Eskom Distribution An Integrated Development Approach Presentation to

Eskom Distribution (An Integrated Development Approach) Presentation to the Portfolio Committee on Public Services and Administration 5 June 2006 1

Contents 1. Brief Introduction/Background 2. Eskom’s Electrification programme 3. Alignment of Projects with IDP Process 4. Electricity Universal Access Approach [2012] 5. National RED – Conceptual Design 6. Progress on Billing Systems [Revenue Enhancement] 7. Electricity Power Challenges in the Western Cape 2

Eskom Holdings : Divisional Mandates Corporate To assure regulatory compliance, ensure effective group wide governance, develop policies for compliance assurance and to provide strategic services. Generation To optimally operate and maintain the plant lifecycle of Eskom’s South African generation capacity assets. Transmission To optimally operate and maintain the lifecycle of the South African transmission network. Distribution To manage the retail business and optimally operate and maintain, the SA Distribution network, while playing an active role in the restructuring of the EDI. Key Customers 3 Key Customer Division To proactively manage contestable client relationships and to trade energy from Generation and international sources to contestable clients in SA (consumers of >100 GWh) and customers abroad Enterprises Division To design, build & refurbish Eskom’s assets, act as a catalyst for globalisation for the group and to be the custodian of Eskom’s nonregulated businesses. Eskom Enterprises will also offer strategic and commercial lifecycle services to the line divisions

Distribution Division : Business Model Wires Business (Engineering/Network) Customer Categories Retail Business (Customer Service) Residential Overall management of network infrastructure in delivery of electricity to end user Purchase electricity from the wholesale market and sell to end user/ Redistributors Traction Agriculture Functional Areas: • Construction of network infrastructure; • Installation of meters; • Inspection, testing, upgrade & maintenance of equipment • Technical customer connections & disconnections Redistributors Prepaid Mining & Industrial 4 Functional Areas: Commercial • Sales & Marketing • Energy Trading • Customer Service • Pricing & Tariff Planning • Call Centre • Billing

Contents 1. Brief Introduction/Background 2. Electrification programme 3. Alignment of Projects with IDP Process 4. Electricity Universal Access Approach [2012] 5. National RED – Conceptual Design 6. Progress on Billing Systems [Revenue Enhancement] 7. Electricity Power Challenges in the Western Cape 5

Electrification - Energy White Paper Mentions the following key issues: n n n 6 Electrification Planning Unit [INEP BPU] National Electrification Fund [NEF] Economic Development Infrastructure creation Economic Nodal Areas identified/priorotised Integrated National Electrification Programme [INEP]

Eskom’s Electrification Programme n 3, 3 m households have been electrified since 1994 n Approx. R 9 b capital expenditure – average cost R 3900 per connection n National Government subsidised INEP since 2001 n R 873 m allocated for 2006/7 programme n 120 000 connections to be realised in 2006/7 [after adjustments (target was 160 000 connections] n Connections mainly in rural areas n Capacity building programmes achieved through ESDEF n Rural Development initiatives in Nodal areas 7

Challenges n Different challenges for current and proposed programme compared to the 1994 programme Limited Infrastructure [mostly in rural areas] n Integration with Government prioritiess n n A phased process for step-up programme Step-up of programme – 18 months lead time required n Average lead time for bulk infrastructure – 27 months n Availability of resources, funding, material, suppliers etc. n n Ensure availability of adequate capacity n Electrical infrastructure in former TBVC states and self governing territories requires major upgrading and strengthening 8

Challenges n Harmonisation of electrification and housing programmes n Balancing cost against social economic requirements e. g. job creation n Ensure availability of data and structural information n Cater for household growth as part of step-up programme n Development of policies regarding implementation issues such as un-proclaimed areas, land usages etc. n Ensure political support in ensuring the speeding-up of housing allocation/tender processes etc. n Integration of supply technologies n Finalisation of the EDI restructuring n Availability of funding up front [R 2, 5 billion per annum] 9

