Solar Water Heater rollout, Thyspunt & Kouga Municipality upates: Department of Energy briefings; Mthombo Refinery Project: PetroSA briefing

NCOP Economic and Business Development

24 January 2011
Chairperson: Mr. F Adams (ANC; Western Cape)
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Meeting Summary

The Department of Energy (the Department) briefed the Committee on the rollout of solar water heaters. The Department had set a target of installing one million solar water heaters by 2014. These were being installed not only by municipalities but also by private entities, of whom several were named. The Department planned to expand the programme so that the Department would install solar water heaters in government-owned residential dwellings, and new building regulations would enforce energy efficient practices in new buildings. However, there had been some concerns in relation to the pricing of the solar heater units. There were also concerns that there might have been some form of collusion within the industry in relation to the prices of the units. The tariff rebate programme and the number of installations resulting from this was outlined. The future plans were presented, but it was noted that there were some infrastructure problems, particularly with water reticulation and household plumbing, and other departments were also being involved. Challenges that affected the rate of rollout included the overly-high capital costs for the components and the systems, the need for funding of capital costs, education and awareness campaigns and skills shortages. These would be addressed through training, education and awareness plans, and encouraging local manufacture of units, including factories being set up. Additional fiscal allocations had been applied for. It was hoped that the targets could be attained, particularly in view of their job-creation potential. Members enquired if the systems had actually been installed in municipalities, sought further details on the alleged collusion and what was being done, and asked what would happen if the units failed to perform some years down the line. More clarity was sought on the tax incentives, the electricity costs, and questions were raised about the rollout in specific provinces and municipalities, the numbers of jobs to be created and whether the units would withstand salty conditions. Members were concerned about some apparent discrepancies in the rebate schemes, enquired who was responsible for maintenance and replacement, and enquired as to the main rationale and how the targets were set and whether they would in reality be achieved. Some Members felt that the process for rebates would be unduly bureaucratic.

A very brief presentation was given in respect of Kouga Municipality. Eskom had apparently acquired land in the 1950s at Thyspunt to build a nuclear reactor there, but there was as yet no decision on whether or not to build the nuclear power plant. A DA Member from Eastern Cape argued that this site was in fact acquired in the 1980s by the Nationalist government, and asked if the title deeds could be produced, also sharing her concerns that the land was purchased cheaply but resold to Eskom at a vast profit. It was noted that the Committee would be conducting oversight here.

PetroSA then gave a presentation on the Mthombo Refinery, which had significant economic and trade advantages, being able to produce about 360 000 barrels a day. The scope of the project comprised of a refinery, utility island and infrastructure support. The total capital expenditure of the project was estimated at US $14.8 billion. The financing structure was set out, based on long-term process-or-pay obligations from reliable processors. Some or all of the processors were likely to be shareholders in Mthombo. PetroSA, whilst driving development, did not have the capacity to fund on its own and was also seeking an anchor partner to co-develop. The two future phases were outlined, with the second being held back until a partner was secured. Members asked if the products to be produced would prove cheaper than imports, questioned whether jobs would really be created, or merely re-shuffled. Members also asked whether the new refinery could produce bitumen, and asked about the number of pipelines, and any problems with them, to Gauteng, and whether they were flawed in design, and asked about the future of the fuel tanks at Port Elizabeth. 

Meeting report

Chairperson’s Opening Remarks
The Chairperson noted apologies from the Minister and Deputy Minister, and the Director-General of the Department of Energy. The Committee would receive a briefing on solar water heaters, and he noted that the Minister had set a target of rolling out one million solar water heaters, and asked the Department of Energy (the Department or DOE) to report how far it was with the project, and whether this was on track with the plans. He would like the Department to address what it had done to help people in rural areas. He noted that the Department of Energy must address the concerns of South Africans.

Department of Energy update on Solar Water Heater
Mr Ompi Aphane, Deputy Director General, Department of Energy, tabled a presentation on the work done, noting that a market study had been done in order to determine the potential of solar heating water in South Africa. He tabled a chart showing a breakdown of living standard measures, stressing that this was attempting not to segregate, but to allow the Committee to understand the dynamics. It showed poor or low income earners who earned less than R6 000 a month, middle income earners who had a salary of between R6 000 and R16 000 a month and upper income earners who had a salary of more than R16 000 a month.

