PRESENTATION TO THE PARLIAMENTARY PORTFOLIO COMMITTEE ON ENERGY

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PRESENTATION TO THE PARLIAMENTARY PORTFOLIO
COMMITTEE ON ENERGY
Mrs Cecilia Khuzwayo Chairperson
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NERSA BUSINESS PLAN AND BUDGET (2011/12)
Mrs Cecilia Khuzwayo Chairperson
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CONTENT

• Introduction
• Regulated Industries
• Vision, Mission, Values and Regulatory Principles
• Mandate
• Strategic Objectives for 2011/12
• Budget and Funding for 2011/12
• Challenges
• Plans for future

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INTRODUCTION

• The National Energy Regulator (NERSA) was
  established on 1 October 2005 in terms of the
  National Energy Regulator Act, 2004 (Act No. 40
  of 2004) to regulate
• Electricity industry (Electricity Regulation Act,
  2006 (Act No. 4 of 2006))
• Piped-Gas industry (Gas Act, 2001 (Act No. 48 of
  2001))
• Petroleum Pipelines industry (Petroleum Pipelines
  Act, 2003 (Act No. 60 of 2003))
• NERSAs predecessor, the National Electricity
  Regulator (NER) regulated the electricity
  industry between 1995 until 16 July 2006
• NERSA is expected to implement its mandate and to
  proactively take necessary regulatory actions in
  anticipation of and in response to the changing
  circumstances in the energy industry

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REGULATED INDUSTRIES ELECTRICITY

• Eskom dominance
• 95 of electricity generated
• Municipal Fragmentation
• Over 174 Distribution and 9 Generation licensees
• In 2009/10 217 TWh of electricity sold
• The Structure of the electricity supply industry
  of South Africa is presented below

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REGULATED INDUSTRIES ELECTRICITY (Cont.)
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REGULATED INDUSTRIES PIPED-GAS

• Accounts for less than 2 of energy needs of
  South Africa
• Approximately 120 MGJ/annum natural gas imported
  from Mozambique
• Approx 188 MGJ/annum of methane rich gas produced
  by Sasol Gas in Secunda
• Sasol Gas dominates regulated areas
• Transmission Operators Sasol Gas, Transnet
  Pipelines, Republic of Mozambique Pipeline
  Company (ROMPCO)
• Distribution Operator Sasol Gas

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REGULATED INDUSTRIES PIPED-GAS (Cont.)

• Traders Sasol Gas, Spring Lights Gas, NOVO
  Energy, Virtual Gas Network, NGV Gas
• Storage Operator Virtual Gas Network
• Reticulation (lt2 bar(g)) not regulated by NERSA
  but in municipal executive authority
• Egoli in Johannesburg
• EasiGas in Port Elizabeth
• NERSA has registered 11 entities in the
  production of gas in various areas in the country
• New entrants into the market

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REGULATED INDUSTRIES PETROLEUM PIPELINES

• Transnet dominates pipeline infrastructure
• Owns the Durban-Gauteng refined products
  pipelines and distribution lines in Gauteng
• Transport crude oil for the NATREF refinery
• Has a single storage facility in Tarlton
• The Oil Majors dominate storage facilities
• BP, Shell, Chevron, Engen, Total and Sasol Oil
• Approximately 26 storage facilities connected to
  the Transnet network
• Approximately 4.5 billion litres per annum
  transported by pipeline to Gauteng areas
• Road and Rail a further 2 billion litres per
  annum

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VISION
To be a world-class leader in energy regulation
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MISSION
To regulate the energy industry in accordance
with government laws and policies, standards and
international best practices in support of
sustainable development
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VALUES

• Passion
• Spirit of Partnership
• Excellence
• Innovation
• Integrity
• Responsibility
• Professionalism

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REGULATORY PRINCIPLES

• Underpinned by NERSAs legal mandate
• Transparency
• Neutrality
• Consistency and Predictability
• Independence
• Accountability
• Integrity
• Efficiency

