Eskom Regulatory Clearing Account (RCA) - FY 2019 NERSA Public Hearings Date: 19 February 2020 Polokwane, Limpopo
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Eskom Regulatory Clearing Account (RCA) FY 2019 NERSA Public Hearings Date: 19 February 2020 Polokwane, Limpopo
Information request update
Information request Timeline to provide information
October load shedding Submitted written response on 4 Feb 2020
Revenue variance information i.e. death spiral Submitted written response on 14 Feb 2020
Regulatory Asset Base Submitted written response on 13 Feb 2020
Coal costs Submitted written response on 18 Feb 2020
Partially submitted written response
OCGTs - related measures to cost and volume
Further written response to be submitted on 25
variance
Feb 2020
New build challenges To be submitted on 28 Feb 2020
OPEX - Insurance and Employee benefits To be submitted on 28 Feb 2020
9 Point Plan - measures in place to address To be submitted on 28 Feb 2020
improvement of performance
Generation performance& maintenance To be submitted on 28 Feb 2020
Start-up oil and gas usage To be submitted on 25 Feb 2020
IPP - deemed energy and use of system costs To be presented at Polokwane (today)
Further information on use of Arnot PS To be presented at Pretoria (21 Feb 2020)
NMD and Network charges To be presented at Pretoria (21 Feb 2020)
Details on load shedding calculation To be presented at Midrand (24 Feb 2020)
Proposal on liquidation of RCA balance To be presented at Midrand (24 Feb 2020)
1
Eskom’s RCA application in accordance with
the Electricity Regulation Act
Legal Basis of the MYPD methodology
The legal basis for the MYPD Methodology is provided in the Electricity Regulation Act (ERA), 2006 (Act
No. 4 of 2006). The Methodology is subordinate to the requirements of ERA and the Electricity Pricing
Policy. The requirements from these two documents will at all times supersede those of the Methodology.
Section 4(a)(ii) of the Act states that ‘the Regulator must regulate prices and tariffs’. Further, section 15(1)
and (2) of the Act prescribes the following tariff principles:
(1) A license condition determined under section 14 relating to setting or approval of prices, charges and
tariffs and the regulation of revenues –
a) Must enable an efficient licensee to recover the full cost of its licensed activities, including a
reasonable margin or return;
b) Must provide for or prescribe incentives for the continued improvement of the technical and
economic efficiency with which the services are to be provided;
c) Must give end users proper information regarding the costs that their consumption imposes on the
licensee’s business;
d) Must avoid undue discrimination between customer categories; and may permit the cross subsidy
of tariffs to certain classes of customers.
(2) A licensee may not charge a customer any other tariff and make use of provisions in agreements other
than that determined or approved by the Regulator as part of its licensing conditions.
Eskom has made this Regulatory Clearing Account (RCA) application to
recover efficient costs in accordance with the ERA and MYPD Methodology
2NERSA’s prudency guidelines is the basis of
Eskom’s RCA application
(section 3.5 of the RCA application)
Extracts from NERSA’s Prudency Guideline
Page 5
Page 5
Page 8
3NERSA’s prudency guidelines is the basis of
Eskom’s RCA application
(section 3.5 of the RCA application)
Extracts from NERSA’s Prudency Guideline
Page 12 & 13
Page 17
4NERSA’s prudency guidelines is the basis of
Eskom’s RCA application
(section 3.5 of the RCA application)
Extracts from NERSA’s Prudency Guideline
Page 18
Eskom has applied the principles of NERSA’s prudency guideline in this RCA
application
5Eskom fully supports NERSA decision with
addressing matters related to governance
failures
On 7 March 2019, the NERSA Media statement as confirmed by the NERSA Chairman
at the media briefing was as follows with reference to previous revenue decisions:
“The Energy Regulator also considered that Eskom conceded that certain
governance failures occurred in Eskom, however, at the time of the above decisions
and although some of the adjustments were effected, the extent of the governance
failures or amounts associated therewith had not been fully quantified. The Energy
Regulator may initiate its own investigation into the governance failures in Eskom
and may effect adjustments to Eskom’s revenue based on the relevant outcome of
its investigation and/or those undertaken by bodies or entities, including, but not
limited to, Eskom, National Treasury, the Special Investigating Unit, the South
African Directorate for Priority Crime Investigation (Hawks), the Parliament of the
Republic of South Africa or any Commission of Enquiry as and when they are
concluded or a conclusive outcome is reached and the costs associated therewith
have been quantified.”
