The future realities and innovations for a sustainable energy value chain - Paul Vermeulen Manager DSM and SSM City Power Johannesburg 8 March ...
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The future realities and innovations for a sustainable energy value chain Paul Vermeulen Manager DSM and SSM City Power Johannesburg 8 March 2018
Presentation theme
Municipal revenues are declining due
to unaffordability of electricity, system
inefficiencies, technology advancement
and slow economic growth - negatively
impacting service delivery.
How can this be turned around and
how does the energy transition provide
opportunities for municipalities to
explore other sources of income and
ensure revenue sustainability? What does our future hold?
2
What’s wrong with the cash cow?
By 2014, it became apparent that electricity’s
Structural core business was unable to generate a surplus
changes to without including grants and subsidies.....
the energy
Sustained
system –
economic Projected demand growth
uptake of
downturn
alternatives
?
from 2008
Energy ~ 25 TWh
Spiralling tariff demand
increases, Peak
unprecedented ~ 12.5 2
demand
TWh 6000 MW
customer
Peak
investments in EE demand 1
2800 MW
2014 time (2034)
(years)
Affordability issues Traditional EDI planning is based on
continuous demand growth – perhaps
a thing of the past? 3
‘As is’ Municipal Distributor Value Chain
Provide Procure Transport Dispense and Collect
Distribution energy via networks Record Revenues
Infrastructure
• Maintain • Procure energy • Operate • Operate and • Vend to pre-
distribution from Eskom networks maintain pre-paid paid customers
infrastructure • (Procure energy • Monitor and metering systems • Bill and collect
• Build new from IPPs e.g. Control power • Operate and revenues from
infrastructure Kelvin) flows maintain post post-paid
• Refurbish aged • Restore outages paid metering customers
infrastructure systems
4
Just how ‘dead’ is the traditional electricity business model?
The NERSA benchmark regulatory methodology excludes any effects related to:
• Cross-subsidies from commercial sector to residential sector as per the Electricity Pricing
Policy
• Insurance and the actual costs of vandalism and theft (particularly copper theft)
5
Shrinking Gross Revenue Margins
Breakdown of key figures within the NERSA 'municipal benchmark' regulatory methodology
R million R million
NERSA regulated sales margin 1.62 Regulated Revenue Allowed R million 1620 This
ss
Hypothetical Bulk Purchases 1000 Total Regulated Costs 1250 busine
is
Total regulated costs 1250 Gross Revenue Potential 370 model
Regulated Cost Breakdown Allowed losses in
s
Purchases, 75% of total 1000 Permitted System Losses Technical, 10% R million 162
distres
Salaries and Wages, 10% 125 Permitted System Losses non Technical, 5% R million 81
Repairs, 6% 75 Actual Surplus -Gross revenue less 'allowed losses' 127
Capital Charges, 3% 37.5 Gross surplus permitted by NERSA, 15% - R million 243
Other Costs, 6% 75 But this includes allowed losses?
Every 1% increase in non-technical losses above the allowed 5%, destroys 12,75% of the surplus!
As the cost of ‘Eskom product’ has increased, so has the cost of cross-subsidy to the poor. This erosion of surplus is not factored into the NERSA
benchmarking model.
The theft of copper cannot be considered as part of the repairs and maintenance allocation – we cannot consider this business as usual, with ‘an
allocation’ for these syndicates.
A transition from benchmark regulation to proper cost based regulation is needed
6
There’s no room for any inefficiencies in the system!
Provide Procure Transport Dispense and Collect
Distribution energy via networks Record Revenues
Infrastructure
• Inadequate substation and • Non-verification of bulk • Excessive unplanned • Illegal service connections • Unbilled customers
network maintenance purchases with check outages • Unmetered Customers • Billing estimation issues
• Continuous recovery from theft metering • Network reliability issues • Bypassed meters • Incorrect customer data
and vandalism • Unnecessary NMD - overloading • Incorrectly metered • Incorrect PoD technical data
• Backlog in refurbishment of penalties • Unmanaged technical customers • Account tampering
aged networks • Increasing peak period losses and reactive • Incorrect tariff migrations • Unending customer Queries
• CAPEX – Delays in build of new energy volumes energy losses • Meter tampering • Legal Queries
bulk supply networks • Unmanaged evening peak • Inadequate monitoring • Incorrect reversals
• CAPEX – INEP delays to demand and control systems
reticulate townships • Effectively a prohibition • Ineffective fault
on alternative, cheaper reporting and restoration
bulk energy purchases - systems
IPPs
These are presently by far the greater threats to business
7
Declining sales volumes vs. increasing customer numbers
The issue of tariff decoupling -
Since 2009, City Power has seen a full 10% reduction in
kWh sales, from 13 100 GWh down to 11 780 GWh per
annum.