CONTRIBUTION TO INTEGRATED SUSTAINABLE RURAL DEVELOPMENT (ISRDP) MANDATE AND STRATEGY n The programme was established in 2001 to support the Integrated Sustainable Rural Development Programme in the 15 identified rural nodes. n Eskom will continue with other development initiatives as per their mandates. n The programme will be reviewed in 2010. MANDATE AND STRATEGY 10

Spread of Projects [In Nodal Areas] Region/Area Amount (R) Eastern Cape [8 Projects] 17 145 282 Northern Cape [5 Projects] 8 278 350 Central Karoo [2 Projects] 2 400 000 Free State [1 Project] 1 200 000 Limpopo [8 Projects] 8 762 355 Kwa. Zulu Natal [11 Projects] 21 690 000 TOTAL CONTRIBUTION 11 59 475 987

Type of Projects Funded Rural Development Projects include the following: n n n 12 Upgrading of Classrooms Contributing towards infrastructure for water projects Food security programmes Multi-Purpose Centres – Electricity Provision Agricultural Development

Additional Eskom’s Programmes For Social Upliftment n n n n Eskom Development Foundation Training and Development Expo for Young Scientists Proudly South African Selected environmental initiatives Chairman and Chief Executive Funds HIV / AIDS / SAAVI, Health Care training / immune boosters n Business Against Crime n Scholarship Programme n Assets donations / BUs donations 13

Contents 1. Brief Introduction/Background 2. Electrification programme 3. Alignment of Projects with IDP Process 4. Electricity Universal Access Approach [2012] 5. National RED – Conceptual Design 6. Progress on Billing Systems [Revenue Enhancement] 7. Electricity Power Challenges in the Western Cape 14

National Electrification Fund Allocation Principles The (INEP BPU) makes recommendations for the approval of the Integrated National Electrification Plan [INEP] to the National Electrification Advisory Committee (NEAC) comprising of inter alia DME, National Treasury, SALGA, AMEU, DWAF, IDT, DPLG and Eskom based on the following criteria: n. Focus on backlog and apply a rural bias n. Prioritise based on Integrated Sustainable Rural Development Strategy (ISRDS) Nodal Zones n. Maximise on available infrastructure n. Past performance taken into account n. Government priorities and initiatives such as Integrated Infrastructure Development considered n. Regional capacity e. g. resources 15

NEF Process for Allocation of Funding to Provinces n Use same criteria as in NEAC n Adjust programme as per DME requirements and in line with the change process n Provincial consultation done through: n Provincial IDP/MIG Forums chaired by Provincial Local Govt officials n Provincial Energy Forums [where applicable] n Final funding allocations to Municipalities are based on the approved budget by DME and are consistent with IDP agreements signed between Eskom and Municipalities n Project Life Cycle principles observed 16

Contents 1. Brief Introduction/Background 2. Electrification programme 3. Alignment of Projects with IDP Process 4. Electricity Universal Access Approach [2012] 5. National RED – Conceptual Design 6. Progress on Billing Systems [Revenue Enhancement] 7. Electricity Power Challenges in the Western Cape 17

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n National Backlog to date n A current backlog of electrification connections of 3. 4 million households. n An estimated requirement of 5 million connections by 2012. If electrification continues at the current rate: n 43% of current backlog (excluding growth) will be electrified by 2012. n 29% of backlog (including growth) will be electrified by 2012. 19

Universal Access Consideration n Step-up programme planning to be phased in (+/- 18 Months) n Master plan needs to be in place n Cost per connection (Based on existing Eskom trends) n R 4, 970 from 2006/7 n R 5, 522 from 2008 to 2010 n R 6, 075 for 2011 to 2012 n High cost per connection to be influenced by : n Less infrastructure available n Catering for higher supply technology e. g. 10 A, integrated development programmes n Low density/long line length 20

Universal Access Considerations n Cost for social economic developments e. g. job creation, BEE should be made available separately (Community based construction -Department of Labour) n Eskom needs to identify risks and consequences of step-up programme n Focus Universal Access as follows [shifting target] n Western Cape - 2007/8 n Northern Cape, Free State - 2008/9 n North West and Mpumalanga - 2009/10 n Universal Access for the rest – target 2012 n Once universal access is reached – business as usual 21