Eskom is on record in support of this approach as clarified during previous submissions
As an example, the recovery from Mc Kinsey has already been included in the RCA
balance determination related to the FY 2018
Eskom is committed to complying with the approach decided by NERSA
with regards to amounts associated with governance failures
6The Regulatory Clearing Account (RCA) is the
regulatory mechanism for risk management
RCA is a risk management mechanism to deal with variances between what was determined by
NERSA for purposes of its revenue determination, and what actually materialised (per Eskom’s
audited financial statements) - a backward looking reconciliation
Landscape for RCA application:
Focus of this consultation is FY 2019 RCA application. Various forward looking clarifications on Eskom’s
operations are of interest. However, ample other opportunities are available for addressing these
1. The submission is based on the MYPD Methodology, published by NERSA during October 2016
2. It is further influenced by the decision and reasons for decision for MYPD 3 RCA for FY 2014
published in March 2016
3. The reasons for decision for MYPD 3 RCA FY 2015, 2016 and 2017 are being reviewed by the
Eskom Board in a High Court application
4. Due to uncertainty in the environment at that time, NERSA approved a single year application for
2018/19
5. The Energy Regulator decision for FY 2019 was an average nominal increase of 5.23%
6. The Eskom Board initiated a process of reviewing the NERSA decision for 2019 through an
application lodged at the High Court. The matter has been heard and a judgement is reserved.
7. Once this RCA balance for FY 2019 determination has been made by NERSA, by 24 March 2020 in
terms of the requirements of the ERA, a subsequent liquidation decision will be made
8. The liquidation decision will inform on the extent and timing of the price adjustment
7Key RCA related Changes in MYPD
methodology
The methodology as released in October 2016 now allows operating costs to be re-
measurable and the calculation for RAB and return has changed
MYPD 3 MYPD 4
methodology methodology
Revenue due to sales
volume changes
Primary energy costs
Regulated Asset Base and Previously
Return was CECA
Operating costs
8RCA application FY 2019
(Section 2.2 of RCA application)
Decision Actuals RCA RCA
RCA for FY 2019 Variance
FY 2019 FY 2019 adjustments FY 2019
Total Revenue Rm 190 348 179 892 10 456 (5 006) 5 450
Primary Energy , Rm 86 094 99 489 13 395 3 392 16 786
Coal 39 177 49 903 10 726 1 689 12 416
Open Cycle Gas Turbines (OCGTs) 345 3 768 3 423 - 3 423
Other 782 - (782) - (782)
Other primary energy 7 595 9 320 1 725 - 1 725
Independent Power Producers 26 596 24 952 (1 644) 1 369 (275)
International Purchases 3 216 3 740 524 - 524
Environmental levy 8 093 7 805 (288) - (288)
Demand Response – Instantaneous 110 - (110) 110 -
Demand Response – Supplementary 162 - (162) 162 -
Demand Response – Programme administration 18 - (18) 62 44
Other costs 104 254 106 871 2 617 2 221 4 838
Depreciation 24 903 26 427 1 524 - 1 524
Return on Assets (ROA) 28 117 28 107 (10) - (10)
Research & Development (R&D) 112 90 (22) (22)
Demand Side Management (EEEDSM) - 29 29 (2) 27
Operating costs 51 122 52 218 1 096 2 223 3 319
Service Quality Incentives (SQI) - 166 166 - 166
FY 2019 RCA Balance Application 27 240
Nuclear decommissioning from RCA FY
83
2013/14 decision phased in over 10 years
Total RCA balance 27 323
9Clarification of RCA adjustments
1 Revenue - (R5 006m) 5 IPPs – R1 369m
Adjustments made to the revenue reflected in the Adjustment related to recognition of capacity
AFS relate to ensuring that all billed revenue is payments for the Department of Energy IPP Open
included by adjusting for non-electricity revenue, Cycle Gas Turbine (OCGT) plants as well as
demand response revenue as well as excluding reversal of provisions
any load shedding volume in the variances
2 Coal – R1 689m 6 Operation costs – R2 223m
Adjustments are mainly as a result of other
Adjustments from AFS related to application of
income (adjustment related to McKinsey refund
NERSA’s MYPD methodology
already included in a previous RCA balance
decision) and arrear debt (adjustment related to a
3 Other – R782m cap on arrear debt in the revenue decision)
“Other” in the primary energy section illustrates a
mismatch between the NERSA revenue decision 7 EEDSM – (R2m)
and the primary energy decision
Adjustment related to the application of NERSA’s
MYPD methodology – i.e. the variance for
4 Demand response – R334m
programme costs is not a pass-through since
