National Energy Regulator & Nuclear Energy Corporation Annual Plans 2011, Multi-Products Pipeline Project, Wind Energy & REFIT tariffs

Energy

23 June 2011
Chairperson: Mr S Njikelana (ANC)
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Meeting Summary

The Nuclear Energy Corporation of South Africa (NECSA) outlined the state of its business and budget. NECSA's operations centered around nuclear power, radiation science, and nuclear programme hosting. NECSA had received government grants to subsidise the costs of its operations, but those grants had diminished in recent years, putting a strain on the organisation's ability to fulfill its legislative mandate. In addition, NECSA anticipated substantial capital costs in the near future, in order to replace an ageing reactor that was critical to achieving its mission. NECSA's subsidiaries had faired better financially. The NTP had success in producing key isotopes needed in nuclear medicine for export to 55 countries. Pelchem, while not as successful as the NTP, had also achieved some success with fluorochemical applications in industry and pharmaceuticals. The long-term objective was to continuously strengthen NECSA's ability to conduct all its programmes, while constantly improving safety, health and environmental quality management performance, and increasing the numbers of black professionals and technical staff. However, the challenges of funding prevented NECSA from taking on the staff who were presently available. There was misalignment between its role and the funding it received, as well as challenges from market conditions. NECSA did not wish government to fund the radioisotope production, as this was essentially a commercial programme, The ageing equipment, business sustainability, fragmentation of the nuclear industry and lack of public knowledge were further challenges. Members asked about the funding mismatches, suggesting that National Treasury must be approached, as government’s stated commitments to the nuclear programmes had to be backed up with sufficient funding, provided that NECSA was viable. NECSA stressed that it was not alone in being subsidized, but the key question was whether government should fund research and development of new technologies. Members were raised concerns about storage of nuclear waste and any implications that this may have on groundwater, and asked why South Africa should be investing so much in nuclear programmes. Further questions related to the US Government grant programme for low-enriched isotope production, and worldwide reduction in nuclear energy.

The National Energy Regulator of South Africa (NERSA) presented its business plan and budget. NERSA regulated electricity, piped gas and petroleum, and the different requirements of these industries in themselves presented a regulatory challenge. These challenges cut across its key areas, from electricity distribution to piped-gas and petroleum pipelines. NERSA indicated that it planed to streamline regulatory processes to increase efficiency. Particular challenges that it faced in the electricity sector, included security of electricity supply, noncompliance issues, particularly with municipal distributors, maintenance backlogs, failure to meet reporting requirements, and the implementation of the inclining block tariffs. Challenges in the piped-gas industry included the regulation of certain piped-gas activities that were not specifically catered for in the legislation, the monitoring and enforcement of Sasol's compliance with the regulatory agreement, the approval of maximum prices, in the absence of a clear market value for gas, and the private sector investment and markets for gas. Petroleum pipeline challenges included security of supply to inland areas, funding challenges of the State Owned Entity, Transnet, who was responsible for the multi-product pipeline, and the need to bring more historically disadvantaged individuals on board. There were plans to introduce more independent power producers, promote renewable energies and utilise the Renewable Energy Feed-In Tariffs (REFIT), giving more certainty around electricity prices. NERSA also hoped to streamline the regulatory process, educate customers, implement compliance frameworks and benchmark licences, as well as amend legislation as necessary.

NERSA then gave a brief presentation on the Transnet Multi-Products Pipeline (MPP), noting that this would run between Durban and Gauteng, with all four lines to become operational during 2011. The entire project was 58% complete, but pipelines were 98% complete, and stations were 82% complete. The initial cost of R11 billion had escalated to R22 billion. There were potential risks at coastal, line fill and security of supply, and there was still some question of final liability for costs, but NERSA had made plans to address these. There would be further increases to pay for capital investments.