A breakdown of the targets that had been set for each year up until 2019 was given. He stressed that the Department wanted to reach a target of installing one million solar water heaters by 2014. For 2010, the Department had set a target of 50 522 solar water heaters. The targets for 2011, 2012, 2013 and 2014 were set at 111 356, 215 984, 311 099 and 402 530 respectively. That would result in one million by 2014.

Mr Aphane then referred to the Eskom tariff based rebate programme. A total of 3 126 solar water heaters had been installed under the Eskom rebate, from January 2009 to April 2010. A number of comments from companies within the industry were also given, and these included comments such as  "We are currently averaging 100 to 200 per month”, of “the rebate programme just is not doing it for the market” and “it would be embarrassing to give you our sales numbers”. The market therefore needed a serious shake-up in order for the Department to reach its target of one million solar water heaters by 2014. He also tabled figures of municipal areas which had active roll out programmes for low pressure systems, using the Eskom rebate. The Nelson Mandela Bay Municipality (NMDM) had began its roll out on 20 July 2010 and by 20 January 2011 this municipality had installed 13 006 geysers. Other municipalities with active roll out programmes were Saldanha, Mossel Bay, Theewaterskloof, Ethekwini and Ekurhuleni. It was stressed that the municipalities had undertaken to do the active rollout programme on a voluntary basis. Installations were either free, or a small nominal fee would be charged. Mr Aphane indicated that, in order for the Department of Energy to reach the one million mark, there was a need for an integrated approach.

Commercial entities were also implementing the solar water heating systems. BMW had implemented the initiative on geysers that used 6 500 litres per day.  Other companies included South African Bureau of Standards (SABS) Roslyn change rooms, Western Cape Environmental Affairs, the Japanese Embassy (which had installed 410 solar panels) Hotel Da Vinci in Sandton and the City of Johannesburg (Cosmo City), which had 700 units installed.

As at 31 December 2010 there were 108 accredited suppliers, 245 registered distributors and 124 registered independent installers. Between April and December 2010, 26 768 units had been installed whilst a cumulative total of 30 974 had been achieved since the rebate programme kicked-off in November 2008. These figures excluded systems that had been installed but had not yet been claimed by programme participants.

A provincial breakdown of the rebate programme was given, for installations that had been paid out between November 2008 and December 2010. The Eastern Cape, Gauteng and the Western Cape had the highest number of installations with 5 511, 5 660 and 4 274 installations respectively. Mpumalanga, the Free State and Limpopo provinces showed the lowest figures with 261, 1 172 and 197 installations respectively.

A municipal breakdown was also given in relation to the fiscal programme, which was funded from 2009/10 allocations, via Eskom. 30 768 systems were established. Tshwane municipality had 15 094, while Sol Plaatje and Naledi municipalities had 7 837 installations each. Additional funding had been allocated for 2011/12, via municipalities, to install more systems. R60 million had been allocated to Umsobomvu, R54.4 million had been allocated to both Musina and Sedibeng, and only R5 million had been allocated to Sol Plaatje.

The future plans were presented to the Committee. Mr Aphane stressed that there were infrastructure problems, especially with regard to water reticulation and household plumbing, which stalled the rollout programme in Naledi and Sol Plaatje. There was a programme in place to address hot water provision in rural areas managed by Department of Rural Development and Land Reform. There was also a programme to install solar heated geysers in government-owned residential dwellings, and this would be managed by the Department of Public Works. It was stressed that new building regulations would enforce energy efficient practices in new buildings. Furthermore it was pointed out that the regulations had been gazetted for public comment and were being signed off for promulgation by the Minister of Trade and Industry. In addition there would be a tax incentive for implementing energy efficiency in accordance with the regulations issued under the Energy Act. The incentive allowed companies to fast track energy efficiency, including solar water heaters, through tax breaks.

Mr Aphane noted that the Minister of Energy had pronounced on a standard offer incentive scheme that would fund all Energy Efficient and Demand Side Management (EEDSM) interventions through the electricity tariff. The scheme was aimed at creating an expanded opportunity for attracting the much-needed sustainable financial stimulus into the EEDSM programme. In their initial stages the standard offer and the rebate programmes would complement each other, and they would merge over time.

