelland CEng
Managing director
EE Publishers

2. Documentation
The full text submission and this slide
presentation to NERSA by Chris Yelland
is available at: www.ee.co.za

3. Outline
 The price impact is worse that it seems
 The question of affordability
 An example of the financial impact
 Environmental levy not applicable
 Costs claimed result from Eskom’s own failings
 Claims grossly overstated and neglect offset costs
 Recalculation taking offset costs into account
 Inadequate disclosure
 Alternatives to a price increase
 Conclusions and recommendations

4. Price impact is worse than it seems
 A 12,69% increase came into effect on 1 April 2015.
 If granted, the extra 12,61% claimed would become
effective on 1 August 2015 at the earliest.
 If recovered over balance of 2015/16 (i.e. 8 months) the
extra 12,61% becomes 12,61 x 12 / 8 = 18,92%
 Thus the price increase from 1 Aug 2015 to 31 Mar
2016 will be 12,69 + 18,92 = 31,61%
 This has not been budgeted by domestic, municipal,
agricultural, commercial, industrial, mining customers.

5. The question of affordability
 The question of affordability to the economy and to
electricity customers has not been considered by
Eskom at all.
 Many submissions to NERSA will deal with the issue of
affordability.
 Therefore affordability will not be dealt with in this
submission, save for just one example.

6. An example of the financial impact
 A directive from National Treasury:
“Any decision that NERSA makes after 15 May
2015 will need to be deferred to the 2016/17
municipal financial year.”
 Thus municipalities cannot pass through any further
price determination by NERSA till 1 July 2016.
 Municipalities will also not be able to pay Eskom for any
further price increase arising after 15 May 2015 as this
would be unbudgeted and unauthorised expenditure for
the 2015/16 financial year.

7. Environmental levy not applicable
 Eskom’s application has assumed that the
environmental levy will take effect on 1 July 2015.
 But the environmental levy increase has not been
published in Government Gazette, and is not in effect.
 NERSA should reject Eskom’s application for a price
increase i.r.o. the environmental levy until the effective
date of the levy increase is formally announced.

8. Extra costs claimed by Eskom
result from its own failings
 By Eskom’s own admission, the unbudgeted diesel and
STPPP costs follow directly from:
– Late completion of Medupi, Kusile and Ingula
– Boiler rupture at Duvha
– Silo collapse at Majuba
 Unbudgeted Eskom diesel and STPPP costs are
therefor a direct result of Eskom’s own failings.
 Therefore by no stretch of the imagination can the
unbudgeted diesel and STPPP costs be considered as
“prudently and efficiently incurred”.

9. Eskom’s diesel & STPPP claims are
overstated and neglect cost offsets
 In MYPD 3, Eskom included costs of electricity from
Medupi, Kusile & Ingula from 1 Apr 2015 to 30 Mar 2018.
 Due to late completion of Medupi, Kusile & Ingula,
Eskom has extra incurred diesel and STPPP costs.
 These extra diesel and STPPP costs must therefor be
offset by the LCOE savings by NOT producing electricity
from Medupi, Kusile & Ingula.
 Yet no mention is made of any cost reduction offsets in
Eskom’s application for “selective reopener” of MYPD 3.

10. Recalculation taking cost reduction
offsets into account
 In 2012, NERSA publicly stated its estimate for the
LCOE from Medupi as about R0,97/kWh.
 Based on an average LCOE from Medupi, Kusile &
Ingula of R1,00/kWh, the net claim for 2015/16 is:
– Diesel: R11,0bn – R5,4bn = R5,6bn net extra diesel cost
– STPPP: R5,4bn – R5,1bn = R0,3bn net extra STPPP cost
 Removing the environmental levy claim and reducing
the diesel & STPPP claim as above reduces Eskom’s
claim for 2015/16 from 12,61% to 3,63%.

11. Alternatives to diesel
 For the 2015/16 financial year, additional diesel costs
are probably inevitable, but the relevant offset cost
reductions MUST be taken into account.
 However for 2016/17 and 2017/18 there are no doubt
lower cost options to unbudgeted diesel, such as:
 Integrated demand management
 Demand market participation
 Conversion of OCGTs to LNG
 Increased renewable energy
 Increased IPP participation
 Power buy-backs
 Power ships
 Domestic time-of-use tariffs
 Ripple control receivers
 Increased industrial co-gen

12. Inadequate disclosure
 Information disclosed in Eskom’s application is
completely inadequate.
 Every reasonable effort to establish from Eskom the
real offset costs, the estimated CTC (including the
overnight construction costs, FGD, IDC and outstanding
contractor claims) and LCOE, for Medupi, Kusile &
Ingula, has failed.
 However NERSA and Eskom have at their disposal
suitable resources and data to perform this
recalculation very accurately.

13. The meaning of “selective reopener”
The meaning of Eskom’s new term
“selective reopener” now becomes clear:
 Eskom gets to select the highest possible costs that
should be passed through to the customer for the
next 3 years.
 Eskom chooses to ignore any cost reduction offsets
that may benefit the customer.

14. Alternatives to price increases
Eskom and its shareholder should also consider new
funding options to recapitalise Eskom and ensure
financial sustainability, other than simply applying for
massive tariff increases year after year, such as:
 Implement the 1998 Government White Paper on Energy Policy
 Unbundle and restructure Eskom Generation
 Sale by Eskom of non-core assets and/or power stations
 Take on strategic equity partner(s)
 Increased public participation in Eskom through an initial public
offering on the JSE and other bourses

15. Conclusion and recommendations
 The 2,51% price increase to recover the environmental
levy should be rejected until the levy is gazetted.
 The claim for extra diesel and STPPP costs for 2015/16
should be rejected due to:
 Overstated costs without disclosure of cost reduction offsets
 The unbudgeted costs claimed result from Eskom’s own failings
 Eskom CEO says Eskom can cope without the 12,61% increase
 Damage to economy and users by further 12,61% increase
 Ruling by National Treasury that any extra price will need to be
deferred to the 2016/17 municipal financial year

16. Conclusion and recommendations
 The claim for extra diesel and STPPP costs for 2016/17
& 2017/18 should be rejected pending disclosure of cost
reduction offsets and alternative technology options.
 Any additional price increase for 2015/16 must take into
account offset cost reductions.
 NERSA should advise Eskom and its shareholder to
consider other funding options to recapitalise Eskom and
ensure its financial sustainability rather than simply
applying for massive tariff increases year after year.