NERSA then briefed Members on the Renewable Energy Feed In Tariffs (REFIT) programme, noting that NERSA had introduced new generation regulations.  When the REFIT guidelines were first developed, they were based on levelised costs of electricity, to stimulate investment, selecting wind, landfill gas, small scale hydro, biogas, biomass, and solar. Unlike European countries, South Africa would have annual reviews to determine tariffs applicable, and a 17% return was considered reasonable. The selection criteria were outlined. The Minister still needed to make the determinations, and this should be finalised by 30 June 2011, after which requests for proposals would be issued.  in accordance with section 34(1) of the Act, which related to a decision on the generation capacity for security of supply, the types of energy sources, the manner of purchase and selling the electricity produced, tendering procedures, and how to provide for private sector participation. NERSA would need to concur, and this was set for finalisation on 30 June 2011. After that, the request for the proposal (RFP) would be issued, and this would state the tendering process.

Finally, the Department of Energy (DOE) presented the status of its Renewable Energy (RE) Programme. The programme aimed to localise energy technology, develop jobs and skills, increase South Africa's energy security, and mitigate the adverse effects of energy on the climate. Wind and solar were the primary drivers of the renewable energy market, with other projects in biomass, hydro, landfill gas, and biogas. Funding had been specifically designed to derive from tariffs, although some industry players had asked for tariffs to remain at 2009 levels, and legal challenges were raised. It was necessary to deal with procurement legislation and consider the impact of these programmes on the national revenue fund, so a two-stage procurement evaluation process would be followed. Members wanted further clarity on this, and asked about licensing applications. They were concerned that not sufficient information might be provided by municipalities. One Member described the whole REFIT process as “frustrating” and thought that the changing rules might discourage investors, and urged that there must be competitive bidding processes. He also questioned why the legal issues had not been resolved sooner. Members also asked about multi-year project development, enforcement of compliance, plans to address electricity theft, the bidding process and how REFIT would operate in future. A Member questioned whether use of wind and solar power made economic sense.  

Meeting report

South Africa Nuclear Energy Corporation: Corporate Plan briefing
Dr Rob Adam, Chief Executive Officer, Nuclear Energy Corporation of South Africa presented the Group Corporate Plan of the Nuclear Energy Corporation (NECSA) to the Committee.

Dr Adam wished to stress that the manufacturing of reactors was entirely different from any other industry, pointing out that whenever nuclear components were manufactured, they had to adhere to certain standards. NECSA would adhere to the key international code ASME, and if it had that certification, it would be able to manufacture the components under license by the different vendors. This was important, because one of the key features of nuclear power generation was that the generation of power was cheap, although the nuclear plant was expensive to build.

Dr Adam noted that Korea had moved from having no nuclear power generation capacity to being able to deliver entire systems. South Africa’s objective was to position itself to be able to manufacture up to 30% of the final product in the next 20 years. South Africa was currently able only to do the civil engineering. By manufacturing a significant number of components, South Africa would be able to win bids to manufacture for the big global vendors. NECSA aimed to convince those vendors to allow it into their supply chains. Feasibility studies had been done on all the nuclear fuel cycle, as required by the Department of Energy, and most had been completed, with one or two outstanding. This project was to establish the development and feasibility of uranium enrichment.

NECSA had enhanced its section quality system by adhering to all the relevant regulations and requirements. It had also contributed to policy-making related to energy planning, nuclear research and development. For the first time since 1963, it had reached a point where it could dispose of low level waste in a way that complied fully with disposal regulations. From a financial governance perspective, it had continued to see that it adhered to necessary requirements.

Dr Adam said NECSA was divided into three central clusters: nuclear power, radiation science and applications, and nuclear programme host. The long-term objective of the nuclear power cluster was to expand and industrialise NECSA's nuclear and related technologies to establish Nuclear Fuel Cycle (NFC) capabilities and plants and to ensure self-sufficiency of nuclear fuel cycle activities for South Africa.

This cluster comprised uranium beneficiation, Material Test Requirments (MTR) fuel and target plate production, the Pressurised Water Reactor (PWR) fuel programme, nuclear manufacturing, components of applied chemistry, and Pelchem Ltd. He also noted that while Pelchem was part of this cluster, its real delivery was elsewhere.