Challenges that affected the rate of rollout were presented to the Committee. The capital costs for the components and the system were too high. The pricing ranged from R 9 000 to R 35 000 for a 200 litre system. There was also need for the funding of capital costs of units, and education and awareness campaigns. Consumers were, for the most part, unaware of the solar water heating benefits. In addition there were skills shortages which delayed the safe scaled up installations.

Numerous suggestions were put forward in order to address the challenges. Training would be conducted in order to address the skills problem, and this would be done with the assistance of academic institutions and professional training bodies. There were also initiatives to undertake local manufacture of solar water units, as many were currently imported, or were knock-down units only assembled locally. A factory had been set up in the East London Industrial Development Zone (IDZ). Discussions were also under way with suppliers, to set up other factories in Eastern Cape and Gauteng provinces. A Memorandum of Understanding (MoU) was also signed with a Chinese firm to set up a solar water heater manufacturing plant. The Department of Trade and Industry (dti) was spearheading the Revised Industrial Policy Action Plan (IPAP 2), which encouraged local manufacture of solar water heaters. The South African Bureau of Standards (SABS) was scaling up testing capacity to remove any bottlenecks that the industry could experience in launching new products.

Mr Aphane stressed that the Department of Energy had developed a comprehensive above-and-below-the-line education and awareness plan. The Department was also seeking partnerships with labour, civil society and the private sector to execute the plan.

Additional fiscal allocations had been applied for. The tariff based rebates were cemented in the Integral Resource Plan and the National Energy Regulator of South Africa (NERSA) would be compelled to make adequate rebates available in the future.

Mr Aphane concluded that the target of one million systems by 2014 could be achieved, especially when the electricity tariff doubled by 2013. It was also stressed that education and awareness building was critical for increased uptake. Lastly, he stated that solar water heaters formed a key component of the IPAP, had the potential to create jobs, and thus had to be intensified.

Discussion
Mr A Lees (KwaZulu-Natal, DA) noted his concerns that this presentation was similar to the promise of 500 000 job, which then only translated to 500 000 job opportunities. He urged the Department to be honest as to whether the target of one million by 2014 would, on the demand side, be reached.

Mr Lees asked whether the 30 768 systems under the fiscal allocations had been installed, or whether the money had been transferred to municipalities, and also as to who had been tasked to verify whether the solar water heaters had been installed.

Mr Lees raised concerns about the range of costs of the units.

Mr Lees asked why the Department thought that there was collusion in the industry and how the issue was being addressed.

Mr Lees asked what would happen if the units failed to perform in three or four years.

Mr Lees felt that the presentation on the tax incentive schemes was vague. He also raised concern in relation to the figures on page 10 of the presentation, which did not tally. Mr Lees also requested that Mr Aphane clarify what he had meant by saying that electricity would double by the year 2013.

Ms B Abrahams (Gauteng, DA) asked why the roll out date for Ekurhuleni was due to start in December 2011. She asked whether there was a special programme for individuals who wanted to install their own solar heating.

Ms Abrahams asked why Non-Governmental Organizations (NGOs) were not involved.

Ms E Van Lingen (Eastern Cape, DA) said she had found it difficult to follow the presentation. She asked how the registration related to the geyser size.

Ms van Lingen asked what the farmers were getting and who was responsible for them.

Ms van Lingen also raised questions about the alleged collusion, and asked what had been done about the issue.

Ms van Lingen questioned how the strong rand had affected the importation of stocks.

Mr B Mnguni (Free State, ANC) questioned the affordability of the rebate system for Eskom and asked how the rebates were going to be sustained, since Eskom itself was borrowing money to build more power stations.

Mr Mnguni asked where the majority of the installers were situated, and how many jobs the Department planned to establish.

Mr Mnguni asked if the solar panels would work if the weather stayed overcast for several days. He also asked how long the solar water heaters would last in coastal areas where there was salty water.

Mr K Sinclair (Northern Cape, COPE) asked whether it was not better to have different types of rebates for low income earners and middle income earners. He asked how long it would take to get the rebate back. He also suggested that government should have a more direct engagement with the banking and insurance sectors.