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MANDATE

• NERSAs Mandate is anchored in
• 4 Primary Acts
• National Energy Regulator Act, 2004 (Act No. 40
  of 2004)
• Electricity Regulation Act, 2006 (Act No. 4 of
  2006)
• Gas Act, 2001 (Act No. 48 of 2001)
• Petroleum Pipelines Act, 2003 (Act No. 60 of
  2003)
• 3 Levies Acts
• Gas Regulator Levies Act, 2002 (Act No. 75 of
  2002)
• Petroleum Pipelines Levies Act, 2004 (Act No. 28
  of 2004)
• Section 5B of the Electricity Act, 1987 (Act No.
  41 of 1987)

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MANDATE (Cont)

• 3 Facilitating Acts
• Public Finance Management Act, 1999 (Act No. 1 of
  1999) (PFMA)
• Promotion of Access to Information Act, 2000 (Act
  No. 2 of 2000) (PAIA)
• Promotion of Administrative Justice Act, 2000
  (Act No. 3 of 2000) (PAJA)

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MANDATE (Cont)

• Functions of NERSA
• Issuing of licences with conditions
• Setting and/or approving tariffs and prices
• Monitoring and enforcing compliance with licence
  conditions
• Dispute resolution including mediation,
  arbitration and the handling of complaints
• Gathering, storing and disseminating industry
  information
• Setting of rules, guidelines and codes for the
  regulation of the three industries
• Determining of conditions of supply and
  applicable standards

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MANDATE (Cont)

• Functions of NERSA (Cont.)
• Consulting with government departments and other
  bodies with regard to industry development and
  regarding any matter contemplated in the three
  industry Acts
• Expropriating land as necessary to meet the
  objectives of the relevant legislation
• Registration and
• Performing any activity incidental to the
  execution of its duties

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STRATEGIC OBJECTIVES (2011/12)

• To create regulatory certainty in the energy
  sector
• To protect the interests of the public and the
  customers
• To create a dispensation for fair competition for
  industry players
• To create energy supply certainty and
• To create an effective organisation that delivers
  on its mandate and purpose

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RING-FENCING METHODOLOGY

• According to Section 13 of the National Energy
  Regulator Act, all accounts for the three
  regulated industries have to be ring-fenced
• all direct costs attributable to an industry are
  allocated to that industry
• the ratio of the staff compliment attributed to
  the industry-specific functions is used to
  allocate the remaining (common) costs to the
  respective industries
• the common costs allocation ratio for
  electricity, piped-gas and petroleum pipelines
  industries is 582121

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BUDGET AND FUNDING FOR 2011/12
Expenditure Levy Income Levies
Electricity R124 667 690 R73 408 045 0.0286 c/kWh
Piped-Gas R50 486 314 R40 496 714 0.2872 c/GJ
Petroleum Pipelines R47 867 696 R33 503 616 0.1905 c/l
Total R223 021 701 R147 408 375
Difference between expenditure and income budgets
amounts to R75.6 million which is attributable to
a refund of surplus funds to the different
industries being regulated and interest
receivable from short term investments
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CHALLENGES FACING NERSA (Electricity Industry
Regulation)

• Security of Supply
• Noncompliance issues especially with municipal
  distributors maintenance backlog and not
  meeting reporting requirements
• Implementation of Inclining Block Tariffs

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CHALLENGES FACING NERSA (Piped-Gas Industry
Regulation)

• Regulation of certain piped gas activities not
  specifically catered for in the Gas Act
• CNG
• Monitoring and enforcing Sasols compliance with
  the regulatory agreement
• Enforcement of the market value pricing
• Approve maximum prices in absence of clear market
  value of gas
• Private sector investment and markets for gas
• Private sector investment in infrastructure faces
  many hurdles i.t.o. supply and offtake agreements