The medium-term objectives included progressing with preparations for the development or demonstration of required nuclear fuel cycle processes and technologies. There were some experimental processes on the way. NECSA also wanted to establish fuel manufacturing capabilities, both for test reactors and PWR reactors. It also wanted to increase nuclear manufacturing sales from R52 million to R98 million by 2013. Dr Adam said that while that seemed modest, it was in line with NECSA’s sales growth with radio isotopes. Finally, NECSA aimed to diversify Pelchem's product portfolio and increase current sales. It had focused too much on luxury good sectors, and this market was hit during the economic downturn. Health care was one sector where expansion was desired.

The Radiation Science and Applications Cluster’s long-term objectives included growing outputs of new technology, products, and services in alignment with applicable national priorities and imperatives. NECSA was at risk because there was huge dependence on just one product, and that must be remedied. Another objective was to utilise reactors optimally for both production and research purposes, in addition to growing revenue in order to maintain NECSA's dominant status in the global radio-isotope market and further grow the market share. This cluster consisted of the radiation science and components of applied chemistry, the SAFARI-1 reactor, and Nuclear Technology Products (NTP) radioisotopes.

Medium-term objectives included increasing NECSA's research, development, and innovation outputs, maintaining the full operational capability of SAFARI-1 and progressing with studies on future irradiation facilities. It also wished to grow the NTP Group sales from R851 million to R1 255 million by 2013.

Dr Adam said that NECSA had the capability to host nuclear programmes. Building that infrastructure was a critical part of the nuclear programme. Hosting nuclear programmes encompassed more than licensing and security, but also included support services such as human resource management, financial management, and communication. While some people considered this a “soft area,” Dr Adam stressed that this was not so, and that all were key components of a nuclear programme.

The long-term objective was to continuously strengthen NECSA's ability to host these programmes. The medium-term objectives included constantly improving safety, health and environmental quality (SHEQ) management performance, and increasing the percentage of black technical staff and black professionals. This had been a particular challenge after the former Department of Mineral Resources was re-organised. NECSA would have liked to have taken on some of the former staff, but could not do so owing to the fiscal climate.  Finally, NECSA hoped to maintain investment in staff training.

Some of the risks NECSA faced included financial resource constraints, including the misalignment of funding required to deliver on the role NECSA had to play in terms of the National Energy Plan (NEP), and challenging market conditions. Dr Adam said he was aware that Members might think that he was boasting about NECSA's growth while also claiming there was not enough money, but he said that was because the growth had been in radio-isotope production. There were significant capital costs forthcoming, because a new reactor needed to be up and running by 2022. NECSA did not believe it was correct to ask government for money for a reactor to produce radioisotopes, which was essentially a business, and that instead of the South African taxpayer being asked to subsidise this, a new reactor should rather be funded out of NECSA savings.

Another key risk was the shortage of appropriately skilled staff to execute and expand NECSA's core technical programmes. This was a timing issue. There were qualified people in the market, including those formerly employed by Department of Mineral Resources, but NECSA did not have the money to employ them.

Other risks included ageing equipment, particularly the SAFARI-1 reactor which was in need of replacement, business sustainability, fragmentation of the nuclear industry, and the lack of public awareness and knowledge of nuclear technologies.

Dr Adam noted that NECSA was at risk of not fulfilling its core legislative and policy mandate, because of the reduction in government allocations to NECSA over the past two budget processes. More challenging market conditions for its commercial subsidiaries had also contributed to this situation. It was also important to highlight that although the NTP Group had produced excellent results most recently, its markets were likely to stabilise  in the future. It was envisaged that the Dedicated Isotopes Production Reactor (DIPR) would require significant contributions from reserves until approximately 2021.

Dr Adam then tabled the key performance indicators, which were logged in the shareholders compact with the Minister of Energy. The indicators covered a number of different areas, including finance, safety, and research. Another key indicator focused on increasing the numbers of black technical and professional staff.

Ms Nishina Dayaram, General Manager: Finance and Information Systems, NECSA, continued the briefing on the budget. She said that there were a number of assumptions and key considerations that went into determining the budget, and that they balanced short and long-term strategies in the plan. There were new developments regarding Integrated Resource Planning (IRP), which required significant funding. NECSA also looked at its business strategies, as well as three key products: major isotopes, chemical production, and high technology product manufacturing. Chemical production had been focused in luxury goods, and a downturn in the economy affected this sector. The Nuclear technology product and health care markets did well, despite the downturn. In the manufacturing of high technology products, NECSA had decided that it should not be dependent on government for funding.

