National Energy Regulator on Multi-Year price determination & Solar Water Heating Mass Program; Committee Report on Energy Department Budget 2010

Meeting report

Chairperson’s opening remarks
The opening remarks of the Chairperson were directed towards the short term as well as the long term energy needs of the country. She especially referred to the upcoming FIFA World Cup event and the requirements which would have to be met by National Energy Regulator South Africa (NERSA) to ensure a successful international event.

The public hearings held in all nine provinces had been concluded and she hoped that the process had reached a broad audience and that the inputs from the public had made a valuable contribution towards the presentation today.

The Chairperson indicated that various apologies had been made by Members either for their non-attendance or the fact that they would be late. She indicated that she was not happy with those who had not tendered apologies at all, and that she was unhappy with an apology that indicated that a Member had “other commitments”, or an apology from a Member who gave no explanation at all, and had to date not attended one meeting, or apologies from two members who said that they would be late “because of traffic”. The Chairperson said she would address these apologies. She accepted the apology of Ms B Tinto, who was ill in hospital.

The Chairperson indicated that the Minister of Energy, Ms Dipuo Peters, and the Director General of the Department of Energy were unable to attend this meeting.

Multi-Year Price Determination (MYPD2): National Energy Regulator, South Africa (NERSA) Briefing
Mr Smunda Mokoena, Chief Executive Officer, NERSA, introduced the members of the delegation, and especially the Chairperson, Ms Cecilia Khuzwayo, who was appointed on 1 January. The Board of NERSA consisted of nine members and was serving a four-year term.

Ms Cecilia Khuzwayo, Chairperson, NERSA, indicated that she would like to sketch the background against which the application from Eskom for an increase in electricity tariffs was received. It was received in October 2009, and applied for an increase of 35%. This was at the time when the recession was at its deepest. However, the economy still needed growth to help create jobs. NERSA had a responsibility to guarantee energy availability. This must especially be seen in view of the upcoming FIFA Soccer World Cup, since a blackout during the event must be avoided at all costs. There was also a responsibility to guarantee sustainable electricity to all South Africans. The application was revised and resubmitted after comment from the South African Local Government Association (SALGA), and from National Treasury (NT). This was published for comment from relevant stakeholders in December 2009. Advertisements were then placed for public comments and this was done throughout the nine provinces, when comments of users of electricity were received and welcomed. The figures were very carefully computed and considered.

Ms Khuzwayo noted that NERSA’s mandate derived from Act 4 of 2006, and in terms of this, the revenue for Eskom was determined, as depicted on slides 3, 4 and 5. The comments from the public were summarised on slide 7, under the themes of the funding model, impact on the economy, protection of the poor, return on assets, and renewable energy.

Mr Mokoena said that the figures presented here were informed by stakeholders, including those who had attended the public hearings. Often there were consumers urging for a particular percentage of increase or decrease in tariff, but ultimately he said that their comments needed to be complemented by reliable informed statistics,  which gave the calculations more credibility.

Mr Thembani Bukula, Regulator Member, NERSA, continued with the presentation on the allowed revenue. This was shown in slide 8 which detailed the forecasted sales, the price and the price increase, and finally the calculation of the total expected revenue from all of Eskom's customers. He continued by giving an analysis of primary energy, and a breakdown of costs, including the coal burn costs for coal fired stations, road maintenance and the environmental levy. For these costs NERSA allowed a total of R38 billion to Eskom. This was the cost for the 2010/2011 financial year, and over a three year period it amounted to a total allowance of R134 billion. Eskom also applied for operating expenditure (Opex) and was allowed, over a three year period, a total of R110 billion. In the analysis of the Opex, slide 13 showed a number of adjustments which were arrived at through making more efficient use of funds for items such as repairs and maintenance. The R110 billion was therefore reduced to R104 billion. Similarly, for the period ending 2012/2013, the capital expenditure (Capex) applied for, of R308 billion, was reduced down to R232 billion. The asset-related returns gave Eskom a healthy enough position after its spend on its build programme. This was, as set out in slide 17, an amount of R92 billion for the period, leaving a net position of R53 billion after the reduction of R38 billion. This related to interest during construction (IDC), which was not allowed. The funding for the building of the Medupi power station would be funded by and was influenced by this net position, which made possible the loan of R47 billion from the World Bank.