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CHALLENGES FACING NERSA (Petroleum Pipelines
Industry Regulation)

• Security of supply of petroleum to the inland
  areas
• State Owned Entity (Transnet) funding challenges
  and the setting of its tariffs
• Promoting access to petroleum storage facilities
  by Historically Disadvantaged South African
  wholesalers

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CHALLENGES FACING NERSA(Cross-Cutting Regulation)

• Processes being dependent on other role players
  and therefore being outside of NERSAs control
  e.g.
• Some of the Electricity Regulation Act
  Regulations not yet promulgated
• insufficient data in licence and tariff
  applications
• Information Asymmetry

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CHALLENGES FACING NERSA (Organisational)

• Management of industry information/data
  (collection, storage, update and dissemination)

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PLANS FOR FUTURE(Electricity Industry Regulation)

• To monitor and enforce compliance by all
  licencees
• Introduction of more Independent Power Producers
• Promotion of Renewable Energies in the generation
  mix hence Renewable Energy Feed-In Tariffs
  (REFIT)
• To monitor the implementation of the second
  Multi-Year Price Determination (MYPD2) by Eskom
  and to revise the rules for the MYPD2 if
  necessary
• To start preparing for the third Multi-Year Price
  Determination for Eskom for the period 2013/14
  2015/16, to continue giving certainty and
  predictability in terms of electricity prices

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PLANS FOR FUTURE(Electricity Industry
Regulation) (Cont.)

• To streamline regulatory processes in the areas
  of licensing, tariff reviews and appraisals
• To rationalize tariff structures, taking into
  account regional pricing and geographical
  differentiation

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PLANS FOR FUTURE(Piped-Gas Industry Regulation)

• To educate customers in order to assist in the
  enforcement of Market Value Pricing
• To implement a compliance framework for licence
  conditions
• To conduct a study on the integrity of the gas
  pipeline network
• To benchmark licence conditions

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PLANS FOR FUTURE(Piped-Gas Industry Regulation)
(Cont.)

• To highlight to the policy maker the need for a
  review of the Gas Act to address
• Definitions and provisions that hamper effective
  regulation of the gas industry
• Infrastructure Planning and Construction
  Licences
• NERSAs Tariff Mandate (Distribution and
  Transmission) and
• Licensing deadlines
• Transition to regulating maximum prices
• Monitoring compliance to licence conditions

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PLANS FOR FUTURE(Petroleum Pipelines Industry
Regulation)

• To monitor the escalations in costs as well as
  the delays in construction of new infrastructure
• To monitor and manage as far as possible a tariff
  spike through tariff structures
• To monitor licensees in the petroleum pipelines
  industrys behaviour and act if and when
  necessary
• To facilitate market entry by historically
  disadvantaged players
• To facilitate third party access
• Monitoring compliance to licence conditions

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PLANS FOR FUTURE(Cross-Cutting Regulation)

• To manage the information asymmetry between NERSA
  and the licencees
• To advise policy makers of NERSA views, policy
  gaps and NERSAs mandate
• To coordinate NERSA activities with other
  regulators with concurrent jurisdiction
• To assess NERSAs processes and methodologies
  against best in world practices through
  regulatory analysis, research, benchmarking and
  auditing

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PLANS FOR FUTURE(Organisational)

• To create an effective organisation that delivers
  on its mandate and purpose
• To exercise high quality corporate governance to
  improve institutional culture, skills,
  administrative systems, meet PFMA requirements
  and measure NERSAs performance
• To establish and maintain an effective and
  efficient information management system
• To strive to ensure that the organisations
  business model (governance model and Regulator
  guidelines) is appropriate and improved where
  necessary
• To identify, develop and preserve the right
  capabilities and resources for NERSAs current
  and future success

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UPDATE ON TRANSNETS NEW MULTI PRODUCTS PIPELINE
PROJECT
Dr Rod Crompton Regulator Member
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CONTENT