Mr D Gamede (KwaZulu-Natal, ANC) noted that it seemed that the upper income group was benefiting more than the other groups. He urged there should be a clear direction as to the main purpose why solar water heaters were being installed.

Mr Gamede asked whether municipalities were rolling out the project in municipalities. He asked who was going to maintain the solar water heaters and where the money needed to build more solar water heaters would come from, noting the comment that R10 billion would be needed.

The Chairperson asked who would be responsible for replacing the solar water heaters in cases of vandalism or breakages.

Mr Aphane responded in general to some of the issues. He said that the one million target was premised on a rallying point in order to mobilise people around a particular objective. He added that the number was an arbitrary one. However, in Germany a similar project was started, also with a target of one million, where this target had been surpassed.

Mr Aphane said that the main rationale for this project was to prevent unnecessary burning of coal, especially where it was possible to replace traditional energy sources with a cleaner option, as also to address the supply demand levels.

Mr Aphane said that when the Eskom programme began, it was aimed only at the high end of the market, where people would be able to spend their own money for the installation, and then receive back a rebate. However, the objective of government was not to focus on one segment only. The programme target of one million heaters was largely premised on high and medium income segments. However, the Department was not stopping new developments from accessing the programme.

Mr Aphane noted that this model was based on a rebate approach. Therefore, an inspector would go and verify whether the solar water heater had been installed, before the rebate was paid. Pricewaterhouse Coopers (PwC) had been appointed by Eskom to audit and verify the rebate finances. Furthermore, the rebate that Eskom paid out was money derived from tariffs. Eskom and its service providers were required to ensure that the solar systems they installed were fully functional, and they had a life cycle management in place, otherwise they would be in breach of contract.

Mr Aphane then addressed concerns around collusion. He was not in a position to state categorically that there was collusion, but as soon as Eskom announced that its rebate was going to increase, the cost among suppliers also increased. In relation to the comment about the doubling of tariffs, he reminded Members that in April 2010 the regulator gave approval that tariffs should increase by a rate of about 25% a year, and by 2014 the original rates would have almost doubled.

Mr Aphane noted that Community Development Workers were not the only people who would be involved in the development of the community. He added that the Department was willing to take any suggestions. Furthermore he stated that the standard offer model was open to people who wanted to do their own installations. Mr Aphane stated that the standard offer model was available to the hospitality industry, who could install and claim the rebate. 

Mr Aphane responded to the question of the registration of accredited installers by stating that a company’s application to get on to the database depended not on what company it was, but on the difference types of geysers. Each geyser was accredited separately.

Mr Aphane answered the question on farmers by saying that the Department needed to design a process whereby it could collaborate with the farmer, the farm workers and municipalities.

Mr Aphane noted that the impact of the strength of the rand had already been hedged, since most of the providers on the Eskom database had their costs in rands.

Mr Aphane responded to the questions around affordability by pointing out that the project was not necessarily a R10 billion project. He stated that if the Department was to install six million geysers then this would be a R60 billion project.  He added that the Department was trying to sort out issues of financing.

In relation to the provincial breakdown of the124 installers, Mr Aphane noted that he did not have the exact figures but Gauteng, Western Cape and Eastern Cape had the most installers.

Mr Aphane then responded to questions around functionality. If the weather was overcast then the geysers would not heat up and stay hot for as long. In response to the question of the functionality of the geysers in coastal areas, he stated that the Department did not know what exactly would happen here, and that although experiences from elsewhere in the world were taken into consideration, only time would tell.

Mr Aphane explained that the rebate system was based on the differing sizes of the geysers. He said that when this rebate programme started, the turnaround time was 18 months but it had since been improved.

Mr Aphane noted that if systems were stolen or damaged, then the standard offer model did not necessarily provide for receipt of the money once-off. It was based on a monthly rebate. He stressed, however, that a house owner must take responsibility for policing his or her own property, despite the fact that most service providers had warranties and guarantees for their products.

Ms Van Lingen stated that it was unrealistic to expect people who stayed in a Reconstruction and Development Programme (RDP) house to maintain their own solar water heaters, since most of them were unemployed.

Mr Lees asked how far the legal obligation that Eskom and its suppliers had extended. He also asked whether other units, which were not under the rebate programme, had been installed, and who was verifying this. He was concerned that seemingly another bureaucracy to monitor and verify was being added. He questioned the benefits of monitoring and verifying. He went on to stress that there might not be any tax breaks catered for in the budget, since politics determined the budget.

