1. Overview of Free Basic Electricity (FBE) Programme and experience of stepped tariffs (IBT)Presentation to the Portfolio Committee on Energy22 March 2012

2. Content Overview of Free Basic Electricity Challenges experienced in implementing the programme Sufficiency of the 50KWh per month Free Basic Electricity Experience and challenges encountered with the Inclining Block Tariffs Conclusion • 2

3. Free Basic Electricity • 3

4. Overview of Free Basic Electricity (FBE) programme • In 2000, Government announced a free basic service policy • In 2003 the Department of Energy (then Department of Minerals and Energy) developed the Electricity Basic Services Support Tariff (EBSST) Policy which was implemented in the 2003/2004 financial year • This policy prescribed an allocation of 50 kWh per month to be provided to all low income households to be funded through the local government equitable share • The obligation to identify low income households to receive FBE, in line with the Constitution remained with municipalities even in places where Eskom is the direct supplier of electricity • FBE is funded through the equitable share, an unconditional grant given to municipalities to assist them in providing basic services to low income households • No funding is directly provided to Eskom from national government but Eskom claims the funding for FBE from municipalities in terms of a funding agreement between Eskom and each municipality • Eskom has 1,15 million customers approved to receive FBE, with agreements signed with 243 municipalities • 4

5. Challenges experienced in implementing the programme • The national average of customers collecting FBE tokens is currently at 76% • In some provinces collection rate is as low as 58% due to collection sites not being easily accessible to customers in remote and rural areas • Improvement and regular interaction is required between Eskom and regional energy forums, with FBE consistently on the agenda • Co-ordination and information sharing between Eskom and municipalities is a challenge • Inconsistent identification of low income households as indigent by municipalities • Challenges with FBE being provided to farm workers as the farmer generally holds the contract of supply, and this needs to be addressed. 5

6. An indication of FBE collection rate in Eskom supply areas by Province • 2020-01-07 • 6

7. Envisaged solutions • Eskom is exploring mobile sites in remote and rural areas to improve the collection rate • Equitable share to be a conditional grant to ensure its application as intended • Eskom to provide municipalities with the FBE status reports and municipalities to discuss the results at all levels. • Municipalities to update their indigent registers annually and confirm correctness. • Regular workshops to be arranged including representatives from Eskom, municipalities and government where ideas can be shared and to strengthen relationships. • Quarterly meetings to be held with representative from Eskom, COGTA, NERSA, DPE, DoE and SALGA (all the stakeholders that are involved in this Programme) to share the challenges of FBE and getting solutions to those challenges. • Formation of a joint task team to explore mechanisms to provide FBE to farm workers. 7

8. Sufficiency of the 50kWh FBE per month • 8

9. Sufficiency of 50 kWh FBE per month • In 2010 Eskom gave inputs to theInter Ministerial Committee (Energy) (IMC–E) Work Group 1A: Protection of the Poor and FBE. • The aim was to develop a report that addressed amongst others: • Evaluation of the current FBE policy and identification of other possible options; • Make it more uniform and effective to reach all customers classified as indigents; • Evaluating whether 50 kWh per month is sufficient as FBE; • It was recommended that the 50kWh per month level is sufficient (refer to next slide). • To date there has been no change in the policy. • Eskom will take its guidance from national policy as to who qualifies and what should be the correct FBE level provided. 9

10. Recommendations made by (IMC–E) Work Group 1A: Protection of the Poor and FBE (24 May 2010) • The recommendations from the report presented to the IMC • Having considered what usage level certain appliances use, the average monthly consumption of an average indigent household is between 50kWh to 100kWh. (2 million Eskom customers consume up to 50kWh per month) • Low income consumers will be able to reduce their electricity consumption with the use of more energy efficient appliances. • It was concluded that the 50kWh per month level is sufficient. 10

11. Steps taken to address the challenges –Working Group 1A • A number of steps have been taken that will ensure that low income households are sufficiently protected from the impact of Eskom electricity price increases, including : • substantially increasing the equitable share over the 2010 Medium Term Expenditure Framework (MTEF) to enable municipalities to deal with the increased electricity bulk costs and extending the classification criteria for indigents • the electricity component for the equitable share allocation amounts to R8.4 billion 2010/11, R9.6 billion 2011/12 and R10.6 billion in 2012/13 • introducing an inclining block tariff from 2010/11 which will ensure that low income households in Eskom areas of supply are cushioned against the impact of substantial electricity price increases. • Other factors impacting the low income households not having access to electricity such as lack of infrastructure for electrification need to be addressed. 11