Since 2002, City Power has connected up 60 000 new
customers (largely in the low income residential sector)
Tariffs that are based purely on
Individual customers are becoming energy efficient but
energy (R/kWh charges) will result in
still rely on the convenience of the grid for their energy
declining revenues
needs
f
Tariffs that include a defined (fixed) Tarif s
The metro economy is becoming less energy ture
charge component to be connected Struc t
intensive while businesses still need mus
to the grid and a separate energy ge
a reliable grid to prosper chan
component are sustainable
8
The New Cousin – Distributed Generation
Distributed, particularly PV generation, is blamed for the demise while in reality
Embedded Generation has many unseen benefits –
ly
False of • Behind the meter commercial PV systems do reduce utility sales volumes to
ed
accus part these customers - but they provide a way for customers to reduce their energy
being e
of th costs, thereby gain a competitive edge and stay in Jo’burg
!
Gang
• Residential PV systems reduce day time kwh volumes but also export valuable
day time energy into the grid, available for sale to neighbors
• Distributed energy sources include peaking plant and energy storage that will
reduce overload at intake points and congested distribution networks
• All distributed energy sources reduce distribution technical losses and can at the
same time alleviate capacity bottlenecks
• Customers want to use the grid to ‘wheel’ and trade energy and are willing to
pay for the service
This is where new business and revenues lie
9
Energy storage – Another New Cousin
City Power
Electrification
• Each year a greater proportion of peaky residential load and self- completed over the
dispatched renewable energy is being connected to our grids. Year years
2013/14 2,151
• The effect is a deteriorating load factor, leading to a higher cost of Eskom 2014/15 2,238
supply. 2015/16 5,438
2016/17 4,850
• DSM tools are needed to contain these costs 2017/18 850
• We require 2 key ‘behind the Eskom meter’ grid management tools to do
this: City Power has to date
– Access to ‘dispatchable’ generation authorized over 15 MW
of private PV power
– Control of flexible loads connected to its grids.
• Energy storage fits the bill as both a flexible load and as a generation
source.
• Where the storage facilities are located is almost irrelevant. As long
as the municipal distributor is able to control the charge and
discharge cycles, the benefits will be realized.
10Municipal C&I Customers - Taxed to death, three times
Municipalities demand a surplus from the Municipal Electricity Distribution Industry to fund other
municipal services.
(Note – Where Eskom distributes for the City of Joburg in Sandton and Soweto – about 25% of the total
power distributed - they are not required to make a surplus contribution to the City)
The Electricity Pricing Policy requires distributors to protect the poor by creating subsidies for low income
residential customers from the commercial and industrial tariffs, the customer segment that is the only
source of any operating surplus
Eskom levies an ‘urban low voltage subsidy’ of R 12,48 per kVA per month on all customers taking power at
above 66kV, including municipal distributors, to meet their own EPP cross-subsidy obligations
Municipal Business Tariff = Eskom base cost + Municipal Surplus + Subsidy for poor + Eskom subsidy for poor
This is taxing the input to the City’s economy rather than the output. Something needs to change!
11An unsustainable SA Electricity Industry Structure
Eskom Generation -
Large coal fleet, one
REIPPP – Green COGTA
Energy nuclear, some hydro
Department of
DPE Cooperative Governance
Department of NERSA Regulates Eskom Transmission
this part of the and Traditional Affairs
Public (Incorporates the System
*Required to
industry using Operator and Single Buyer
Enterprises . generate a
Eskom Retail Tariff Office )
surplus for SALGA
Control over and Structural South African Local Government
SoEs such as Eskom Distribution municipalities.
Adjustment Association
Eskom Methodology Retail Sales
National *170
Eskom C&I Smaller
Treasury PFMA *8 other
Customers Eskom *City Power Munics NERSA Regulates
Compact with Metro s this part of the
Residential Metro (SoC)
Eskom Customers Distributor industry using a
municipal
City of Johannesburg benchmarking
methodology
National Municipal Municipal
Not required to generate
Nuclear a surplus for the City Residential C&I
Regulator Customer Customers
DoE – Department of Energy has oversight over the whole industry 12Reassessing the value of the grid
g r id Instant load balancing services
The Night time backup service for natural energy systems
can ly A marketplace for distributed generation investors to sell surpluses
le ss
seam ide: Enhanced security of supply where islanding facilities are combined with
prov energy storage
Is our future a transition from a commodity sales based business to a commodity transport based
business, or somewhere in between?
How much of the business is there to provide product – just energy in the form of kWhs?
How much of the business is there to provide network services – access into or out of an energy
highway?