NECSA also looked at balancing capital expansion and capital replacement. There was ageing infrastructure that needed to be replaced, while NECSA looked to grow.

An additional key consideration was the growth in salaries, particularly in light of the reducing government funding to NECSA. This was an issue in both the short and long-term. This financial constraint needed to be balanced with the need to retain key skills.

Ms Dayaram discussed the status of government grant allocations at NECSA. Over a four year period the government allocations had been reduced by R150 million, and by R400 million over the five-year period. These figures showed the need for increased self-sustainability. However, revenues for the NECSA Group had grown significantly, from R1.7 billion to R2.5 billion over a four-year period. This represented aggressive growth and demonstrated the success of the commercial subsidiaries. Sales accounted for about 64% of total revenue for the NECSA group, with government grants accounting for 28% of revenue. On the expenditure side, there was a healthy balance, with a large focus on operating and manufacturing expenditures. Personnel costs made up 42% of total expenditures.

Ms Dayaram explained that NECSA prioritised its key projects in regard to capital expenditure over the next four years. One of the key projects was the long-term DIPR. That project was already in the planning stages, with feasibility studies expected shortly, and an expected completion date of 2020. NECSA was looking into a combination of funding mechanisms for that project. SAFARI-1, which she reiterated was an ageing reactor, would need to be shut down in future. This project was a business continuity project for both the NTP group and NECSA at large. It was a huge project, with production expected in 2014. Pelchem had received funding for expansion of its business into fluorine. There was an anti-viral production project using fluorine technology, with a completion date in 2015, that had not been factored into the numbers presented.

NECSA Corporation revenues included 50% by way of government allocations, and sales at 35%. The government allocations three years previously would have accounted for a larger percentage.

Ms Darayam said that personnel costs made up 54% of NECSA Corporation expenditure. This had grown significantly over the last few years, although total income had not grown at the same pace. NECSA would have to look carefully at the requirements in order still to undertake expansion projects, while maintaining key skills in order to deliver on its mandate. NECSA predicted that, in future, the personnel costs would flatten out so that although there would be salary increases, NECSA hoped to keep the total salary bill at a level which it could afford in the long-term.

Mr U Natha, Strategist, NECSA, noted that the Portfolio Committee would receive a separate presentation in the following week on safety considerations.

NECSA Subsidiaries briefing: Pelchem
The Chairperson asked that representatives from the subsidiaries should briefly discuss their work before Mr Natha continued with his presentation.

Mr Rajen Naidoo, Business Development, Pelchem, reported that Pelchem was a subsidiary that produced fluorochemicals on the local market. He explained that this was a branch of chemistry that used fluorine in order to adapt the molecules, giving them unique properties. Some became hazardous and reactive, and were beneficial for use as catalysts and as cleaning agents in metal industries. Others were safe for pharmaceutical applications and artificial compounds, such as teflon. He reported that Pelchem was particularly pleased about its new products. It had developed a product that was used in electronic applications, such as laptops, televisions and cell phones. It is also developing another electronic component which would be able to miniaturise complex technology. There were also drug applications. Fluorines were able to make drugs more effective for patients, and Pelchem was looking to apply this both to anti-viral and anti-malarial drugs. There were also potential uses in the energy sector. Fluorochemicals could be used in solar panel production, as well as in metal production, to make magnets for wind turbines and electric motors. Pelchem believed the fluorochemicals added value to the goods produced and manufactured in South Africa, and could increase the export value of many locally produced materials.

Mr Naidoo concluded his brief discussion by noting that Pelchem was corporatised in 2007 and had a staff of 180 employees, with annual revenue of R170 million.