• New Multi Products Pipeline Concept
• Map of New Multi Products Pipeline
• Background
• Completion Date Forecasts
• Costs
• Risks
• Risk 1 Coastal End (Durban)
• Risk 2 Line Fill (NMPP)
• Risk 3 Security of Inland Supply
• Road and Rail Requirement Data Challenges
• Road and Rail Requirement Estimate
• Pipeline Tariff Durban to Johannesburg (Rounded)
• Tariff forecast for Durban to Alrode
• Pipeline Tariff Impact on Gauteng Petrol Price

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NEW MULTI PRODUCTS PIPELINE CONCEPT
Terminal
Terminal
Bullet train
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Source Transnet, NERSA
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BACKGROUND

• Licence granted -12 September 2007
• Conditions
• Ready in 4 years and
• Deadlines for parts.

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• COMPLETION DATE FORECASTS

Licensed activity License condition (original) Latest forecast ( in operation)
Pipeline Waltloo to Kendal Dec 2009 April 2011
Pipeline Jameson Park to Alrode Sept 2011 May 2011
Pipeline Alrode to Langlaagte Sept 2011 May 2011
Pipeline Durban to Jameson Park March 2011 Jan 2012 (partial)
Coastal Terminal Sept 2011 Dec 2013
Inland Terminal Sept 2011 Dec 2013
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(No Transcript)
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COSTS

• 2007 R 11 bn
• 2009 R 12.6 bn
• 2010 R 15.4 bn
• 2010 R 23.4 bn ( interest)
• 2011 R 22 bn ( interest)
• Next ????

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RISKS

• Coastal end (Durban)
• Line fill (NMPP)
• Security of inland supply

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RISK 1 COASTAL END (DURBAN)

• Construction delays in coastal terminal and
  feeder lines from oil companies
• Solution tight lining until accumulator
  facility is ready

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RISK 2 LINE FILL (NMPP)

• Costs
• Who pays? Not resolved
• Resulted in commencement delays on 3 branch lines
• Worst case NMPP finished but no line fill

3 Branch lines R 108 mil Sasol loan
Trunk line R 1 bn ????
Total R1.1 bn ????
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RISK 3 SECURITY OF INLAND SUPPLY
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RISK 3 SECURITY OF INLAND SUPPLY (Cont.)

• Riskiest period to en 2011
• Transnets Mitigation strategy until NMPP
  finished
• use both old and new pipelines in parallel
• road and rail

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ROAD AND RAIL REQUIREMENT DATA CHALLENGES
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ROAD AND RAIL REQUIREMENT ESTIMATE
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PIPELINE TARIFF DURBAN TO JOHANNESBURG (ROUNDED)
Actual Actual Actual Actual Actual Estimate Estimate Estimate Estimate Estimate
2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17
Durban to Gauteng tariff (cents / litre) 12 12 11 12 18 23 25 33 36 37
increase / (decrease) in tariffs 3 (11) 6 55 27 9 32 9 3
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TARIFF FORECAST FOR DURBAN TO ALRODE
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PIPELINE TARIFF IMPACT ON GAUTENG PETROL PRICE
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RENEWABLE ENERGY FEED-IN TARIFFS (REFIT) REVIEW
Mr Thembani Bukula Regulator Member
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CONTENT

• Background
• NERSAs Mandate
• REFIT Guidelines 2009
• Latest Developments
• Outstanding Matters

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BACKGROUND

• White Paper on Renewable Energy 2003
• 10 000GWh by 2013 (i.e. 1141MW _at_ 100 Load
  Factor)
• Consultations between 2004 and 2008
• Regulatory framework (funding, implementation
  rules/methods, technologies)
• REFIT guidelines published in March October
  2009
• New generation regulations promulgated in August
  2009
• REFIT Programme IPP Programme for conventional
  power
• NERSA to develop selection criteria
  standardised PPA
• Eskom (System Operator) to purchase power
  according to the selection criteria
• MYPD2 approval in February 2010 with REFIT
  allocation
• R12.3bn for 1025MW over the 3 year period
• Implementation date 1 April 2010

