MYPD2 APPLICATION 15 OCTOBER 2009 Jacob Maroga – Chief Executive Empowering the South African dream

2016/07/102 Introduction: Process  We have submitted the proposed MYPD 2 application to NERSA, National Treasury and SALGA on 30 September 2009  This marks the beginning of a consultative dialogue with South Africa  NERSA will hold public hearings to obtain further input on the application  Decision is expected from NERSA early in 2010 in order to allow for the tabling of that decision in Parliament  Implementation on 1 April 2010 for Eskom customers and on 1 July 2010 for municipal customers

2016/07/103 Key pillars of the application 1.The role of Eskom in the economy 1 1.Resolving the funding model for the build 2 1.Invest for the future needs of the country 4 1.Allow for entrance of IPPs The cost of keeping the lights on 3 Address the impact on economically vulnerable communities

2016/07/104 The Role of Eskom Reframing the role of Eskom Eskom’s role is visibly and vividly embedded in the aspirations for the country The key role we play in the South African economy

2016/07/105 Principles guiding the role of Eskom A united, democratic and prosperous South Africa Eradication of poverty and unemployment A thriving economy connected to the world and integrated with the broader African continent A sustainable economy, not harmful to the environment and committed to climate change mitigation initiatives Enhancing the potential of each citizen through an integrated education and skills development system Leveraging the role of financially sustainable SOEs to set a foundation for growth and development of the economy

2016/07/106 Our value proposition Providing power to South Africa is fundamental Power is like oxygen to the economy This is fundamental to the aspirations of our country The current operations have a substantial macro-economic footprint The total value chain of Eskom is like a “mini” economy The capital expansion programme is a major economic stimulus Growing the economy Mitigating the global economic crisis Ensuring adequate power for the future Confidence in future supply key for economy to grow

2016/07/107 Policy evolution and the history of Eskom Electricity Act of 1922 Provide electricity for public benefit Provide it cheaply and abundantly Wherever it is required Not for profit nor loss Self funding, no financial support from the state

2016/07/108 The Capital Development Fund of 1972 The funding model for the build of the 70’s and 80’s Build reserves for the build from tariffs Massive tariff hikes between 1975 and 1982 Reached 32,5% of tariff in 1979 The highest recorded increase of 48,2% in 1977 History of pricing continued

2016/07/109 The De Villiers Commission of 1983 Response to the massive tariff hikes of the late 70’s and early 80’s Reviewed the impact of tariffs on the economy Scrapped the Capital Development Fund History of pricing continued

2016/07/1010 The Energy White Paper of 1998 Competition and private sector participation Suggested fundamental industry reform Break-up of vertical integration Eskom instructed not to build in favour of new power entrants into the market Decision not to build reversed in 2004 History of pricing continued

2016/07/1011 The Eskom Conversion Act of 2001 Eskom converted to a normal company Under the Companies Act not Electricity act Made the ownership by Government more explicit History of pricing continued

2016/07/1012 The Electricity Pricing Policy of 2008 (EPP) Approved by Cabinet in December 2008 Full cost recovery based on re- valued assets Cost reflectivity Transparent pricing with minimal subsidies Develop and publish a pricing path Protection of the poor History of pricing continued

2016/07/1013 The Paradigms The Public Benefit Paradigm vs Commercial and Competitive Paradigm History of pricing continued

2016/07/1014 Cabinet Review 2004 Moratorium lifted in 2004 Consensus that the build programme was already late Immediate start of build programme required An intention to address funding as we build Start of the new build programme

2016/07/1015 Based on the need to finalise funding model Sufficient for the operational cost only Applicable for 2009/10 This MYPD2 will be applicable from 1 April 2010 to 31 March 2013 Nersa interim determination The Interim Adjustment

2016/07/1016 The regulatory and funding model New plant funded from… Retained earnings (reserves) New equity Borrowings Regulatory return allows for… Recovery of prudently incurred: Primary energy Operating Expenditure A recovery of the existing assets: Depreciation A return on the existing assets: Return on Revalued assets

2016/07/1017 The Funding Options Retained earnings (reserves) Equity Borrowings Regulated revenue and tariffs The funding model

2016/07/1018 Equity Provided by Shareholder R60bn over three years R176bn Government guarantees

2016/07/1019 Borrowings Borrowing target of R40 bn per annum over the three-year period Borrowing programme supported by Government guarantees of R176bn Funding from Development finance institutions (World Bank and Africa Development Bank) to be included in mix Dependent on depth of market Supportive price path is key to unlocking funding Depends on credit rating

2016/07/1020 Regulated Revenue Recover prudent costs Move towards sustainable tariffs Strengthen capacity to borrow Support investment grade credit rating

2016/07/1021 The Country Plan for security of supply The Country Plan South Africa requires additional MW by 2020 The plan integrates climate change objectives of the country MYPD allows for cash flows associated current build programme, IPP’s and future investment Energy efficiency initiatives are an important element

2016/07/1022 The cost of keeping the lights on Primary energy Human capital Maintenance Demand side management & energy efficiency Other Operational Expenditure Investment in existing business Refurbishment of ageing plant Normal network growth An average of R23 bn per annum over three years

2016/07/1023 Primary Energy Excludes road maintenance, non-Eskom generation, imports, environmental levy Due to low reserve margins, greater reliance on more expensive power stations Transportation of coal further increases the delivered price Provision made for running of OCGTs to meet demand R25b R32b R37b R43b R49b R56b

2016/07/1024 Operating Costs Human capital increases - for the build programme - attract and retain skills Higher maintenance as ageing plant and more networks are utilised to meet growing demand Need for DSM due to low reserve margin and to balance supply and demand R31b R37b R41b R47b R57b R52b

2016/07/1025 New build capital cost Capital Expenditure An average of R90 bn per annum over MYPD period Continue with committed projects Medupi, Ingula and Kusile Complete the return to service of the previously mothballed power stations Allow for additional investment decisions

2016/07/1026 Capital Expenditure Capital is required for network business to connect power stations and customers Eskom will spend significant capital on building new power stations R70b R106b R112b R125b R131b R164b

2016/07/1027 Independent Power Producers IPPs Support Independent Power Producer investment Over the next three years IPPs will contribute 2189 MW at the end of MYPD period

2016/07/1028 Tariff structures and the economically vulnerable communities Free basic electricity Average low income customer’s consumption is 80kWh Recommends free basic electricity increase from 50 kWh to 70kWh Recommends funding incremental costs through a cross-subsidy

2016/07/1029 The Application Eskom has considered two alternatives Smoothing option Smoothed over three years 45%, per year, over three years Price increase over period to 99c/kWh  R30bn cash shortfall in Eskom  Eskom will look into other funding interventions to address the expected shortfall 146% increase in the first year from 33c to 83c 12% increase in year two from 83c to 93c 12 % increase in year three from 93c to 104c AB Significant increase in year one will have major impact on customers and economy Preferred option as it is progressive over a period. Once-off increase

2016/07/1030 Average monthly bill FBE excluded *revised * * *

2016/07/1031 The Way Forward We are committed to closing the R30 bn shortfall This application serves as a transition to financial sustainability An unavoidable adjustment for a sustainable and secure future We are committed to continuously identifying efficiencies in the value chain We are committed to a dialogue with our customers and stakeholders

2016/07/1032 Conclusion The value proposition of this application Ensuring the continuous supply of power - power is the oxygen of the economy 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