Revenue Application FY2018/19 August 2017 CONTENTS Eskom Holdings Revenue Application FY2018/19 Page: 2 CONTENTS Preface ....................................................................................................................................................... 9 Executive Summary ................................................................................................................................ 10 1.1 Key elements of allowed revenue for the 2018/19 financial year ............................................ 11 1.2 Recovery of efficient costs ......................................................................................................... 11 1.3 Earning a reasonable return on assets ...................................................................................... 13 1.4 Revenue recovery ........................................................................................................................ 13 1.5 Electricity price impact in 2018/19 .............................................................................................. 14 2 Basis of Application ..................................................................................................................... 15 2.1 Legislative and regulatory framework ....................................................................................... 15 2.1.1 Electricity Regulation Act (Act No. 4 of 2006) ...................................................................... 15 2.1.2 Electricity Pricing Policy ....................................................................................................... 15 2.1.3 Municipal Finance Management Act (Act 56 OF 2003) ....................................................... 15 2.1.4 Multi-Year Price Determination (MYPD) Methodology ........................................................ 15 2.1.5 Eskom retail tariff and structural adjustment (ERTSA) methodology .................................. 16 3 Changes in landscape with regards to supply demand balance ............................................ 18 3.1 Medium term system adequacy outlook .................................................................................... 18 4 Generation landscape .................................................................................................................. 20 5 Energy Wheel ................................................................................................................................ 25 6 Allowable Revenue....................................................................................................................... 27 6.1 Allowed Revenue formula ........................................................................................................... 27 6.2 Revenue recovery ........................................................................................................................ 28 6.3 Electricity price impact in 2018/19 .............................................................................................. 29 6.4 Rebasing of sales volumes ......................................................................................................... 30 6.5 Inclusion of full international purchases ................................................................................... 31 6.6 Operating costs increase ............................................................................................................ 32 6.7 Depreciation and return on assets ............................................................................................. 32 7 Indicative Standard Tariff Increase ............................................................................................ 33 7.1 Tariffs ............................................................................................................................................ 33 7.2 Standard tariff increases ............................................................................................................. 33 7.3 Catering for the poor.................................................................................................................... 34 7.4 Illustrative Standard tariff category increases for 2018/19 ...................................................... 34 8 Sales Volumes .............................................................................................................................. 36 8.1 Introduction to sales volumes .................................................................................................... 36 8.2 Sales forecasting approach ........................................................................................................ 37 8.3 Sales volume forecasting assumptions..................................................................................... 38 8.3.1 Gross domestic product (GDP) ............................................................................................ 39 8.3.2 Commodity prices ................................................................................................................ 39 8.3.3 Price elasticity ...................................................................................................................... 41 8.3.4 Furnace load reduction in winter .......................................................................................... 41 8.3.5 Energy Efficiency Demand Side Management (EEDSM) savings....................................... 41 8.3.6 Weather conditions .............................................................................................................. 41 CONTENTS Eskom Holdings Revenue Application FY2018/19 Page: 3 8.4 Forecasted sales for the application .......................................................................................... 42 8.5 Under-recovery of allowed revenue in MYPD3 ......................................................................... 45 8.6 Initiatives to grow sales volumes ............................................................................................... 47 8.7 Debt owing to Eskom ................................................................................................................... 48 8.7.1 Strategies to improve debt collections ................................................................................. 49 8.7.2 Arrear Debts ......................................................................................................................... 49 9 Production Plan ............................................................................................................................ 50 9.1 Background to the production plan ........................................................................................... 50 9.2 Production Plan Assumptions .................................................................................................... 51 9.2.1 The Energy Forecast ........................................................................................................... 51 9.2.2 Eskom Generation Capacity ................................................................................................ 51 9.2.3 Plant performance data ........................................................................................................ 52 9.2.4 Non-Eskom Generation ....................................................................................................... 52 9.3 Production Planning Process ..................................................................................................... 52 9.3.1 Base load ............................................................................................................................. 53 9.3.2 Gas Turbines ....................................................................................................................... 53 9.3.3 Pumped Storage .................................................................................................................. 54 9.3.4 Hydro .................................................................................................................................... 54 9.4 Production plan results ............................................................................................................... 55 9.5 Energy Losses .............................................................................................................................. 55 10 Cost of Capital .............................................................................................................................. 57 11 Regulated Asset Base.................................................................................................................. 59 12 Return of Assets ........................................................................................................................... 60 13 Depreciation .................................................................................................................................. 62 14 Capital Expenditure...................................................................................................................... 63 15 Primary Energy ............................................................................................................................. 65 15.1 Overall summary of primary energy ....................................................................................... 65 15.2 Independent Power Producers (IPPs) ...................................................................................