Nuclear Technology Products (NTP) Radio-Isotopes briefing
Ms Mapula Letsoalo, Director: Radiopharmaceuticals, NTP Radioisotopes, introduced this subsidiary to the Committee. She said that NTP was a world leader in the production of radioisotopes on the global market, with supply going to 55 countries. NTP's biggest product was molybdenum-99 (mo-99). This was an active ingredient in nuclear medicine, and a starting material for other products. NTP had shipped mo-99 worldwide. Because the half-life was only 66 hours, there were only two days in which to ship to the consumers. South Africa had produced a container specifically for transportation of mo-99, and they were essential to the shipment process. Ms Letsoalo explained that it was advantageous to shift mo-99 for three reasons. Firstly, it was a small product, and was much easier to ship than the final product. Secondly, the final product had a half-life of only six hours, which would make shipment impossible. Thirdly, most companies in the nuclear medicine industry could not produce mo-99.

The final product was used for diagnosing cancer and other health issues. The doctors injected the final product into patients, in order to carry out diagnostic tests and indicate, prior to surgery, where the problems were. Use of mo-99 kept the costs down for the patients, and saved time for the doctors.

NTP also produced another isotope, Iodine-131, was one of the oldest isotopes used in nuclear medicine. It was used, for example, in treatment and diagnosis for thyroid abnormalities. These two isotopes were the core of nuclear medicine. Over the past ten years, there were also developments in the area of Positron Emission Tomography (PET), which did not require a reactor to produce the isotopes.

The NTP also had a small cybitron to produce an isotope called fluorine-80, and the final product from this was used to help doctors identify cancer cells as small as 8 millimeters in size, which had major advantages for patients.

Ms Letsoalo noted that NTP was corporatised in 2003. There were 250 employees, in addition to 20 contract workers. NTP generated approximately R880 million per year. Most of NTP's sales came from export, and were based in US dollars or the Euro. As a result, it was affected by currency fluctuations.

Discussion
Mr S Motau (DA) said there was a mismatch between revenue and expenditure, and wanted to know what measures were being taken to address that.

Mr D Ross (DA) said his concern was that there was a reduction in government grants by 40% over the next four years. In addition, salary increases put a squeeze on the budget. He suggested the National Treasury needed to be involved. If government was committed to nuclear programmes, it would be inconsistent not to fund them properly.

Mr L Greyling (ID) said that his issue was that the government was giving R500 million to NESCA each year. While NECSA was recouping some of those costs, it was not a viable industry. He understood that there was a mandate, but wanted to know specifically what that mandate was, given the financial investment that had been made. He wanted to know the rationale provided by the government and the benefit to South Africa in providing government grants.

Ms Dayaram said that NECSA had wanted to look carefully at the NECSA business model, comparing the value of the government grants to the personnel bill. It would be necessary to commercialise subsidiaries to the point where they were sustainable. Although the subsidiaries were not dependent on government grants, NECSA was, and it was not ready to be independent, as the subsidiaries were, and therefore still needed a contribution from government. NECSA wanted to look at total income and total expenditures.

She added, in relation to the subsidiaries, that these were separate legal entities that could be self-sustainable and could grow. NTP showed good results. Pelchem had not been as successful in terms of profitability, and there were some projects that would need to be implemented long term to take it to full profitability. Pelchem had been heavily affected by the market conditions. In addition, the exchange rates had not been favourable for either Pelchem or the NTP. Pelchem generated 50% of its income from exports, while NTP generated 90% of its income from exports. Sales for the NTP were expected to increase from R747 million to R1.2 billion in 2015. Profitability would increase from R142 million net profit, to R309 million in 2015. She reiterated that NTP was a separate entity, but noted that NECSA received a dividend stream, which was positive for NECSA. In future, NTP had some significant projects, including the DIPR, which would require significant funding. Even with a debt instrument, it would still require a return for investors.

Dr Adam added that many industries in South Africa were subsidised, and the key question was whether government should fund research. NTP was profitable, and Pelchem was close to becoming profitable. The value of investment lay in research and development, particularly in developing new technologies.

Mr Motau asked what technologies NECSA would embark upon, in relation to PWR capability, and whether the PWR reactor would be the base for other technologies.

Mr Motau wanted to know how high radioactive waste was stored, and how would be handled in the future.

Ms N Mathibela (ANC) asked if nuclear storage was likely to contaminate ground water

Dr Adam said that there was no licensed long-term disposal site for high-level nuclear waste in South Africa. The Radioactive Waste Management Institute would identify such a site in the next few years. There were two categories of waste – low-level and high-level. The modeling indicated that, given the geographical characteristics of South Africa, it would take thousands of years for that material to enter ground water.