The weighting and ratio of fixed network charges to variable charges of future
tariffs will depend on how these questions are answered
13Right-sizing the businesses
We have 177 municipal electricity distributors ranging from small – less than 20 MW of load to large
metros distributing 1000+ MW
The smaller municipalities do not have a sufficiently large revenue base to employ the necessary
engineering skills to operate, maintain and expand their networks as they should
Some municipalities do not have a favorable customer mix – too few Commercial and Industrial
customers with a large proportion of Low Income Residential customers simply leads to higher
prices all around and migration of businesses
The distribution industry needs to be consolidated into distribution companies
that are big enough to be regional players, including Eskom distribution.
These companies can pay servitude rentals to municipalities (Portland example)
14Small Scale Embedded Generation tariff and cost of PV
NERSA Approved for City
Power, 2017/18 on an Those willing to invest
must be on the
interim basis residential TOU tariff
Cannot be on a pre-
paid tariff
Those willing to ‘Net Billing’ applies Surplus energy put to
invest must be on a 15 MW already the grid is credited at
conventional tariff commissioned 43,77 c/kWh The Levelized Cost
Cannot be on a pre- Of Energy (LCOE)
paid tariff of rooftop PV
Surplus energy put to systems is around
the grid is credited at R1,12 per kWh
36,96 c/kWh The present average cost of
Eskom power is R0,90 per and will stay fixed
kWh and is likely to escalate at that price for
at above inflation rates the next 20 years
*Energy only = R0,71 per kWh
15The changing, but stuck energy mix
• SSEG tariffs allow City Power to
TREASURY procure surplus residential PV
!
Eskom Generation -
Large coal fleet, one Provides tax incentives for energy at 43 cents per kWh
REIPPP – Green
nuclear, some hydro EE and RE
Energy • Eskom energy now costs 90 cents
SALGA and CITIES per kWh (2018/19 may be R1,08)
½! Eskom Transmission
(Incorporates the System ! Recognize climate change issues • The margin of selling surplus PV
Operator and Single Buyer energy is 27 c/kWh better than
Office ) selling Eskom power
NERSA
Eskom Distribution
Retail Sales
! Approved SSEG tariffs for several
municipalities
• Without storage, 100 000 affluent
residential PV customers could
contribute 700 MWh of cheap
energy towards the 29 000 MWh
û
*170
Smaller
the city requires each day.
Eskom C&I
! Customers Eskom *City Power
*8 other
Metro s
Munics • This would be a fair contribution
û
Residential Metro (SoC) to the cross-subsidy needed to
Customers Distributor support the poorer residential
le
Doub o n sector
City of Johannesburg
i s ru pti
D • Munics have been told not to
Municipal Municipal for bother applying for generating
Residential C&I
u n ics! licenses for their own PV farms, as
Customer Customers M the Minister has not made a
! !
determination on the matter
• Is a determination necessary? 16New service offerings where the grid is key
New value proposition from grid operators is to provide
backup supply and seamless load balancing services
From a national While storage cost
systems point of Grid provides the DG investor a marketplace to trade is still relatively
view, the most their surplus energy and optimize their investment. Low high, the EDI has a
efficient green cost surplus alleviates cross-subsidy burden small window of
energy solution opportunity to
includes the Grid enables Green Energy trading and new municipal convince customers
existing grid – AC revenues from the ‘transport’ of energy of the value of the
or DC An element of storage added to a grid tied renewable grid
energy system is of benefit to the investor as well as the
municipal distributor
Avail the grid as a market for all forms of energy
Support for trading or energy offsetting across the grid
Introduce time dependent use of system charges
Include the low income sector in the PV revolution (e.g. Mauritius)
Apply storage to effect enhanced security of supply
Deliberate islanding to secure supply
Offsetting energy from home to office for EVs
17De-dumb ‘Smart’ systems – drive appropriate technology
What is smart about meters if they cannot support new tariff structures we need, like -
• Fixed charge (network) and variable (energy) charges on a pre-paid basis?
• Support for time of use tariffs on a pre paid metering basis?
• Support for FBE energy packages with ‘top-up’ options in the case of the low income sector?
The South African EDI was instrumental in pioneering the original pre-
paid metering systems
We now need more sophisticated pre-paid systems and must define
the market once again
18Conclusion - some likely additions and changes
Provide
Distribution &
Procure Transport Dispense and Collect
Generation
energy via networks Record Revenues
Infrastructure
• Add energy
• Focus on Eskom • Avail the grid for • Offer new ‘top- • Modernize
storage
role as supplier of energy trading up’ tariff revenue
facilities
last resort • Create super packages for low collection
• Venture into
• Accommodate secure key income systems
DC distribution
“prosumer” customer zones residential sector • Utilize block-
and micro-grids
surpluses with islanded • Enhance chain
• Build a portfolio of storage facilities metering to technology for
partner IPPs • Promote the support trading trading
• Invest in own value of the grid • Convert
renewable energy to customers residential sector
plant to TOU tariffs,
with home
automation 19Thank you, from the City of Johannesburg
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