12. Conclusions of (IMC–E) Work Group 1A: Protection of the Poor and FBE • Lack of properly administered indigent registers by municipalities to capture the indigent households must be resolved • General funding constraints in municipalities where FBE allocation competes with other priorities to be addressed with National Treasury and COGTA • Some municipalities and Eskom may struggle to implement a stepped tariff approach in the short to medium term due to technology and systems constraints. • Attention should be on extending free basic electricity to indigent households not yet receiving free basic electricity rather than extending the FBE threshold to more than 50kWh per month. 12

13. Inclining Block Tariffs (IBT) • 13

14. What is the inclining block rate (IBT) tariff? An inclining block tariff (IBT) is a mechanism where tariffs rise in stepped increases according to the amount of electricity used. This benefits poor customers who use less electricity and thus pay the lowest rates, while customers who use more electricity pay incrementally higher tariffs, and thus a higher average rate, as their electricity consumption rises. The structure is commonly used to charge for water usage. The tariff is divided into four consumption blocks and each subsequent block has a higher price per kWh of energy. The amount payable is the sum of consumption per block multiplied by the energy rate/price per unit associated with each block. The selection of the blocks, the limits and the prices per unit have been set by NERSA and is required to be implemented by Eskom and municipalities as determined by NERSA. The tariff is for both prepayment and conventionally metered customers In addition to the low price of electricity in the first two blocks the poor also receives 50kWh Free Basic Electricity (FBE) from government. • 14

15. Inclining Block tariff (IBT) – overview/implemented • NERSA made a decision in February 2010 to introduce IBT with effect from 1 April 2010 • Was implemented for billed customers on 1 April 2010 • The implementation for prepaid customers was delayed to 1 April 2011 as the vending system needed to be upgraded; during this period a single rate was applied • The rates originally approved by NERSA over the MYPD period were as follows: • 15

16. Inclining Block Tariff Rates in 2010/11 50 kWh • 1st block can take 50 kWh • @ 57,65c/kWh 300 kWh • 2nd block can take 300 kWh • @ 66,16c/kWh 250 kWh • 3rd block can take 250 kWh • @ 96,05c/kWh Remainder • All in excess of 600 kWh • @ 105,35c/kWh • Block rates are exclusive of VAT. VAT is then added to the sub-total of the bill

17. IBT implemented fully from April 2011 • 17

18. IBT – Unintended consequences • The tariff is successful in providing subsidised electricity for low income households with low consumption, but has a number of unintended consequences, as follows: • The IBT structure is difficult to understand and complex to administer resulting in many customer queries; • The prepayment vending system which preceded IBT, was not designed to deal with these complexities. • The tariff has resulted in cross-subsidies with large customers subsiding residential customers. It is currently manageable by Eskom due to its large customer base but is not sustainable . Also not all municipalities have enough of a large customer base to provide the cross-subsidies through electricity tariffs. • Large low income households or single stand households with multiple dwellings do not necessarily benefit as their consumption is high. • Affluent households can afford energy efficient technologies benefiting further from lower consumption. • Not all municipalities implemented IBT due to their own challenges. 18

19. Example of Prepaid Customer Purchases in Soweto (Chiawelo) - Actual customer bill • 2020-01-07 • 19

20. Background on Eskom residential customers • Most of the residential customers on average consume 350kWh or less per month • 20

21. IBT Subsidies – implications of the MYPD 2 decision • The lower increase in 2012 has resulted in lower IBT rates for higher consumption and a R810million reduction in estimated subsidies.

22. Inclining block tariff – the way forward • NERSA published a consultation paper on IBT in October 2011 on which Eskom provided the following comments: • Eskom supports that the low income households must be protected against high price increases, but proposed that this be done through a national subsidy framework; • The mechanism for the funding of subsidies should be investigated as not all distributors (Eskom and municipalities) can provide subsidies equitably through electricity tariffs alone; • NERSA should develop a national residential tariff guideline that provides a framework for residential tariff structures and design, • All distributors should be entitled to develop their tariffs in line with the abovementioned national residential tariff guideline taking into account unique circumstances, as a one-size-fits-all approach is not practical. • IBT should be revisited as a tariff option and in compliance with the DoE’s Electricity Pricing Policy Eskom proposed an alternative option (next slide). 22

23. Eskom’s proposed residential tariff strategy to replace IBT in response to NERSA consultation paper 23

24. Conclusion • 24

25. Conclusion: • Challenges with FBE: • Consistency of approach in application of the FBE programme • Unconditional equity share grants with FBE competing against other priorities • The programme to be easily accessible to customers in rural and remote areas • FBE threshold: • Based on policy and research done It was concluded that the 50 kWh per month is adequate. However more needs to be done to make it accessible to all qualifying customers • Challenges with IBT: • IBT does protect low income households but is complex, difficult to understand and implement. • IBT is not implemented equitably in Eskom and municipality areas and as Eskom we have proposed that it be revisited • Eskom recognises the challenges and is committed to support government initiatives and national policy to protect low income households against increasing prices of electricity 25

26. THANK YOU • 26