EIUG Project Update

EIUG Executive Report 2015

EIUG_AR_2015
Download the Report here: EIUG Executive Report 2015

1. Security of Supply

6.1 NRS048-9

The EIUG has technical representatives on the NRS048-9 Task Team. The EIUG facilitated quarterly workshops between BUSA, Business Leadership South Africa (BLSA) and the NRS048-9 Task Team this year.

On 16 March 2015, the EIUG, Chamber of Mines (CoM) and Eskom participated in a workshop to discuss Disaster Planning: Extreme Supply Constraint / ECS-Integrated Demand Management (IDM) & Pricing Options being considered by Eskom. The purpose of the meeting was to discuss and debate future IDM opportunities and pricing options, as well a contingency plan in the event that the first three stages of load shedding/curtailment are insufficient to prevent under-frequency shedding. The notes and presentations from this workshop are available on the web portal.

Background
The National Code of Practice for Emergency Load Reduction (NRS048-9 Ed.1) was developed by a multi-stakeholder Task Team after load shedding in 2008, and approved by NERSA as a regulatory license requirement in 2010.

The Code was applied operationally for the first time on 19 November 2013 and then 20-21 February 2014 (in both cases only large customers were called on to curtail load).

On 6 March 2014 both curtailment and load shedding (Stage 3) were called on for the first time with the coal supply incident affecting all Kendal units.

Significant experience has since been gained with the application of the Code, in particular to minimize the economic and social impact. This experience has been used to modify its application through formal agreement with NERSA. A revised Edition 2 has been drafted, which NERSA requires completed by March 2016. This presentation reviews the learning to date and the inclusion in draft Edition 2. The presentation is available on the web portal.

NERSA required Eskom to amend the document within 18 months, hence the exemption. Eskom plan to have the document in place with all the regulatory approvals and processes by March 2016. NERSA advised Eskom to involve a number stakeholders in reviewing the document before it goes to NERSA for their processes, to avoid having multiple reviews at their final consultation process. Eskom together with BUSA and the EIUG have helped put the revised document together.

Blackout Disaster Planning

  • In order to have a realistic black-out plan, for instance a two-week scenario, Eskom’s ability to resolve the black-out will be compromised if the rest of the country is not playing its role.
  • Blackout prevention, response, recovery:
  • Eskom’s core role is to prevent a blackout.
  • Second focus is in the business continuity realm.
  • In terms of the Disaster Management Act it is the DoE’s responsibility to manage energy related disasters. However, they do not have the capacity to manage the blackout.
  • An NRS 048-9 presentation was made at the EIUG General meeting on 4 August 2015. This presentation is available on the web portal.

On 22 September 2015, Eskom held a workshop with the BUSA Energy sub-committee to provide an overview of NRS048-9 Edition 2 (Draft 8). Below are the key changes to the document:

  • Revision of the forward and introduction to better address the context of the second edition.
  • The inclusion of demand reduction scenarios in the introduction of this document to facilitate a better understanding of the context, when available options for load reduction are selected.
  • A review of the principles on which the code is based (to order to facilitate pragmatic decision-making by the System Operator to reduce the impact on customers and the economy). In particular an increased pragmatism in application of the requirements of this document and a review of the concept of equitable participation.
  • Clarification of the definition of a system emergency, given the requirement of the system operator to ensure adequate reserves during a system emergency, and to prudently manage reserves over various operating periods.
  • Clarification on the protocols for declaring a system emergency (inclusion of the definitions of a System Early Warning and System Alert condition).
  • Clarification of the application of the code, in relation to other legal requirements, that the electricity supply industry is subject to.
  • Clarification of the application of the code, in managing a longer-term energy constraint, through planned demand reduction and rules of implementing this. This in the absence of an approved Energy Conservation Scheme (ECS). (The first edition included an assumption that ECS would be in place to manage such constraints).
  • Clarification on the pragmatic use of load shedding vs. mandatory curtailment in the context of different system conditions.
  • Revision of the load shedding schedules to cater for all time periods under all stages of load reduction (24hrs per day including weekends).
  • Greater standardisation of load shedding schedules for the electricity supply industry.
  • Introduction of an additional stage of scheduled load shedding, i.e. Stages 1 to 4. (This to: address the large increment in load reduction required previously under Stage 3; to manage deeper levels of reduction whilst limiting the impact on the country; and to allow for greater levels of planned reduction whilst still allowing for an additional stage of scheduled load shedding should system conditions dictate this).
  • Inclusion of a section related to a severe supply constraint and the inclusion of demand of the reduction requirements beyond Stage 4.
  • Increased flexibility for curtailment customers through options that better match the economic impacts that these customers would be exposed to.
  • Removal of Stage 0 as a curtailment option given the low uptake of this option, the similar role that DMP plays, and in order to reduce the complexity of load shedding (given the introduction of a new scheduled stage).
  • The base-lining and measurement of curtailment.
  • Critical loads and exemptions (NERSA process).
  • The specification of compliance and reporting requirements (general and real-time).
  • Guidance on the implementation of smart metering as a means of reducing the impact of load shedding on customers
  • Various editorial changes to the document, including replacement of the term “shall” with “should”, given the status of the document as a guideline to the industry until formally approved and amended as appropriate by NERSA.