Context ………. n Farm worker houses included as part of connections n The following were not factored in n Non grid concessions/connections n Local economic development planning n Land restitution issues n Emerging farmers [electrification, support and development] n Impact of Municipal Infrastructure Grants (MIG) n Schools and clinics electrification n Planning Targets should be negotiated with Municipalities to ensure alignment 22

Journey to Universal Access n Eskom identified 3 phases for development of the Universal Access Planning approach: n Phase 1 - (Short term): High level planning proposal to achieve universal access in line with Government objectives; n Phase 2 - (Medium term): Detailed planning proposal per municipality for the current Medium Term Expenditure Framework 3 year cycle (with refined Phase 1 planning proposal); and n Phase 3 - (Long term): Long Term approach on the development of the Universal Access Plan (UAP). 23

Project Charter for Phase 3 (2 Stages) n Project charter on how the plan might be prepared, based on 2 stages: n Stage 1: UAP Business Case l Review the 3 year rolling electrification plan and related available data, for the 3 year MTEF cycle as per NT process and to be gazetted by February 2007; and l Develop DME Business Plan (Case Study). Agree upfront on what the DME requirements are for a BP. The minimum requirements are: l Scope and definition of what is required. l Resource requirements with a 2012 view broken down per year. l Scenario sketching and sensitivity studies. l Risk identification and mitigation The biggest risk is that Eskom must do more than 350 000 connections within any year. 24

Project Charter for Phase 3 (2 Stages) n Stage 2: National requirement for Universal Access l l l 25 Compile the Connection Master Plan & Network Development Plan, noting needs of low density areas & small scale farming, & constraints of the 2012 target; Assess impact on Eskom Generation & Transmission, other operational issues, financial viability, recommended subsidies, tariffs, & refurbishment; Assess application of technologies (including non-grid), appropriate execution strategies, resource availability & timeframes; Align to Electricity Supply Industry & Electricity Distribution Industry restructuring, development plans, other planning processes & government initiatives; and Compile “next phase” detailed projects & timelines after Government decisions.

Stage 2 Project Approach 26

Contents 1. Brief Introduction/Background 2. Electrification programme 3. Alignment of Projects with IDP Process 4. Electricity Universal Access Approach [2012] 5. National RED – Conceptual Design 6. Progress on Billing Systems [Revenue Enhamcement] 7. Electricity Power Challenges in the Western Cape 28

Background Cabinet decision of 14 September 2005: “… six metro REDs needed to be set up as soon as possible after the local government elections, and that other areas would be covered under separate local REDs or a national distributor. Eskom will continue to play a critical role particularly in the national RED” February-May 2006: Financial Viability analysis. Awaiting Cabinet approval. 29 Meeting of the economic cluster ministers (DPE, DME, dplg, National Treasury) on 29 November 2005: • 6 Metro REDs confined (for the 1 st phase) to metro boundaries to be confirmed by March 2006 • Business model for national RED in place by June 2006, subject to realistic timeframes January 2006: Minister of Public Enterprises requested Eskom to conceptualise the national RED with concrete proposals on management & governance

Key Features of the National RED Use the Eskom national footprint as the basis of the National RED - enhanced economies of scale through proven technology, business processes & scaleable IT solutions - improved service delivery through customer focused value chains - sustained industry skills in various centres of excellence - national planning and infrastructure development - earlier progress - limited dependence on RED creation - a base for equitable national tariffs Staff Benefits - stability for industry employees 30 Credible consolidation vehicle for municipal electricity undertakings - immediately address weak rural distribution - leverage on Eskom experience of TBVC and SGT take-overs - equalise the financial impact of restructuring through inclusion in the national rate base Support free basic electricity & universal access to electricity by 2012 - proven Eskom track record particularly in rural electrification - economies of scale with respect to planning, project management & national infrastructure development - delivery of national electrification infrastructure - government interaction on electrification funding and reporting limited to a single service provider (national RED) as opposed to multiple municipalities