Ms Mathibela expressed her appreciation for the information presented, and said that it was exciting to hear of industry developments. However, she asked why South Africa should care so much about nuclear technology, and asked for the proper perspective to be placed on it.

Dr Adam responded that although, for instance, Australia did not have a nuclear programme, the Australian government had put more money into the equivalent of NECSA, simply because it believed that a modern State needed to understand this science and technology and get advice from practitioners on the ground, rather than relying solely on government officials. From a geo-political perspective, it was necessary for a country’s strength that it have strong programmes for security, safety, and licensing issues.

Mr K Moloto (ANC) asked if NECSA was underperforming.

Mr Moloto also wanted to know if, given the shortage of skilled staff, NECSA was attracting black applicants.

Mr Greyling wanted to know about the United States’ Government's grant programme for low-enriched isotope production. He assumed this was to encourage low-enriched uranium so there would not be as much high-enriched uranium in the world. He also asked if there were any security issues at play with high-enriched uranium, and what South Africa had done to ensure it was safe.

Dr Adam commented that the US government was providing a “carrot” to induce low-level use. This was no surprise, particularly after 9/11. Security measures had increased with regard to highly-enriched uranium. There were monitors in place, with safeguards, and other security measures. In addition, regular inspections by the Atomic Energy Agency were performed.

Mr Ross asked how a worldwide reduction in nuclear energy compared to what was happening domestically in South Africa.

Dr Adam said that all the market factors were in South Africa's favour. The current reactor would go down in 2016, because of its age. It was also a high level reactor, which was contrary to the US Policy Initiative, to which funding was attached. He noted that the reactor components market was difficult. However, if South Africa just considered manufacturing components, it would be a failure. South Africa needed to aim for global vendors, in order for the programme to grow.

Dr Adam summarised that the reduction in funding from the government was a concern. However, he hoped that NECSA would be able to rise above the gloomy scenario of not increasing the wage bill. He added that as many countries, particularly in Western Europe, reduced nuclear dependence, these technologies would find relevance in other countries like Korea, Russia, China, and India, with the US still holding a powerful position at the table. Dr Adam said that whilst Germany did not build new plants in that country, it was utilising new plant construction in France. Germany planned to import more nuclear power from France, while aiming for zero nuclear power production itself. Even Denmark, which had the highest proportion of wind power in the world, had some unclear energy policies. Dr Adam believed that the whole European economy would be tied up with one powerful nuclear player in Europe.

National Energy Regulator of South Africa: 2011 Business Plan and Budget, and update on Transnet's New Multi Products Pipeline Project
Ms Cecilia Khuzwayo, Chairperson, National Energy Regulator of South Africa, noted that the National Energy Regulator (NERSA) was established under the National Energy Regulator Act (the Act), to regulate electricity, piped-gas industry, and the petroleum pipeline industry. NERSA's predecessor, the National Electricity Regulator (NER), had regulated the electricity industry from 1995 until 2006.

NERSA was expected to implement its mandate and to take proactive and necessary regulatory actions in anticipation of, and in response to, the changing circumstances in the energy industry. She noted that different industries were regulated. Firstly, electricity was dominated by Eskom, which generated 95% of all electricity in South Africa, with some municipalities also responsible for generation. In the value chain, NERSA regulated generation, transmission and distribution, as well as the imports, exports, and municipal generators.

Piped-gas accounted for less than 2% of South Africa's energy needs. Approximately 120 gigajoules (MGJ) of natural gas was imported from Mozambique each year, along with another 188 of methane-rich gas produced by Sasol Gas in Secunda. Sasol dominated the regulated areas, with other transmission operators comprised of Transnet Pipelines and the Republic of Mozambique Pipeline Company (ROMPCO).

In regard to petroleum pipelines, Transnet was the dominant actor. It owned the Durban-Gauteng pipelines and distribution. Storage facilities were also dominated by the oil majors, including BP, Shell, Chevron, Engen, Total, and Sasol Oil. Approximately 4.5 billion litres were transported by pipeline to Gauteng each year, with road and rail handling an additional 2 billion litres per year.

