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Click to edit Master title style 0 Eskom’s MYPD2 Tariff Application 03 December 2009 Brian Dames – Chief Officer (Generation Business)

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Presentation on theme: "Click to edit Master title style 0 Eskom’s MYPD2 Tariff Application 03 December 2009 Brian Dames – Chief Officer (Generation Business)"— Presentation transcript:

1 Click to edit Master title style 0 Eskom’s MYPD2 Tariff Application 03 December 2009 Brian Dames – Chief Officer (Generation Business)

2 1 Eskom‘s MYPD2 tariff application – setting the context ▪ History and context – 25 years of unrealistically cheap electricity ▪ Consequences of SA’s current electricity constraints ▪ Motivation for Eskom’s Multi-Year Price Determination (MYPD2) application –Changed assumptions and shift in Eskom’s risk profile –Funding –Risks ▪ Overview of the MYPD2 cost base –Capital expenditure –Operating expenditure –Primary energy ▪ Implications –Economic impact on SA –Protection of the poor ▪ Way forward – meeting SA’s capacity requirements over the next two decades

3 2 Drivers for the change ▪ Economic impact of price increase -Recovery from recession will be slow -Electricity not to constrain post recession growth -Price increase by 16c/kWh per year ▪ Impact on the poor and small business ▪ Financially sustainable Eskom and operationally efficient ▪ Strategic shifts – We cannot do it alone –Demand reduction – reduce SA energy intensity per GDP –New sources of funding at project level and additional borrowing –Operational savings –Next coal plant – not build by Eskom –Road repair and maintenance to Government –Project phasing

4 33 O&M cost R/MWh, FY 2009 costs* Eskom unit Benchmarking of generation business shows Eskom’s FY09 costs to be very low compared to peers Power stations ▪ 11 Eskom stations benchmarked against 100 international peers ▪ In order to make stations comparable, technical adjustments were made to account for factors such as age of technological standard, cooling water mechanism, type of mills, boiler design, etc ▪ Almost 100% of generation operations costs were covered by the benchmarking analysis 1 Dec 2008 cost projections, forecast FY 2009 station send out as at 1 Jan SOURCE: McKinsey benchmarking study 2008 A BCDEF H GIJK Costs are relatively high as it is one of the recently ‘de-mothballed’ stations 1 st quartile2 nd quartile3 rd quartile4 th quartile 3

5 44 New business drives the above inflation increase in operating costs, while the real cost per MW is constant Rm /10 Existing % / New Cost of cover DSM / / New business drives the above inflation increase in operating costs While the real cost per MW is constant +43% +8% +52% -20% Compound annual growth rate 10/1111/1212/1309/ Existing business operating cost (Rm/MW) - real Total operating cost incl new business (Rm/MW) - real 4 SOURCE: MYPD 2 application

6 5 Price driven increasingly by Capital Expenditure

7 6 We have the world cheapest electricity, but just do not have enough ……and assuming no change for other counties

8 7 Residential tariffs a different story ……and assuming no change for other counties

9 8 Smoothed over 3 years 45%, per year, over 3 years Price increase over period to 99c/kWh R30bn peak cash shortfall in Eskom Eskom will look into other funding interventions to address the expected shortfall Eskom’s new alternative Smoothed over 3 years 35%, per year, over 3 years Price increase over period to 82c/kWh R14bn peak cash shortfall in Eskom Eskom will look into other funding interventions to address the expected shortfall A re-opener may be necessary if our funding assumptions do not materialise NewOld Not all risks are within control of Eskom & participation of stakeholders necessary to manage these risks New alternativePrevious alternative

10 9 Summary We require strong partnerships to make this happen The significant shift in risk appetite will mean the introduction of independent private producers in power generation, phasing of the supply side expansion programme, intensifying energy savings and greater cost efficiency Eskom commits to achieve the operational efficiencies in this application. Robust monitoring process required Failure to reduce our energy use and introduce private participation in power generation, would require a review of strategy and will create a power generation gap in the next five years with its consequent disastrous impact on the economy. Eskom cannot do it all alone, hence the application comes with significant risks that we as a country have to manage together A re-opener may be necessary if we not successful

11 10 Conclusion The value proposition of this application remains the same Ensuring the continuous supply of power The oxygen of South Africa Setting a foundation for a cleaner and greener future Build capacity for the future needs of the country Empower the industrial development and economic growth of the country Create employment opportunities Build confidence in the future

12 Thank you


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