In the Energy Efficiency and DSM programme some funding applied for was disallowed. This was, for example, based on the distribution of gas stoves which had begun well but later was found to be an inefficient initiative, because these were returned by consumers or not used. On the other hand the use of the energy saving bulbs would continue because it had been efficient. Partial funding for the solar water heaters was allowed, but funding for converting from electricity to LPG was disallowed. He said the total efficiency savings were quite substantial. He pointed out that there would still be a cash flow shortfall after making the loan and this was central to making the informed decision to increase tariffs.

The principle used for the increase was “the more you use, the more you pay”. The indigent sector received the first 50kw free, then the increase would be applied on the principle as mentioned.

Ms Khuzwayo concluded by saying the price increase was awarded so as to ensure enough revenue for Eskom to continue its business. This was the core of the determination in this decision.

Discussion
Mr D Ross (DA) thanked the delegation for their presentation but said he was concerned that the cross-subsidisation intended to benefit only a narrow band of residential suburbs, mainly poor suburbs. This was also the case for cross-subsidisation benefiting big industry. Eskom was obliged to provide for the poor in this way, but the middle class, he contended, also had obligations. He also asked what the effect on pricing  would be in terms of the re-negotiation of contracts between Eskom and Billiton.

Mr S Motau (DA) said that it was clear that Eskom needed funds to enable it to do its work, but he was concerned that in three years from now the plan may not work and that Eskom would approach government for a bailout. He wanted to know how NERSA would ensure that that did not happen. He feared that the plan presented was in danger of collapse. He was further concerned that the 5% increase would be unaffordable for an indigent person. Many municipalities were already under administration and may not therefore possess the capacity to implement the plans as presented here. He wanted to know how NERSA would approach that concern.

Mr E Lucas (IFP) said that it was a mistake not to have discovered how Eskom had come into this situation and he was not sure whether the money spent would assist the problem. He said that the 35% requested was a red herring, and that he thought there would be a bargaining situation whereby an agreement would be reached somewhere halfway. There were many municipalities indebted to Eskom and it was not clear how that money would be recouped. Big business also continued to benefit by receiving a reduced rate for electricity. He felt that poor people were being made to pay for these problems, and in addition rural folk, who were the most recent recipients of electrification, would be the first to suffer. Under the former government, electricity power lines would be spanned across vast spaces to reach far-flung farms while bypassing poor people en route. He said that situation now had improved but the poor people would now be suffering in a different way, through the tariff increase. He was in doubt whether those listening to the public hearings, and those making their presentations, especially poor people, truly understood this. Eskom, moreover, had a surplus some time ago, but saw fit to pay out big bonuses and this was contributing to the dire situation today. He asked that the real issues be examined.

Mr P Dexter (COPE) said he believed the situation was not of NERSA's making and any comments he may offer were not meant to attack NERSA. He fully understood and appreciated the serious issues involved. However, he was concerned about the economic modelling, how it had been done, and whether it had been done in-house or independently. He said that it was highly optimistic to suggest that this would be the economic impact of such a price increase. NERSA, as the regulator, was a stakeholder and he wanted to know how the loan would affect NERSA.

Mr Dexter asked that the Chancellor House issue also needed to be clarified because NERSA was supposedly looking after the interest of the public.

Mr Dexter said that pressure should be brought upon Eskom to make a change and place more emphasis on renewable energy, and allow independent producers into the fold. He was suggesting that NERSA should become more radical, since the public perception was that it was merely a rubber stamp. The outcome of the public hearings was predictable, even though that process had been undertaken with great vigour. He said that NERSA made a pretence of acknowledging the public's input, because it already knew the outcome before the process had begun. NERSA needed to position itself differently.

Mr Dexter said that the main problem with Eskom was not the issue of the tariff increase but a lack of strategy. NERSA was able to influence that process and he urged that this be done, since he believed, like Mr Lucas, that the increase was not the solution to the problems in which South Africa found itself.

