Part 1 Revenue Application: Multi-Year Price Determination ... - Eskom

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Overview of Multi-Year Price Determination 2013/14–2017/18 (MYPD 3) Determining a “fair” return on assets Page 22 of 144 In assessing its revenue requirement, Eskom is allowed to factor in a fair return on assets used to generate, transmit and distribute electricity, including assets under construction. The return is earned on the assets operated by Eskom and should represent the total cost of funding the business (both equity and debt) based on the weighted average cost of capital (WACC), as determined by Nersa. This return is applied to the depreciated replacement value of the assets (including assets under construction). The return is a key determinant of Eskom‟s financial sustainability: it provides the revenue to meet debt interest payments and build a base of retained earnings – essentially equity returns – that can anchor the balance sheet. This will enable future borrowing and expansion of the asset base and ensure that current debt can be repaid while providing Eskom with ability to achieve cheapest financing option supported by standalone credit rating. The revised funding plan for MYPD 3 will see Eskom reach a total debt of over R333 billion on domestic and international capital markets at the end of the MYPD 3 period (peaking at over R 360 billion in 2016/17). The net finance costs (cash component) will total R115 billion over the same period. Total interest over the period is R140 billion including accruals. Eskom‟s ability to service this debt – and build a base of retained earnings to secure future borrowing – depends on its returns, which will swing from negative to positive after 2014/15, resulting in a total return of R186 billion for the period. This leaves a cumulative return of R46 billion to the shareholder at the end of MYPD 3. Eskom will sacrifice R209 billion by earning less than the 8.31% return on assets. The R46 billion will not be paid as a dividend but will be reinvested in the business, strengthening Eskom‟s balance sheet and contributing towards a standalone credit rating. By 2017/18, Eskom‟s real returns will have reached 7.8% before tax, which is lower than Nersa‟s WACC of 8.16% (as determined for MYPD 2) and Eskom‟s currently calculated WACC of 8.31% before tax. Eskom‟s real returns are also well below the returns any private- sector investor would require. However, as a state-owned company with the benefit of government guarantees, Eskom can tolerate a lower rate of return and still source funding for its capacity expansion drive. The government of South Africa – Eskom‟s sole
Overview of Multi-Year Price Determination 2013/14–2017/18 (MYPD 3) Page 23 of 144 shareholder, represented by the Minister of Public Enterprises – also accepts that lower shareholder returns are required. Capital expenditure Eskom‟s approximate R337 billion capital expenditure budget for the MYPD 3 period is not included in the revenue request (although depreciation is included when newly built assets are commissioned). About half of the MYPD 3 capital expenditure budget (R160 billion) goes towards funding the current capacity expansion programme, which involves the construction of new generation, transmission and distribution infrastructure and the refurbishment of existing infrastructure to prolong its useful life. (Note that refurbishment – periodic maintenance and improvements – is separate to routine maintenance and repairs, which are included in day-to-day operating costs and form part of the revenue application.) The capacity expansion programme includes the Medupi coal-fired station (4 764MW), the Kusile coal-fired station (4 800MW) and the Ingula pumped-storage scheme in the Drakensberg, which will deliver 1 332MW of hydroelectric power during peak demand periods. Eskom will also embark on the Sere wind plant of 100MW and concentrated solar (CSP) power plant of 100MW. It also includes expanding the transmission network. As already explained, Eskom does not fund its capacity expansion programme directly through electricity prices. Only a return on capital expenditure is included. Even though capital expansion costs are not directly recoverable from electricity sales, these costs are closely linked to depreciation and return on assets. Depreciation is used to incrementally recover the cost of new plant over the lifetime of assets once they come into operation, while the return on assets is calculated on the regulatory asset base, and includes works under construction to service the debt incurred for infrastructure investment. Depreciation of assets commissioned is used to earn revenues to build up retained earnings for future replacements of the current fleet, and repay debt borrowed to fund the construction of the assets. The capacity expansion programme also influences Eskom‟s operating costs, particularly
Page 1 and 2: Part 1 Revenue Application: Multi-Y
Page 3 and 4: Overview of Multi-Year Price Determ
Page 5 and 6: EXECUTIVE SUMMARY Introduction Over
Page 9 and 10: ESKOM PROFILE Overview of Multi-Yea
Page 21: 1.4.2 Independent power producers O
Page 31 and 32: Price path: Funding: Other: Overvie
Page 37 and 38: 2 THE MYPD PROCESS Key points Overv
Page 39 and 40: Electricity Pricing Policy Overview
Page 41 and 42: Accomplishments during MYPD 2 Overv
Page 43 and 44: Base case application Overview of M
Page 59 and 60: Environmental levy Overview of Mult
Page 63 and 64: Table 17: IPP projects (costs and e
Page 67 and 68: Cost of cover Overview of Multi-Yea
Page 69 and 70: Operating efficiencies target Overv
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3.5.2 Carbon tax Overview of Multi-
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Table 34: Eskom’s funding over th
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Weaknesses: Overview of Multi-Year
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Overview of Multi-Year Price Determ
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Phasing in price increases over fiv
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INVESTMENT GRADE RATIOS CAPACITY AN
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INVESTMENT GRADE RATIOS CAPACITY AN
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Simplify tariff structures Modify s
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7 CONCLUSION Overview of Multi-Year
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Transmission Overview of Multi-Year
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Part 1 Revenue Application: Multi-Year Price Determination ... - Eskom

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