Benefits to Municipalities MUNICIPAL REQUIREMENT Financial Position not adversely affected NATIONAL RED OFFERING n. Secure cash flow through asset compensation (sale or lease) Effective and efficient n. Effective service provision based on regulatory electricity service provision standards n. Delivery on Electrification and FBE targets based on contractual agreements Effective and Efficient non- n. Opportunity for focused attention to non-electricity service provision services n. Eskom support for non-electricity municipal services e. g. billing, cash collection & contact centres Equitable electricity tariffs 31 n. Low equitable tariffs in the long term due to enhanced business efficiencies through consolidation and economies of scale n. National RED a base for equitable national tariffs

Municipality Non-Electricity Municipal Service Provision [Conceptual Design] Dispatching Finance Water / Sewage Operations ESKOM Water / Sewage Trouble Calls Electricity Trouble Calls Single Customer Data Base Information & Cost for service Electricity Dispatching Shared Service Contact Centre Refer to municipal account Copy Billing & Account Ops Copy Billing & Copy Billing Account Ops & Account Ops Municipal Services Revenue Party water credit Management Refer to Electricity account Billing & Account Ops All trouble calls & bill queries Rates & Services Meter Account Reads Electricity Wires Finance Information National Distributor Electricity Account KSACS Meter Reads Elect. Meter Electricity Revenue 3 rd 32 Water Meter 3 rd Party cash collection Customer

Summary 33 n The proposed conceptual design of the national RED fully supports the national objectives n The national RED will be an effective consolidation vehicle for non-metro municipalities n Initially, minimal restructuring effort is required to immediately address the problems of rural distribution n The national RED will significantly contribute to meeting the target of universal access to electricity by 2012 n Eskom’s national footprint will provide the base for significant benefits through economies of scale and skill

Summary n Municipalities will benefit from the process through: n secure cash flows from asset compensation n enhanced non-electricity service provision through a service provided by the National RED n The financial implications of the national RED divesting of its business in the Metro boundaries as well as transferring in municipalities are manageable 34

Contents 1. Brief Introduction/Background 2. Electrification programme 3. Alignment of Projects with IDP Process 4. Electricity Universal Access Approach [2012] 5. National RED – Conceptual Design 6. Progress on Billing Systems [Revenue Enhancement] 7. Electricity Power Challenges in the Western Cape 35

Strategy n Target 6 Munics from the list of 12 as a pilot n Liaise with DPLG Service Delivery Facilitators locally n Customised offering per Munic from: n Electricity provision n Contact Centre n Account Operations n Water, rates, sewerage, refuse billing n Systems 36

List of 12 Munics with Service Delivery Facilitators Proposed Municipalities Population # of Households Other services 1 st phase suggestion Eskom Region 1 Mafikeng Local Municipality (NW) 259, 478 64, 674 C 2 Makhuduthamaga Local Municipality (LP) 262, 903 53, 156 N 3 Matjhabeng Local Municipality (FS) 408, 170 120, 288 30, 000 NW 4 City of Johannesburg (GP) 3, 225, 812 1, 006, 931 5 Tsantsabane Local Municipality (NC) 31, 013 7, 227 6 Greater Kokstad Local Municipality (KZN) 56, 528 19, 625 7 UMngeni Local Municipality (KZN) 73, 896 20, 488 E 8 Dr. J S Moroka Local Municipality (MP) 243, 313 53, 582 9 Cederberg Local Municipality (WC) 39, 326 10, 366 W 1, 005, 778 260, 799 701, 890 191, 046 10 Nelson Mandela Metropolitan Municipality (EC) 11 Buffalo City Local Municipality (EC) 50, 000 S 12 Moretele Local Municipality (NW) TOTAL 177, 905 43, 008 6, 486, 012 1, 851, 190 228, 684 37

High Level Assessment and Recommendations There appears to be no major technical obstacles n We can use Eskom’s Billing and Contact Centre Systems n Staff and systems are scalable Municipal customer impacts n One municipal bill for all services separate from any Eskom bill n No change to current municipal bill layout and logo n New account id will be allocated to the customer n Need to convert sufficient history to enable accurate estimates Time Frames n At least 10 months to set up systems 38