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NERSAs MANDATE

• National Energy Regulator Act, 2004
• The custodian enforcer of the national
  electricity regulatory framework
• To provide licenses and provide for matters
  connected therewith
• Electricity Regulation Act, 2006
• Issue rules designed to implement national
  governments electricity policy framework
• Regulate prices tariffs
• Furnish potential licensees with all the
  information necessary for licensing
• Make guidelines, rules, codes of conduct after
  consultation with interested parties
• Facilitate the conclusion of Power Purchase
  Agreements
• Make license conditions relating to
• Setting of prices, tariffs charges
• The methodology to be used in determining tariffs
• The format contents of agreements entered into
  by licensees
• Period of validity of licenses

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REFIT GUIDELINES 2009

• REFITs based on levelised cost of electricity
  (LCOE)
• Stimulate the Renewable Energy industry
• Over a 20 year period (20 year Power Purchase
  Agreement (PPA))
• Wind, Landfill gas, Small scale hydro, biogas,
  biomass and solar
• Annual review for the next 5 years every 3
  years thereafter applicable to new projects
• No reduction rate (as in other countries such as
  Spain, Germany, Denmark)
• Reasonable/attractive Returns of 17 (ZAR)
• Consultation papers on the selection criteria
  PPA Feb 2010
• Plant location and technology that contributes to
  local economic development
• Compliance with legislation in respect of
  advancement of HDIs
• Projects demonstrating the ability to raise
  finance
• Small distributed generators over centralised
  generators
• Shortest commissioning times
• Network integration stabilisation, transmission
  losses, environmental approvals

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LATEST DEVELOPMENTS

• Consultation paper on REFIT review issued in
  March 2011
• Reduction in capital costs (solar PV reduction
  around 40, Wind 5)
• Significant changes in the foreign exchange rate
  (from ZAR10/ to ZAR8/)
• Creation of space for additional renewable energy
  technologies
• Maintaining the reasonable/attractive returns of
  17(ZAR)
• New generation regulations promulgated on 4 May
  2011
• REFIT programme replaced by IPP procurement
  programme
• DoE the procurer PPA negotiator,
• Eskom the buyer/off-taker
• Ministers press release 26 May 2011
• Current REFIT procurement programme will use 2009
  REFIT
• 2nd phase procurement will use the revised REFIT
  (March 2011 Consultation paper)
• Completed the procurement of 1000MW by December
  2011

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OUTSTANDING MATTERS

• Section 34(1) Determination by the Minister
• Generation capacity for security of supply
• Types of energy sources
• Manner of purchase and selling the electricity
  produced
• Tendering procedure (fair, transparent,
  equitable, competitive cost effective)
• Provide for private sector participation
• Concurrence by NERSA on the above Section 34(1)
  determination
• Finalisation by 30 June 2011
• Issuing of the Request for Proposal (RFP)
  documents
• Stating the tendering process (June 2011)
• Licensing of successful IPPs by NERSA
• Maximum of 120 after application is lodged
• Shorter period can be facilitated

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CONCLUSION
Mrs Cecilia Khuzwayo Chairperson
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CONCLUSION

• NERSA would like to thank the Portfolio Committee
  for the opportunity to present its Business Plan
  for 2011/12 as well as to update the Committee on
  construction of the New Multi-Product Pipeline
  and the REFIT review
• Electricity regulation has matured whilst
  piped-gas and petroleum pipelines regulation is
  at its infancy - up to date the majority of the
  effort was located in the licensing of existing
  facilities but now compliance monitoring can
  start
• Balance is required between differences and
  synergies between and amongst the approaches in
  regulating the three industries
• Governance issues and legal regulatory
  requirements are being addressed
• MOU on concurrent jurisdiction is necessary

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THANK YOU