Mr Aphane stated that the fiscal programme was being managed by Eskom, and the Government had given Eskom additional funds. He added that the maintenance obligation lay with Eskom, including the RDP houses. The beneficiary household was required to pay nominal costs once only, and thereafter Eskom would take over. There was also provision for certain overhead costs, and not just the capital costs to cater for the maintenance of solar water panels. The fiscal programme was the same, since Eskom also looked after the life cycle and maintenance issues of the solar water heater. However, in certain instances Eskom would transfer the risk to solar heater installers. Furthermore, under the standard offer model, suppliers were paid on a continual basis and not once-off, so as to avoid installers running away. He added that the NERSA approval required that the number of solar heaters should be converted into a certain number of given hours of savings, and if Eskom failed to do this it would run the risk of failing to claim the rebates.

Mr Aphane noted the comments on the increased bureaucracy but said this was provided for under the Energy Act of 2008. In order to claim from the United Nations Framework Convention on Climate Change (UNFCCC) the entity must be confident that it could verify the saving hours, and this was the reason for having the involvement of the South Africa National Energy Development Institute (SANEDI) and NERSA, rather than being unnecessary bureaucratic.

Mr Lees commented, in answer to this, that the mere fact that something was legislated for did not necessarily mean that it was correct. Officials could address this. He did not see the benefit of having these entities that played a part in the verification process.

Mr Lees asked whether it was correct that 30 974 solar water heaters had been installed under the fiscal scheme and only 200 had been installed under the Eskom rebate.

Mr Aphane responded that the figures on page 10 of the presentation gave a provincial breakdown of solar water heaters that had been installed under the rebate programme. He added that under the rebate programme of Eskom, about 30 974 systems had been installed.

Mr Sinclair asked whether the solar water heaters for Sol Plaatje had been allocated or whether they had been installed.

Mr Aphane stated that an additional R5 million had been allocated to the municipality in order that it could finish the programme.

Mr Sinclair noted that in theory the figures were high, but the reality of rollout was far slower.

Ms M Dikgale (Limpopo, ANC) asked what progress had been made in the Limpopo province.

Mr Aphane stated that nothing in the fiscal allocation stopped towns from participating in the rebate programme. He noted that there was, however, a need to address specific concerns in Limpopo.

Kouga Municipality Electrification: Briefing by Department of Energy
Mr Aphane stated that the Kouga Municipality would be fully electrified within the next two years, and there would be no backlogs by then. He pointed out that there was some difficulty in the nuclear programme. During the 1950s, Eskom had acquired land in order to establish a nuclear project. However since that Eskom programme had been aborted, government had not made pronouncements on a nuclear power programme, let alone confirming that Thyspunt would be used as the site. He added that if the nuclear programme were to be established in South Africa, there would be rigorous consultations with stakeholders, including the community in the targeted sites. He further added that although the site belonged to Eskom, Eskom was not in control of a nuclear programme. There had been numerous settlement patterns on the site since it was bought in the 1950s. In short, no decision had been made yet.

Discussion
Ms Van Lingen asked whether this represented the Department’s whole presentation.

Mr Aphane stated that there was very little more that could be said on the topic.

Ms Van Lingen asked whether Mr Aphane could produce the title deeds that stated that Eskom had acquired the land in the 1950s. She added that the Thyspunt site in question had been selected in the 1980s by the nationalist government, when it wanted to keep the nuclear sites as far as possible from the homelands. She asked whether a decision was taken on Thyspunt. She also pointed out that land was being bought at very low prices and was being sold to Eskom for exorbitant prices, citing an example of land that was bought for R18 million from its original owners by a conglomerate which included some people who were in the Kouga municipality, then resold to Eskom for R218 million. She claimed to be able to produce evidence that the nuclear site in question was acquired in the 1980s as opposed to the 1950s.

Ms van Lingen expressed her frustration that the oversight visit to Kouga and Thyspunt had been postponed twice.

The Chairperson stated that the oversight to the Kouga Municipality was still on the agenda for 21 to 25 February. Both Eskom and the Department of Energy would be present. He added that the National Nuclear Regulator had not granted a licence for a nuclear plant.