Mr L Greyling (ID) concurred with the previous speaker about the public participation process. He had listened to many of the presentations and wondered what NERSA's scope had been to engage with the presentations, and the outcome, and what it meant to have a coal-based future. Like the Congress of South African Trade Unions (COSATU) he wanted to know whether consideration might have been given to gaining a limited amount from a tariff increase and the remainder from a tax. It would be useful to know these things so as to have an insight into how these public hearings would be run in the future. One person, for instance, said that she had made presentations year after year but had been consistently disregarded. That was an allegation that needed to be looked into. Gig business was more energy intensive yet continued to enjoy cheaper rates. If other contracts entered into before 1994 were now being renegotiated, then surely now was the time to bring these contracts under the ambit of NERSA. He said it made for an untenable situation to have these re-negotiated under Eskom, since the stake in it amounted to a 10% increase in the energy reserves if these were negotiated down.

Mr Greyling noted that, with regard to demand side management, 260  000 solar water heaters were being provided, but one million had been committed. The question was where the funding would be sourced for the remainder, and he questioned whether NERSA was not concerned that this could significantly increase the reserve margin. He felt it would be more sensible to channel funds into this project than any other project such as the proposed building of the Kaselli power plant. He wanted to know whether there was indeed a proposal to build another power plant, in addition to the proposed Madupi power plant. This would make for a very different scenario.

Mr Greyling said, on the issue of Chancellor House, that although it was not within NERSA's ambit, the contracts for Kaselli should be examined in the interests of value for money and the cost to the country.

The Chairperson said she wanted clarity on the cost agreements signed with big companies. She asked when these would expire, and whether this was to be expected soon or in the longer term. The Chairperson questioned why there would be a loss of 250 000 jobs as a result of the tariff increase, when big companies would continue to benefit from the reduced rates. She too said it did not make sense that the agreements with Eskom were still in place for the reduced rates yet there would still be job losses. She wanted to know if this information was available to the Committee.

Members of the NERSA team responded to the questions by themes.

Mr Bukula responded on the issue of the differing tariffs, especially the tariff for indigent consumers. He said these figures were available on Eskom's website. The question around the 138 high end users, and who had signed which contract with big companies, varied from company to company, and this information was not available to the public. He said, in answer to Mr Greyling, that the rate was 41.7 cents, and not 17 cents. The reason that these companies could enjoy a cheaper rate was because supply was at high voltage, which was cheaper for Eskom to provide, in comparison with the lower-voltage supply to households.

The margin within which Eskom was allowed to operate was regulated by Act No 4 of 2006, and this information was available to the public.

On the matter of the municipalities, Mr Bukula said that 184 municipalities were at this stage licensed to implement the free basic electricity. However, he acknowledged that there were problems with others, such as Cape Town. The question of whether a bailout would be needed in the future was not an issue, since those funds had been ring-fenced, making it impossible to access the funds for any other purpose. He said that most municipalities were paying their bill to Eskom. Eskom was also an importer of electricity; in fact it imported more than it was selling.

Mr Bukula said that in regard to the economic modelling, NERSA made use of the services of the Reserve Bank as well as the Bureau for Economic Research. It must be borne in mind that these statistics were an opinion. He further stated that the loan from the World Bank had a condition that 150 megawatts of renewable energy had to be generated in order for the loan to be granted. He said the cost for the generation of renewable energy was much higher than the cost of coal-fired energy, the latter being 33 cents per kilowatt, while it cost R4 for the same result from renewable energy. Each of these had their own challenges. For example, solar energy could not be stored, while wind energy was dependent on the weather. For these and other reasons, coal-fired energy was still a necessity. R12 billion had been ring-fenced towards the development and implementation of renewable energy.

Mr Bukula said the length of the term of contracts with big companies varied from 8 to 10 years and there were those which would expire soon and would then come within the ambit of NERSA. For the building of Kaselli the funding would come from equity reserves.

Ms Khuzwayo said that the issue with Chancellor House was indeed beyond NERSA's scope. She assured the Committee that the needs of the poor had been very carefully considered. The average user of electricity was getting a 10% reduction in the first year, and 5% in the second year. NERSA was doing all it could to help Eskom educate its end users.

Mr Mokoena said that NERSA was governed by the Public Finance Management Act insofar as the building of Kaselli was concerned. The procurement was within the competency of Eskom, not NERSA. Public hearings were considered very important to NERSA and helped it to educate itself.

The Chairperson said a lot of issues had been covered but more engagement would be required on the reasons that led to the recommendation or decision to increase. She said that in all of the deliberations the one most important factor was to avoid hurting the poor, who were the majority of private individuals. She encouraged NERSA to continue with its efforts and felt that its responses today were well prepared.

