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Regulatory Entities Capacity Building Project Review of Regulators Orientation and Performance: Review of Regulation in the Electricity Supply Industry

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Regulatory Entities Capacity Building Project Review of Regulators Orientation and Performance: Review of Regulation in the Electricity Supply Industry CCRED Centre for Competition, Regulation and Economic Development Regulatory Entities Capacity Building Project Review of Regulators Orientation and Performance: Review of Regulation in the Electricity Supply Industry Trade and Industrial Policy Strategies (TIPS) Reena das Nair Gaylor Montmasson-Clair Georgina Ryan 11 April 2014 This paper is an output of the Regulatory Entities Capacities Building Project that was undertaken by the Centre for Competition, Regulation and Economic Development, funded by the South African government’s Economic Development Department under an MoA with the University of Johannesburg. Abbreviations and Acronyms AFSA Aluminium Federation of South Africa AMEU Association of Municipal Electricity Undertakings AMPLATS Anglo American Platinum AMSA ArcelorMittal South Africa BTI Board of Trade and Industry CAPEX Capital Expenditure Expansion Programme CCRED Centre for Competition, Regulation and Economic Development c/kWh Cents per Kilowatt-hour COUE Cost of Unserved Energy CPI Consumer Price Index DEA Department of Environmental Affairs DME Department of Minerals and Energy DMP Demand Market Participation DMR Department of Mineral Resources DoE Department of Energy DPE Department of Public Enterprises DSM Demand Side Management DTI Department of Trade and Industry DWA Department of Water EAF Energy Availability Factor ECB Electricity Control Board EDD Economic Development Department EIA US Energy Information Administration EIUG Energy Intensive Users Group of Southern Africa EPP Electricity Pricing Policy ERA Electricity Regulation Act ESI Electricity Supply Industry GDP Gross Domestic Product GGGI Global Green Growth Institute GJ Gigajoules GWh Gigawatt hours HSRC Human Sciences Research Council IBT Inclining Block Tariff IDC Industrial Development Corporation IDM Integrated Demand Management Programme IEA International Energy Agency IEP Integrated Energy Plan INEP Integrated National Electrification Programme IPAP Industrial Policy Action Plan IPP Independent Power Producers IRP Integrated Resources Plan ISMO Independent Systems and Market Operator LCOE Levelised Cost of Electricity LME London Metals Exchange LPU Large Power User LRMC Long Run Marginal Cost kWh Kilowatt Hour Page 2 of 137 MFMA Municipal Finance Management Act MYPD Multi-Year Price Determination MW Megawatts NEMA National Environmental Management Act NER National Electricity Regulator NERSA National Energy Regulator of South Africa NIASA Nuclear Industry Association of South Africa NMB Nelson Mandela Bay NPC National Planning Commission NT National Treasury PCP Power Conservation Programme PGM Platinum Group Metals PPI Producer Price Index PV Present Value RAB Regulatory Asset Base RE Renewable Energy REDS Regional Energy Distributors ROA Return on Assets RoR Rate of Return RTS Return to Service SAIDI System Average Interruption Duration Index SAIFI System Average Interruption Frequency Index SAIPPA South African Independent Power Producers Association SALGA South African Local Government Association SCOA Standard Chart of Accounts S/NPA Special or Negotiated Pricing Agreement SOE State Owned Enterprise TNS Transmission Network Services TIPS Trade and Industrial Policy Strategies TOU Time of Use UJ University of Johannesburg UCLF Unplanned Capability Loss Factor Page 3 of 137 Table of Contents 1. Introduction ......................................................................................................................10 2. The Electricity Supply Industry (ESI) ..............................................................................14 2.1. ESI Market Structure ...................................................................................................14 2.1.1 Generation ...........................................................................................................16 2.1.2 Transmission .............................................................................................................17 2.1.3. Distribution ...............................................................................................................17 2.2. Key Players in the ESI .................................................................................................17 2.2.1 Eskom ..................................................................................................................17 2.2.2 Municipalities .............................................................................................................18 2.2.3 Independent Power Producers (IPPs) .......................................................................18 2.2.4 Institutional stakeholders of the ESI ...........................................................................18 3. Regulatory and institutional framework .........................................................................20 3.1. The institutional and legislative framework ..................................................................20 3.1.1. Institutional arrangements: Who calls the shots? ..................................................20 3.1.2. Legislative framework: A very complex picture .....................................................27 3.2. Key problems in the regulation of the ESI ....................................................................33 3.2.1 Looking back: The deficiency of policy learning ....................................................33 3.2.2. Keeping the course: Managing time inconsistency ...............................................37 3.2.3. Managing the present: Blurred lined or the absence of clarity and certainty ...........38 3.2.4. Looking ahead: The absence of a clear overarching vision ..................................43 3.3. Conclusion ..................................................................................................................50 4. Electricity Pricing in South Africa ...................................................................................52 4.1. Brief history of electricity pricing until 2006 ..................................................................53 4.2 Pricing since 2006 to date ...........................................................................................55 4.2.1 Current principles of pricing ..................................................................................56 4.2.2 Multi-Year Price Determination (MYPD) ...............................................................56 4.2.3 Components that make up the final electricity price ..............................................58 4.2.4 What are the main influences on costs, therefore influencing the MYPD outcome? 62 4.2.4.1 Valuation of Eskom’s Regulatory Asset Base (RAB) ...............................................62 4.2.4.2 Accurate reporting of all other costs .......................................................................66 4.3 The MYPD process: How it works in practice ..................................................................67 4.4 Conclusion ..................................................................................................................69 5. Pricing to different customer groupings ........................................................................71 5.1 The different Eskom tariff structures ................................................................................71 5.1.1 Different tariff structures .......................................................................................71 5.1.2 Rationale for differences in tariff structures ..........................................................76 5.2 Trends over time ............................................................................................................78 5.3 Municipality pricing of electricity .....................................................................................82 5.3.1 Concerns around municipality funding models and the impact on electricity prices 83 5.3.2 So what is the problem? .......................................................................................87 5.3.3 What can NERSA do, or is the problem beyond NERSA? ....................................92 Page 4 of 137 5.4 Pricing to large industrial users ...................................................................................93 5.4.1 Energy-intensive industrial users locked into favourable long-term contracts or negotiated pricing agreements- the case of aluminium .......................................................94 5.4.2 Energy-intensive ferrochrome smelters and Eskom entered into electricity buy-back schemes ........................................................................................................................... 106 5.4.3. Impact of electricity prices on mining value chains- incentivising move to greater use of renewables? .......................................................................................................... 107 6. NERSA’s Performance of the Electricity Supply Industry ........................................... 110 6.1. NERSA’s Performance .............................................................................................. 111 6.2. Regulatory Impact ..................................................................................................... 117 6.2.1 Cost Effectiveness of Electricity Supply .............................................................. 117 6.2.2 Reliable Infrastructure Services .......................................................................... 119 6.2.3 Financial Performance and attraction
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