Ms Van Lingen stated that she did not understand why the Department was dealing with the issue when the matter was not in its jurisdiction.

Mr Sinclair stated that the presentation was part of a bigger picture. He requested that a separate presentation be done about nuclear power in South Africa.

Mr Gamede suggested that the presentation on the electrification status of Kouga municipality should stand over.

Project Mthombo:  Update by PetroSA
Mr Vukani Khulu, Business Manager, PetroSA, gave an update on the Mthombo Refinery. The key design features of the refinery, which gave it significant differentiation and economic advantage over the local refinery industries, were the ability to process heavy, high sulphur and high TAN crude oil, traded at a discount against reference crude, and low cost to producer, due to economies of scale and its ability to produce 360 000 barrels. The scope of the project comprised of a refinery, utility island and infrastructure support. The estimated capital expenditure for the refinery was US $11.6 billion. However the total capital estimate for the refinery project and associated infrastructure was said to be US $14.8 billion.

He outlined that PetroSA was pursuing a limited recourse project financing structure, with appropriate shareholder support prior to completion and limited recourse after completion. The structure was based on long-term process-or-pay obligations from reliable processors. He added that some or all of the processors were likely to be shareholders in Mthombo. The structure had the ability to generate stable and strong cash flows. Furthermore, via the processing structures, Project Mthombo would largely be de-risked, enabling it to target initial and on-average 15-year financing.

Mr Khulu said that whilst PetroSA, as the national oil company, was driving the development of Project Mthombo, it did not have the capacity to finance such a large scale infrastructure project on its own. Furthermore PetroSA was actively seeking an anchor partner to co-develop the project. To date it had engaged with Petronas, Sonangol and Sinopec. There were two stages that needed to be reached when moving forward. FEED Study Phase 1 would secure Anchor Partner agreement and alignment on project objectives, scope, and therefore manage the risks. The cost of the phase was estimated to be around R300 million, with a planned duration of 12 months. Under FEED Study Phase 2, engineering studies would be completed to develop a more accurate cost estimate that would inform the preliminary investment decision. A bankable business case would be finalised, in order to support a final investment decision by the shareholders. The cost of this phase was estimated to be R2.1 billion and the expected duration was 15 months. It was further stressed that Phase 2 would not be undertaken unless a partner was secured.

Discussion
Mr Lees asked whether the products that the refinery would produce would be cheaper than the imports. He was concerned that the building of the refinery would not sort out security of supply issues, and did not think that this was a good motivation. He also asked if existing refineries would close down in the future and whether job creation would be sustainable. It seemed to him that the jobs were simply being shuffled.

Mr Lees asked how many pipelines were feeding fuel to Gauteng Province and how many times the pipeline had broken down.

Mr Lees enquired whether the new refinery would be able to produce bitumen, and what the current position was in the country with regard to bitumen.

Mr Khulu responded that he was strongly under the impression that the products that would be produced in South Africa would be produced in a cost effective manner. He further added that the price of petrol in South Africa was regulated. He went on to state that jobs were going to be created and not shifted. He clarified that existing refineries would not be closing down.

Ms Dikgale asked for further breakdowns on the job creation figures.

Mr Khulu responded that he did not have the exact figures.

Mr Sinclair noted that R2.1 billion was a lot of money.

Mr Khulu agreed that the money was high, but he noted that a reputable international company was used to verify the figures.

Ms Van Lingen noted that the pipeline issue had been glossed over. She asked whether it was correct to build over a geological fault line.

Mr Khulu responded that geo-technical studies had been conducted and from the results there seemed not to be any huge fundamental flaw.

Ms van Lingen wanted more information on the partners in crude fields.

Mr Khulu said that this would be provided at the FEED stages.

Ms van Lingen questioned the lifetime of the fuel tanks in the Port Elizabeth Harbour, and whether they were going to be moved.

Mr Khulu said that a tender call had been issued at the Port Elizabeth harbour by Transnet, but it had not been awarded as yet. He stressed that PetroSA was not brushing aside the issue of the pipeline but that PetroSA mainly focused on shipping products, and the pipeline was an alternative.

The Chairperson noted that the Committee would be doing oversight at Kouga.

The meeting was adjourned.

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