Committee’s draft report on the Department of Energy (DoE) Strategic Plan and budget and further points raised by the Department of Energy
The Chairperson said that the draft report had been distributed to Members. Some issues had been raised previously and these would need to be considered before the adoption of the Report. She asked the delegation to commence its presentation.

Mr Tseliso Maqubela, Deputy Director General: Hydrocarbons and Energy Planning, Department of Energy, noted that the Minister of Energy was unable to be present at the meeting today because she was accompanying the President on a visit to Washington. The Director General of the Department of Energy (DoE or the Department) was unable to attend owing to the illness of a close family member.

Mr Maqubela noted that he would give a two-part presentation, as well as a brief overview on the Solar Water Heating (SWH) Programme. The delegation's brief had been to inform the Committee on progress in terms of commitments made in last year's budget vote speech.

Mr Ompi Aphane, Acting Deputy Director General: Electricity, Nuclear and Clean Energy Programme, DoE, noted that the commitment was to provide one million solar water heaters rolled out over a period of five years, to service 6 million households. His briefing would indicate what the implementation model entailed, what the programme had yielded thus far, what the targets were on a disaggregated level, where its potential lay, and what had been achieved over the past 8 months. In view of the blackouts experienced last year across the country, due to the shortage in supply of electricity, this programme was aimed at alleviating the water heating load on electricity. There was also a need to create jobs and that potential did exist, due to this initiative. It impacted positively upon the country’s carbon footprint.

The discussion on how to cushion the impact of cost to the poor and the domestic user must be contextualised in a broader scope of activity, and this kind of programme contributed to this scope. There were seven or eight potential market segments that could be dealt with differently. The general aim of the programme was to try to mitigate against the increase in demand for high income households. The biggest opportunity presented in the middle to lower income household, where there were 3.5 million households. These houses were largely similar, being of a townhouse nature, and bonded houses under government housing schemes. There had been an allocation for 260 000 systems in the Multi-Year Price Determination (MYDP) for this programme. DoE was not completely in agreement with NERSA about this. A rebate would be allowed for the lifespan of the geyser, rather than for the installation itself of the geyser. The National Efficiency Agency would be used for the installation of the geysers.

It was intended that the initiative would be implemented across high Living Standards Measure households, insurance industry geyser replacement, public buildings (including the over 100 000 buildings owned by government), new buildings (once building codes were promulgated), and others. The fiscal allocations were R74 million in the 2009/10 financial year, rising to R75 million, R109 million and R118 million respectively for each year up to the 2013 financial year. This accounted for the installation of 30 100 geysers. It was apparent from slide 6 that this figure excluded the number of installations by the Department of Public Works in the 2010/2011 year. The potential for job creation amounted to over 6 000 direct jobs by the fifth year of installation. The total potential over 20 years would be over 120 000 jobs.

With regard to carbon emissions, Mr Aphane indicated that the World Bank, prior to granting the loan to Eskom, had expressed unease with South Africa being a high carbon-emitting country, but that was countered by the fact that South Africa did have a number of carbon reducing initiatives. One million SWH would be installed over four years to reduce consumption of energy on water heating. Of the 10 million households, 6 million would be serviced by this programme. This was one of the promises made in last year's budget speech. This significantly contributed to having achieved DoE's goals.

Mr Musi Mkhize, Chief Director: Hydrocarbon and Energy Planning, DoE, presented the budget. He said DoE had finalised the document and was currently in consultation with other government departments before sending it off to Cabinet. In some cases, the Department did not get funding last year, resulting in it being late for modelling. DoE had several meetings, including some seeking internal approval. The South African National Energy Development Institute (SANEDI) business plan was waiting approval of two ministers before proceeding. A review of the Charter would take place this year.

Mr Aphane noted that SANEDI had been established by December last year. Currently DoE was ready to create the board of directors and put the board into operation.

Mr Aphane noted that by the end of the weekend 7 000  SWHs would have been installed in the Winterveld, Tswane. Last year the  first Integrated Resources Plan was promulgated. This was limited to promulgating the Eskom MYPD programme over a 5 year programme.  The Minister of Public Enterprises, with Eskom, was ready to implement the co-generation programme.