Adjustment related to the application of NERSA’s Eskom achieved more MW compared to the
MYPD methodology – i.e. the variances for decision
instantaneous and supplementary is not a pass-
through since Eskom achieved more MW and
GWh compared to the decision
10Eskom’s FY 2019 RCA submission is driven
substantially in specific areas – Revenue
variance
The MYPD Methodology refers to the variance between the total actual and
Legislation total decision as below:
– 17.1.1.5 Adjusting for other costs (7) and revenue variances where the
variance of total actual revenue differs from the total allowed revenue
• It would be incorrect to further divide the total actual revenue variance
Approach into fixed and variable elements – since the variable elements are
already addressed through the volume related aspects of the PE, etc
costs. If this is done – results in double counting to the detriment of the
consumer (when actual volumes are higher) or the detriment of Eskom
(when actual volumes are lower)
• The total approach is in line with the MYPD methodology
• The correction of such initial over-estimation/under-estimation of sales -
does not increase/decrease the overall cost to the consumers, but merely
represents deferred / advance recovery of the fixed cost as per NERSA
revenue decision
Variance • NERSA, in its decision determined a higher sales volume compared to
what actually materailised. Sales volume variances are due to lower
explanation
international sales as well as poor economic conditions for local sales
• Sales is ~3 922 GWh lower than the decision
• Revenue from sales is R10 billion lower than the decision. After various
adjustments the revenue variance in the RCA calculation is R5 450m
11Eskom’s FY2019 RCA submission is driven
substantially in specific areas – Coal cost
variance
The MYPD RCA formula with reference to coal costs is:
Legislation
“Performance Based Regulation PBR cost (Rand) = (Alpha x Actual
Unit Cost of Coal Burn + (1 – Alpha) x Coal burn Benchmark price) X
Actual Coal Burn Volume”
The NERSA prudency criteria refers to recognition of committed costs
having to be paid that leave no discretion as to whether to make the
payment in the future
NERSA’s decision on primary energy was approx. R10 billion lower
Approach than the application. This would require Eskom to decrease coal costs
by ~17%
NERSA applied a theoretical index to derive the FY 2019 cost in R/t
based on the FY 2014 RCA decision
NERSA did not consider Eskom’s existing contractual obligations,
Eskom’s procurement policies, the mining environment and the factors
that impacted that environment in the intervening years
This results in a RCA balance variance for coal costs of over R12
billion
12Eskom’s FY2019 RCA submission is driven
substantially in specific areas – Operating
Expenditure
The new methodology allows for operational expenditure to be re-
Legislation measurable for RCA balance applications.
It requires the most recent prudently and efficiently incurred actual costs
when making a decision and adjusting for prudently incurred over or under-
expenditure on operating costs as may be determined by the Energy
Regulator
• Many remnants of what seems to be a previous decision were abandoned
Approach in the final decision.
• In addition, the decision is not made where the licensees and corporate
applications are considered. It was assumed that the number of employees
would be aligned to the sales volume in 2008.
• Recognition of other developments in the industry did not seem to have
been considered.
Variance • The FY 2019 determination left Eskom with a funding shortfall. This
shortfall needed management intervention and a re-prioritisation of cost
explanation
between the different licensees and cost categories
• Key variances were experienced in employee benefit costs for the benefit
of Eskom. Eskom implemented extreme measures, such as an embargo
on external appointments to work within the financial constraints. Eskom
has assumed in its application that the efficient number of employees
would have reached 39 186 for FY 2019 but the actual number was 38 292
• Variances for maintenance costs were in favour of the consumer. Due to
the financial constraints, Eskom was required to reprioritise, defer and
revise its approach to maintenance
13Eskom’s FY2019 RCA submission is driven
substantially in specific areas – OCGT revenue
In accordance with the MYPD Methodology, the gas turbine usage should
Legislation be allowed as it was incurred to ensure security or supply and was utilized
as a last resort before the implementation of load shedding.
