DoE Policy & Planning REIPPPP

Department of Energy: Report on Energy pricing

Parliamentary Committee on Energy | 06 August 2013

The department gave a report on electricity pricing by focusing on the Electricity Pricing Policy (EPP)  and the Electricity Regulation Act (ERA) and briefly touched on other provisions that affect the process of pricing such as those in the NERSA Establishment Act. The department stated as that it is not responsible for tariff determination. The department then proceeded by stating the nature of the relationship of the electricity pricing policy and costing. The following principles were stressed as underlying in the pricing of electricity:

  1. NERSA chooses its own pricing methodology
  2. Pricing must reflect costs
  3. Pricing must include maintenance and improvements/repairs
  4. Information on how electricity is supplied must be furnished to the consumer, when requested
  5. Pricing is never based on discrimination

ERA gives effect to the EPP which is then regulated by the national regulator. There exist instances where the ERA cannot resolve conflict between NERSA and local government. This is in instances where constitutional obligations are placed on municipalities and the very same provision is also translated in the ERA as falling under the jurisdiction of NERSA. The department had found a consultative process that can deal with such instances. The EPP basically states that the end user pays for:

a)      Capacity charge (actual and potential availability of power)
b)      Energy charge (the actual supply of power)
c)       Ancillary charge (the transmission of power through the grid)

The generation has two categories, this being by the utility which is Eskom and by independent power producers (IPPs). Each is governed by two different mechanisms. The utility is governed by the EPP, thus the utility price must cost both power and generation. Whereas, IPPs are governed by power purchase agreements and IPPs enter into such agreements with the utility. This applies in the determination of tariffs. Differentiation between the utility and IPPs is also done in the market. IPPs are separated in terms of their generation source, for example all wind companies are grouped in one segment and so are solar and hydro etc. the department also rationalizes the fact that IPPs cannot fund their generation through tariffs like the utility because renewable energy (RE) IPPs have funds such as the Green Fund or Carbon Development Mechanisms to aid them.

However, regardless of the generation source, all electricity is sold and distributed without distinction of origin. In terms of different pricing during end use, the department and the utility as well as municipalities have explored different structures. The best example of dealing with peak times is the time of use (TOU) structure. Although not implemented everywhere, it is the best pricing measure to account for demand fluctuations and to price the use of electricity accordingly.

The current pricing equation is as follows AR = PE + O&M + (depreciation + return on capital) acquisition of asset. The Multi Year Price Determination 3 (MYPD3) application included capital costs in the tariff for future build, this is in line with the methodology chosen by NERSA and as recognized in the EPP.

  1. AR: Allowed Revenue (this is total revenue the utility is allowed collect within the specified period)
  2. PE: Primary Energy (Fuel costs for coal or gas etc)
  3. O&M: Operation and maintenance

Questions and answers:

  • When is the Integrated Resource Plan (IRP) review? It seems very important that the assumptions of the IRP be reviewed before the country commits to more generation programmes.
  • In the equation PE seems to be large and fairly consistent without any changes, what will the effect be when we factor in energy efficiency?
  • Why was there a shift from Renewable Energy Feed in tariff (REFIT) to REBID (the process used in the current RE procurement programme)?
  • Why was the DSM programme cancelled?

DSM was done in Eskom supplied areas in most cases or was implemented in municipality supplied areas, only when the city contracts Eskom to do the installations. The rationale behind DSM was not entirely fair for consumers, as all consumers nationally paid for DSM and only select would receive its benefits. The funding for DSM is still collected through tariff revenue and will be used in new programmes that are yet to be launched but have been finalized.

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