Mr Aphane moved on to the question of bio-fuels, saying that the dollar price of oil had declined, and therefore a review of the bio fuels mix was due to this. Electrification projects had been concluded in certain areas. Agreements had been signed in respect of direct supply with some municipalities. The tariff regime fell under the EDR programme and became difficult with certain municipalities, because of legalities.

Mr Marin Masemola, Executive Manager: Integrated National Electricity Programme, DoE, noted that although this had been a brief presentation, this was the status of DoE’s commitments.

Discussion
The Chairperson said there was no way in which the Committee would feel comfortable about approving the budget on the basis of such scant information.

The Chairperson questioned how the target of 260 000 geysers would be achieved if only 7000 had, for this financial year, been installed in Tswane to date.

Mr J Salau (ANC) asked how the installation of SWH was related to areas in Cape Town, such as Khayelitsha. He said that he had received the impression, from the NERSA presentation, that it was more expensive to make use of renewable energy sources than coal burning energy, and he wanted to know how the use of that energy would not incur more expenses.

Mr L Greyling wanted to understand how this budget was arrived at without the integrated resource plan, although he had understood that there had been such a plan. He asked what the timeframe was for the review of the renewable energy plan, and how this fitted together.

Mr Masemola responded that in relation to the IRP and ERP interface, DoE needed to look at a plan because it had foreseen a situation where the IRP would take a longer period of time than anticipated. This had since been revised so that it would take less time. With the second Integrated Resource Plan (IRP2) it was “all systems go”, and DoE would be able to meet the commitments made. The timeline for the delivery of the IET would be the end of this financial year.

Mr Greyling welcomed the fact, under the SWH programme, that greater emphasis and priority had been given, as it was very likely the single biggest difference that could be effected for the saving on energy supply. He was aware that a target had been set for 1 million units to be installed in three years but in reality the DoE was far short of that target because only 2 500 in over the past two years had been installed. He enquired how the new target and timeframe would be reached, but more specifically how DoE would be held accountable for this target.

Mr Aphane noted that the SWHs initiative had a double benefit in that it was both a renewable source as well as being cheap to provide. It resided under the demand side management. The White Paper on Renewable Energy was being reviewed. DoE would be pronouncing this week on its engagement with different stakeholders. The problem with the SWH programme in the past was that there had been no funding. The country had also been operating on an extremely low electricity tariff. Together with the tariff increase, energy saving would become increasingly important. In the past, the rebate offered for solar powered geysers was not attractive enough. In effect, providing the SWH programme was like building a power station which was cheaper than the continued burning of coal, and this would be provided virtually for free.  The MYPD2 was approved only in March this year, making this possible. Programmes such as the one in Khayelitsha had been really struggling but would now benefit. The programme would also contribute to job creation, as it would try to limit the extent to which products from overseas were able to enter the market, whilst meeting the demands of the programme, because local production was preferable, contributing to job creation. Community awareness and education about the programme entailed going beyond just advertising, and the DoE would attend to this.

Mr Greyling said that the rebate system had not delivered. It would have delivered more if an outside agency such as the Energy Efficiency Agency, rather than Eskom, were to be commissioned for that. He asked whether the rebate system would change and if so, how it would change, and lastly whether it would be applied retrospectively.

Ms N Mathibela (ANC) wanted to know why the use of bio fuels had not succeeded.

Mr Aphane noted that when the oil price was 100 US dollars or more, the mixing of diesel with bio fuel was affected. With the decline of the dollar price, the case for renewable energy could not be made.

Ms Mathibela noted that in regard to money owed by municipalities to Eskom, those monies were shored up in trust funds. It seemed a major challenge to recover those monies, and, she asked how Eskom would approach the problem since it was in need of those funds.

Mr Aphane said that in regard to municipalities where trusts were formed to avoid payments, DoE was addressing the problem under the distribution programme. DoE had to ensure that the tariff increase did not have a negative affect. He referred to the term “non technical losses”, which would be addressed by means of an intervention. Such intervention did carry legal connotations, making it rather limited, and this prevented the problem

Ms L Moss (ANC) said that education of the public was essential. She asked that since the SWH campaign was of such importance, that an awareness campaign be implemented, especially for poor people.

The Chairperson thanked the delegation for their response asked the delegation to clarify the number of household electrifications completed last year.