Variance • The system operator was required to dispatch more OCGTs (both
Eskom’s and IPPs) than in the NERSA decision or assumed in Eskom’s
explanation
application
• The dispatch was undertaken in accordance with NERSA’s scheduling
and dispatch rules
• The utilisation of OCGTs contributed towards minimising load shedding. In
accordance with the MYPD Methodology, the gas turbine usage should be
allowed as it was incurred to ensure security of supply and was done so
as a last resort before implementing load shedding
• OCGTs were used during peak and emergency periods throughout the
year. OCGT and IPP usage reduced load shedding by providing additional
capacity. The use of OCGTs must be considered in combination with all
other available options to manage the power system
• Reduced usage of the OCGTs would increase the incidents, duration and
severity of load shedding. The knock on effect of this would be worsening
plant performance and longer time periods to return to operation
• The variance between the assumptions in the decision and actuals for FY
2019 illustrate the need to use OCGTs to minimise the impact of load
shedding on the SA economy
• The variance between NERSA’s decision and actuals for Eskom’s OCGTs
was ~R3.4 billion
14Eskom Regulatory Clearing Account 2018/19 Application IPP Deemed Energy and Use of System
IPP Costs FY 2019
Independent Power
Cost (R'm) Volumes (GWh) Average costs (R'm)
Producers
FY 2019 Decision Actuals Variance Decision Actuals Variance Decision Actuals Variance
Renewable IPP
24 216 22 364 (1 852) 11 591 10 792 (799) 2 089 2 072 17
Programme
DoE Peaker 2 380 4 291 1 911 88 552 464 27 046 7 780 19 266
Total IPP's 26 596 26 655 59 11 679 11 344 (335) 2 277 2 350 73
IPP ancillary costs - - - - - - - - -
Total IPP's 26 596 26 655 59 11 679 11 344 (335) 2 277 2 350 73
Notes:
(1) RE-IPP volumes lower by 799 GWh, and prices lower (CPI increase only 4,7% against
expected 6%)
(2) Peaker volumes higher by 464 GWh, much lower average rates due to the fixed costs
being applied to higher volumes
16Detailed IPP Costs FY 2019
Technology specific results (as per AFS)
Average cost
Programme Cost (Rm) Energy (GWh)
(c/kWh)
Renewable IPP 22 364 10 792 207
Wind Projects 7 810 5 895 132
Solar PV Projects 10 011 3 600 278
Concentrating Solar 4 389 1 193 368
Other projects 154 104 148
DoE Peaker 4 291 552 778
Total 26 655 11 344 235
17IPP Costs FY 2019
Costs (R million), as per AFS Notes:
(1) RE-IPP experienced a
Decision Actuals reversal of a previous
Programme Variance
FY 2019 FY 2019 provision of R52.35m
Renewable IPP 24 216 22 364 (1 852) (2) Peaker provision of
R386.5m raised to
DoE Peaker 2 380 4 291 1 911
account for the Fuel
Total 26 596 26 655 59 Levy compensation
event
Costs (R million), adj for Provisions
Decision Actuals
Programme Variance
FY 2019 FY 2019
Renewable IPP 24 216 22 416 (1 800)
DoE Peaker 2 380 3 905 1 525
Total 26 596 26 321 (275)
1819
Deemed Energy payments FY 2019
IPP Deemed Energy Cost Details regarding Deemed Energy Events
Dispute resolved regarding the delay in Grid
Connection (System Event) The dispute resolution
Amakhala R5 794 985.41 resulted in an award (announced on 12 December
2018) of three days of Deemed Energy to the Seller as
a result of the delay in Grid Connection in July 2016.
System Event during the period 4-Aug-15;25-Aug-15;
Kouga R449 404.55
and 2-Sep-15.
Dispute resolved regarding Curtailment from 1-Oct-15
Kouga R 8 471 217.40 until 28-Aug-16 due to network constraints experienced
in the region.
Dispute resolved regarding Curtailment during the
Jeffreys Bay R13 804 041.52 period 13-Apr-15 to 22-Jun-17 due to network
constraints experienced in the region.
Curtailment instruction 28-Apr-18; 18-Jun-18;23-Jul-18;
043 Dorper R 1 520 926.82
29-Jul-18 and 19-Aug-18.