General protection of industrial customers under stages 1&2 was considered, but not included due to equity and the impact on other sectors. The latest NRS048-9 Edition 2 document was presented to the EIUG on 24 November 2015, at the Industry Energy Forum. The presentation is available on the web portal.

The EIUG remains committed to working with Eskom, under these guidelines, to ensure security of supply.

2. Pricing and Tariffs

2.1. Eskom Selective Reopener

NERSA approved the third Multi-Year Price Determination for the period 2013/14-2017/18 (“MYPD3”) on 28 February 2013.

In April 2015 Eskom applied for a ‘selective reopening’ of the MYPD3 decision for the 2015/16 to 2017/18 period. The reopener relates to:

  • increased diesel costs arising from high Open-Cycle Gas Turbines (OCGT) utilisation;
  • the cost of the Short-Term Power Purchase Programme (STPPP) in order to stem load shedding requirements; and
  • increase in the environmental levy.

Eskom’s selective reopener application required cost recovery of:

  • R32,9 billion for OCGTs;
  • R19,9 billion for the STPPP; and
  • an increase in the environmental levy of 2c/kWh (R11,2 billion)
  • According to Eskom’s application, the selective reopener will result in a total price increase of 25.30% for 2015/16. This will consist of the 12.69% previously approved by the Energy Regulator for the year, a 10.10% 3-point selective reopener for OCGTs and the STPPP and a 2.51% point increase for the environmental levy increase.

The EIUG submitted comment on the application, this is available on the web portal.

Following the necessary regulatory process, including the review of written comments and two days of public hearings, NERSA announced on 29 June 2015 that it had decided not to approve Eskom’s application for the selective reopener of the third MYPD application.

2.2. Electricity Levy and Special Levy

In the 2015 Budget Speech, the Minister of Finance announced that the Electricity Levy would temporarily be increased by 2 cents/kWh from 3.5c/kWh to 5.5c/kWh. This increase is intended to assist with funding Demand Management projects.

The notes to the Minister’s speech said:

The 2c/kWh increase is a temporary measure to be withdrawn when the carbon tax is introduced in 2016.

The intention (as we understand) is to implement the increased levy with effect from 1 July 2015 at plus Eskom’s own consumption/losses. This means that the Environmental Levy is now higher than the proposed Carbon Tax of approximately 4.8 c/kWh.

Contained in the detailed documentation* accompanying the Budget Speech is also this statement:

“Government is examining loopholes that unduly favour intensive electricity users, and will consider a levy that would apply to users and exporters of electricity who consume in excess of 800 000 MWh per year. To prevent the possibility of double taxation, a credit of 5.5c/kWh could be provided for users if the price they pay is above 37 c/kWh. Before any measures are proposed, government will consult with industry, the electricity regulator, Eskom and other interested parties.”

[*Full Review, Chapter 4 – Revenue Trends and Tax Policy]

Based on further stakeholder engagements and gathering of information, National Treasury has scrapped the Special Levy and also has not implemented the 2c/kWh increase in the Environmental Levy for this year.

2.3. Genesis Carbon Tax Impact Report

The report has been circulated to all members. The purpose of the report was to firstly assess the impact of the carbon tax on electricity prices in terms of the remaining two years of MYPD3 and beyond. And secondly, to assess the economic impact of higher electricity tariffs on the electricity sector specifically, rather than the broader impact of the impending carbon tax on individual companies or sub-sectors.

Some key conclusions from the report include:

  • Nominal average prices are likely to increase substantially over the remainder of the IRP period, even without the carbon tax. The imposition of a carbon tax results in further incremental price increases over the period. These increased prices will impact users of electricity, as well as consumers of goods and services reliant on electricity.
  • The impending carbon tax is intended to create a price signal that would lead to behavioural change in both the processes that lead to emissions and electricity consumption. This would result in reduced carbon emissions. However, by levying the carbon tax on Eskom, which has limited scope to change its technology choices, it will simply be passed on to electricity users, adding to cumulative electricity price increases. This would cause significant direct negative impacts on electricity-intensive users.
  • Eskom is already subject to a number of environmental cost commitments, (i.e. the Environmental Levy, the DSM Programme and mandated procurement from Renewable Energy IPPs) which have also resulted in increased prices, largely to the same extent as the increase the carbon tax would cause. Therefore it is clear that a strong price signal for electricity users is already present, and thus there is a case for a) elimination of both the carbon tax and the Environmental Levy in the electricity sector, or b) eliminating either the Environmental Levy or the application of carbon tax to the electricity sector.
  • This report will be added as an appendix to the joint ITTCC and EIUG comment on the proposed Carbon Tax Bill and submitted to National Treasury and other key government stakeholders.