Contents 1. Brief Introduction/Background 2. Electrification programme 3. Alignment of Projects with IDP Process 4. Electricity Universal Access Approach [2012] 5. National RED – Conceptual Design 6. Progress on Billing Systems [Revenue Enhamcement] 7. Electricity Power Challenges in the Western Cape 39

Western Cape Network Load Winter Max : 4250 MW Summer Max : 3900 MW Transmission Capacity 2400 - 2800 MW Koeberg Generation 1800 MW Eskom Peaking Generation 400 MW Palmiet Note: The above excludes The City of Cape Town’s generation 40

What happened? 41 Date Incident Resulting Impact on Supply 11 November 2005 n Switchgear failed n Transmission lines and transformers tripped n Loss of supply 16 November 2005 n Fire under the line n Koeberg Unit 2 shutdown n Loss of supply 23 November 2005 n Controlled shutdown of Koeberg Unit 2 n Load shedding due to network limitations 25 December 2005 n Controlled shutdown of Koeberg Unit 1, foreign object detected n Loss of supply 18 to 19 February 2006 n High pollution levels and misty conditions n Kendal Unit 6 and Koeberg Unit 2 shutdown n Loss of supply n Full black-out n Subsequent load shedding 28 February 2006 n Multiple line faults n Shutdown of Koeberg Unit 2 n Subsequent load shedding

What does this mean? – Supply Capacity Sufficient electricity supply Limited electricity supply One Koeberg unit operational at a time Both Koeberg units operational Complete repairs to Koeberg Unit 1 before end of May Key: Koeberg Unit 1 Shut down Koeberg Unit 2 for refuelling at end of May Koeberg Unit 2 Shutdown Koeberg Unit 1 Generating electricity Koeberg Unit 2 Transmission System Intact Palmiet Pumped Storage 06 27 42 M ar ch 2 ril 24 Ap 6 6 00 20 22 M 2 ay 19 ne Ju 0 20 End July 06 28 A ug 00 20 25 S t 2 ep 6

What does this mean? – Supply Forecast Sufficient electricity supply Limited electricity supply Koeberg Unit 900 MW Koeberg Unit 480 to 900 MW Palmiet Up to 400 MW Key: Electricity supply forecast (Illustrative) 06 27 43 M ar ch 20 2 ril 24 Ap 6 6 00 22 M 2 ay 19 ne Ju 0 20 End July 28 A ug 06 20 6 00 25 S t 2 ep Transmission System 2400 to 2800 MW (varies according to Koeberg output)

What does this mean? – Supply Shortfall We need more electricity than can be supplied Enough electricity to meet needs Gap = Electricity Supply Shortfall of 300 to 400 MW during morning and evening peak times through the winter 06 27 44 M ar ch 20 2 ril 24 Ap 22 2 ay M Electricity supply forecast Electricity need/demand forecast 6 6 00 Key: 19 ne Ju 0 20 End July 28 A ug 06 20 6 00 25 S t 2 ep

What are our Action Plans? We need more electricity than can be supplied n Koeberg Repairs and refueling n Transmission Grid activities n Load Shedding Plan n Demand Side Management (DSM) 45 Enough electricity to meet needs n No shortage of electricity supply after the end of July since supply will be provided by: n Koeberg Unit 1 n Koeberg Unit 2 n Palmiet (during peaks) End July n Transmission System

Koeberg - Update Area 46 Progress Update Risks Unit 1 n Synchronised on to the grid n At this stage there are no at 10 h 30 on 17 th May major known risks on the plant n Steadily increasing its power output n Currently generating 99% (890 MW sent out) power n Final adjustments to be made before increasing to full power Unit 2 n Unit 2 shutdown during the n As it is early days in the early hours of the 22 nd outage no new risks or May for its routine threats have been refuelling shutdown identified n Shutdown is planned for 59 days n Should synchronise on to the grid on the 19 th July

Issues to note n Electrification n Progress to date and funding requirements n Universal Access Approach/Strategy n Co – ordination of projects to meet IDP requirements n Training, development and capacity building initiatives as part of Eskom’s social responsibility programme n Revenue Enhancement pilot project n REDS and associated benefits n Western Cape recovery Plan 47

Thank You 48