1920
Deemed Energy payments FY 2019
Deemed Energy
IPP Details regarding Deemed Energy Events
Cost
148 Kouga R 147 573.97 Curtailment instruction 28-Apr-18.
Curtailment Incident 18-Jun-18; 24-Jun-18; 2-Jul-18; 27-
186 Jeffreys Bay R1 561 084.21
Jul-18 and 19-Aug-18.
240 Amakhala R718 355.94 Curtailment Incident 19-Aug-18.
303 Tsitsikamma R 639 717.35 Curtailment instruction 16-Jul-18;22-Jul-18 and 29-Jul-18.
Curtailment instruction 30-Apr-18; 18-Jun-18;27-Jun-18;
309 Aurora Wind R 948 863.91
11-Jul-18; 16-Jul-18; 29-Jul-18 and 19-Aug-18.
Curtailment instruction 28-Apr-18; 27-Jun-18; 11-Jul-18;
362 Waainek R 112 776.08
and 16-Jul-18.
364 Grassridge R 203 583.94 Curtailment instruction 28-Apr-18; and 27-Jun-18.
372 Chaba R 50 535.74 Curtailment instruction 28-Apr-18; and11-Jul-18.
2021
Deemed Energy: Curtailment events FY 2019
2018/08/19
2018/08/12
2018/07/29
2018/07/27
2018/07/23
2018/07/22
2018/07/16
2018/07/11
2018/07/02
2018/06/27
2018/06/24
2018/06/18
2018/04/30
2018/04/28
- 0,25 0,50 0,75 1,00 1,25 1,50
Total Deemed Energy Paid for Curtailment (Rm)
2122
Use of System - background
Distribution Grid Code
4.2.1 General tariff principles
(1) The Distributor shall make capacity available on its networks and provide open non-
discriminatory access for the use of this capacity to all South African Customers (loads), and
Embedded Generators. In exchange for this service, the Distributor is entitled to a fair
compensation through electricity tariffs.
Power Purchase Agreement
8.4 The Buyer shall reimburse to the Seller the Use of System Charges, if any, which the
Seller is obliged to pay and has paid in terms of the Distribution Agreement or the
Transmission Agreement, as the case may be in each Billing Period. If any Use of System
Charges are repaid to the Seller as a result of a dispute in terms of either the Distribution
Agreement or the Transmission Agreement, then the Seller shall be obliged to repay the
Buyer to the extent such amounts have already been reimbursed to the Seller in terms of this
clause 8.4 (Use of System Charges), and the Buyer shall be entitled to deduct such amounts
in the next Invoice issued to the Seller
MYPD Methodology
13.4 Use-of-system charges incurred by the buyer in line with the PPA from IPPs will be
allowed as a full pass-through cost.
2223
Use of System FY 2019
FY 2019
Use of System relating to Generator output
• For REIPP generators passed through to the
Buyer under the PPA
IPP Generator
Use of System
101 • Other non-Eskom generators that sell directly to
other customers (wheeling) cannot pass this
back to the Buyer
Use of System relating to consumption
• Not a pass-through under REIPPP
IPP energy consumed
101
and related DUOS
Other Sales Revenue 179,690
179,892
R million
23Conclusion Public Hearings Date: February 2020
Conclusion on Eskom FY 2019 RCA application
• Eskom’s RCA application is based on MYPD Methodology and NERSA RCA FY 2014 reasons
for decision
• Eskom’s revenue is determined by NERSA through a revenue application process and then the
RCA process which this submission addresses. The RCA is meant to ensure that Eskom can
recover its full efficient costs as the actual realities have occurred differently than assumed
during the revenue decision
• Eskom’s RCA application is for R27 240m
• None of the financial ratios and free cash flow outcomes determined by NERSA has
materialised
• Eskom has not yet recovered revenues, determined by NERSA to be efficient and prudent,
incurred as far back as FY 2015, by FY 2020
• In addition, NERSA has decided that this trend would continue for revenues previously
determined to be efficient and prudently incurred during the FY 2017 to only be recovered in the
FY 2023. The methodology does not allow for the time value of money to be included
• In light of NERSA’s mandate to balance the impact on sustainability of Eskom with the impact of
consumers, Eskom proposes that this RCA balance for FY 2019 be recovered as soon as
possible
2526
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