    2.4. Regulatory Clearing Account (RCA)

    Overview
    The RCA is a monitoring and tracking mechanism that compares certain uncontrollable costs and revenues assumed in the MYPD decision (made by NERSA) to actual costs and revenues incurred by Eskom. This mechanism is to allow for changes in the actual conditions, for specifically identified cost items, when compared to assumptions made when the MYPD application was considered.

    The difference between the decision and actual costs and revenues is subject to the approved RCA rules applicable to the MYPD decision period. This results in a RCA balance – either recovered by Eskom (if overspent) or given back to the customers (if underspent). Once the RCA balance has been determined by NERSA, a separate process is followed to decide on the liquidation thereof, which would take place through implementation of adjustment in tariffs.

    Process time lines
    Using current rules implies at least a 2 year time lag to liquidate variances as it is based on audited financials. These are subject to a NERSA prudency review and audit.
    The liquidation implies a tariff adjustments up or down as follows:

    • Greater than 10% impact on revenue – a public process regarding only the timing of liquidation will be triggered;
    • Less than 2% – balance is carried forward to next year; and
    • Between 2%~10% – balance is fully liquidated.

    Eskom RCA Application
    The National Energy Regulator (NERSA) announced in November that it had received Eskom’s Regulatory Clearing Account (RCA) application for the first year of the Third Multi-Year Price Determination (MYPD3) period (2013/14 financial year). Eskom has applied for an RCA balance of R22.8 billion.
    Eskom submitted its RCA application for consideration by the Energy Regulator on Tuesday, 10 November 2015. In terms of the provisions of the MYPD Methodology, the Energy Regulator has to, upon application by Eskom, assess certain qualifying allowed revenue and expenditure against actual revenue and expenditure. The National Energy Regulator will assess Eskom’s application following due regulatory processes.
    The EIUG and Chamber of Mines were invited to a briefing session by Eskom on the RCA application on 10 December 2015.

    The deadline for public comments was 14 December 2015.

    The EIUG submitted written comments on the application; the final response is available on the web portal.

    2.4. National Subsidy Framework

    Eskom Cross Subsidy Framework Workgroup
    Maree Roos has been facilitating these sessions as a sub Task Team of the Tariff Working Group. Early meetings developed the ToR and proposed the Scope of work.

    On 14 September 2015, the draft review of existing policy, legislation and regulation of electricity subsidies in South Africa was presented and discussed. The detailed report has been circulated to Task Team members for comment, and subsequently an updated report has been circulated.

    The Task Team is due to meet early next year to continue this work. We will keep members informed of progress.

    3. Non-Utility Generation

    3.1. Third-Party Use of System Charges (Wheeling)

    The EIUG submitted comments on NERSA’s Regulatory Rules on Network Charges for Third-party Transportation of Energy Framework on 27 February 2015. The NERSA Advisory Committee met to review the comments and to work towards agreement on a framework on 19 and 20 March 2015. The EIUG comment paper and the presentation for the Advisory Committee are available on the web portal.

    Subsidies and losses are still areas of concern, as raised at the meeting to discuss the comments received on the framework. Further work will be undertaken on these. NERSA is expected to put out a revised framework discussion document in the coming months, which will include the changes as per comments and inputs received.

    4. Policy

    4.1. Current Policies

    Carbon Tax – Davis Committee Inquiry

    Davis Tax Committee to review proposed Carbon Tax
    Final Comment Due Date: 8 May 2015

    National Energy Act (2008) and Mandatory Reporting of Energy Data

    Report: Draft Regulations regarding Registration, Reporting on Energy Management and Submission of Energy Management Plans
    Department of Energy: Energy Regulations and Energy Management plans
    Final Comment Due Date: 29 May 2015

    National Environmental Management Laws Amendment Bill 2015

    The National Environmental Management Laws Amendment Bill 2015, was published for public comments on 13 October 2015.

    Notified Maximum Demand (NMD)

    The invitation for public comment on the Eskom Retail Tariff and Structural Adjustment (ERTSA) methodology, and Eskom’s application for the introduction of a Landlight 60A Tariff and amendment of the Landlight 20A Tariff, was published by NERSA in the Sunday Times on 18 October 2015. Timelines are as follows:

    Affected member organisations were requested to prepare a company response for submission.

    Eskom RCA Application

    Eskom submitted its RCA application for consideration by the Energy Regulator on Tuesday, 10 November 2015. In terms of the provisions of the MYPD Methodology, the Energy Regulator has to, upon application by Eskom, assess certain qualifying allowed revenue and expenditure against actual revenue and expenditure.

    The National Energy Regulator will assess Eskom’s application following due regulatory processes.

    The deadline for public comments is 14 December 2015.

    Draft Carbon Tax Bill

    On Monday, 2 November 2015, the South African National Treasury published a Draft Carbon Tax Bill (the “Bill”) for public comment, with the comment period commencing immediately and continuing until 15 December 2015.