Mr Masemola replied that 150 000 connections were projected to be completed every year with the available funding. In other words, only 450 000 for every 3 years could be accomplished. The cost per connection was quite high, especially where additional bulk infrastructure needed to be built. To achieve more would require twice the budget, in other words, a budget of R6.2 billion. Furthermore, to reach universal access by 2012, the budget would require to be R26 billion. The biggest challenge in electrification in terms of geographical area were the two provinces of the Eastern Cape and Limpopo.

The electrification programme was divided into two parts, one part being implemented by Eskom, and the other part by licensed municipalities. 122 000 electrifications had been completed by the end of February, and Eskom had completed 74 000. By March 98% of the funds had been transferred and the remainder of that figure (150 000 less 122 000) would be completed by June. He said the report to National Treasury would follow, being a report in two parts.

The Chairperson noted that this last response had sparked more responses and questions from members, but it seemed time would not allow more discussion on that point.

Ms N Mabedla (ANC) asked if the number of schools still needing electrification could be checked. She said that last year a list, per province, of the schools needing electrification had been made available, and the timeframe given for completion was June 2010. She asked for the progress on this goal. In terms of free basic electricity, she noted that there were a number of municipalities which were not complying with this regulation. She asked for a report on compliance.

Mr Masemola said that the information on the electrification of schools was still the same. The commitment to complete by June 2010 was on track. There was a backlog with regard to construction, which was affected by funding, but this backlog was being addressed. DoE was in constant contact with the Department of Education with regard to the schools which were eligible and those which were not. He said that by the end of February, 600 of the 1000 schools had been completed.

The Chairperson said this was the last opportunity to meet on the budget, although she felt that the information on the budget was rather sparse. She asked Members whether they thought the budget could be adopted.

Ms Moss proposed that the report be adopted.

Mr Motau said that most issues had been covered. There was just “a gap here or there”. He said the report should be adopted because a failure to do so would leave the DoE without a baseline from which to operate.

The Chairperson did not agree with the recommendations, and said this could go to a vote if necessary.

Many Members raised their voice in disagreement. The Chairperson pointed out that she had the power of veto. She specifically asked Mr Greyling to comment.

Mr Greyling said he was sympathetic and that the Department of Energy was struggling as a result of the split of the former Department of Minerals and Energy into two departments. He felt that its capacity was compromised due to a shortage in human resources, but said it seemed the officials had coped well with producing this budget, and therefore he was positive about the Department’s goals and strategy.

Mr Motau was very emphatic that the budget and strategy plan should live up to its goals, that the DoE must “do as they say” and be made accountable for their operations.

The Chairperson noted the assurance by the Department that all the goals would be achieved and that the Department would be accountable. She said she shared the same concern as Mr Motau.

The Chairperson then referred to the Report, noting a few typographical errors. She also noted that the draft report lacked recommendations. These had been written up at the previous meeting, being the workshop at Lagoon Hotel. She said the Committee Secretary was responsible for ensuring the correctness of the Report and in this case she viewed it in a very serious light that the recommendations were missing from the draft Report. She said this document differed from the minutes of the meeting, and that the rules of Parliament needed to be closely followed. She called upon the Committee Secretary for his response.

Mr Peter-Paul Mbele, Committee Secretary, said that the Committee needed only to vote on the budget, not on the Report.

The Chairperson countered that the discussion on that issue was very clear in that it contributed significantly to the set of documents which informed Members' decisions here today. She asked that this not be allowed to happen again.

Mr Aphane said that the team in his Department, which had worked diligently on the Strategic Plan and budget, was completely committed to its task. He said everyone had worked extraordinary hours to put it together, had put a lot of effort into it, and even had seconded human resources from elsewhere to assist in compiling the documents.

The Chairperson acknowledged this, but said that had everything been done as it should have been in the first place, there would have been no need for today's meeting.

The Chairperson asked Members for their recommendations.

Ms Mathibela proposed adoption of the Report, as amended, and Mr Motau seconded the motion.

Mr Motau proposed adoption of the budget, and Mr Selau seconded this motion.

The Chairperson said that although it should not have been necessary to hold this meeting to give assurances to the Committee, since the Committee had not been entirely happy with the first briefing, the Committee nonetheless now appreciated the effort. She also thanked the NERSA delegation and the Members, for putting in overtime.

The meeting was adjourned.