NERSA's vision was to be a world-class leader in energy regulation. Its mission was to regulate the energy industry, in accordance with government laws and policies, standards, and international best practices, in support of sustainable development. NERSA was passionate about its values, which included responsibility, integrity, professionalism, innovation, excellence, and the spirit of partnership. Underpinning NERSA's mandate were the key regulatory principles, including transparency, neutrality, consistency and predictability, independence, accountability, integrity, and efficiency.

NERSA's mandate was anchored in four primary pieces of legislation. These were the National Energy Regulator Act, the Electricity Regulation Act, the Gas Act, and the Petroleum Pipelines Act. NERSA collected funding from levies, which derived from the legislation in relation to gas, petroleum pipelines and electricity. Three other Acts also had a bearing on the NERSA mandate, being the Public Finance Management Act, the Promotion of Access to Information Act, and the Promotion of Administrative Justice Act.

NERSA aimed to create regulatory certainty in the energy sector, to protect the interests of the public and the customers, to create a dispensation for fair competition for industry players, to create energy supply certainty, and to create an effective organisation that delivered on its mandate and purpose.

Ms Khuzwayo tabled the NERSA budget for the year, indicating that this outlined total expenditure of R223 million, and total income of $147 million. Ms Khuzwayo indicated that this disparity would be explained later during the briefing.

NERSA faced several challenges in the electricity sector, including security of electricity supply, noncompliance issues, particularly with municipal distributors, maintenance backlogs, failure to meet reporting requirements, and the implementation of the inclining block tariffs (IBTs).

Challenges in the piped-gas industry included the regulation of certain piped-gas activities that were not specifically catered for in the legislation, the monitoring and enforcement of Sasol's compliance with the regulatory agreement, the approval of maximum prices, in the absence of a clear market value for gas, and the private sector investment and markets for gas.

In regard to petroleum pipelines, challenges included the security of the supply of petroleum to inland areas, funding challenges of the State Owned Entity, Transnet, tariff setting, and promoting access by Historically Disadvantaged South African wholesalers to petroleum storage facilities.

She noted that in future, NERSA wanted to monitor and enforce compliance by all licencees. The licencees were at different stages, so NERSA worked with everyone. NERSA planned to introduce more independent power producers (IPPs), promote renewable energies and utilise the Renewable Energy Feed-In Tariffs (REFIT). NERSA would monitor the implementation of the second Multi-Year Price Determination (MYPD2) by Eskom and revise the rules if necessary. NERSA was going to start preparing for MYPD3. It would continue to give certainty and predictability around electricity prices. It also planned to streamline the regulatory processes in the areas of licensing, tariff reviews, and appraisals, and rationalise the tariff structures, while taking into account regional pricing and geographical differentiation.

In regard to piped-gas, NERSA planned to educate customers in order to assist in the enforcement of Market Value Pricing, to implement a compliance framework for license conditions, to conduct a study on the integrity of the gas pipeline network, and to benchmark licence conditions. Together with the Department of Energy (DOE), NERSA had identified gaps in the Gas Act and planned to address them with amendments. It would also continue to monitor compliance with licensing issues.    

The future plans for petroleum pipelines included monitoring the escalations in costs, as well as the delays in construction to new infrastructure, monitoring and managing, as far as possible, a tariff spike through tariff structures, monitoring the behaviour of licensees in the petroleum pipeline industry as necessary, facilitating market entry by historically disadvantaged players, and monitoring compliance to licence conditions.

Transnet Multi-Products Pipeline (MPP)
Dr Rod Crompton, Regulator: Petroleum Pipelines, NERSA, continued the briefing with an update on Transnet's new multi-products pipeline project (NMPP). The project would consist of two “terminals” with a pipeline to carry multiple products. The new pipeline would run between Durban and Gauteng in a more direct route than was used at present. There would also be three additional short lines, and all four lines would be operational within the year. The license for the project was granted in 2007, on the conditions that it would be ready in four years.

He noted that the construction was at 58% of completion. The pipelines were 98% complete, while the stations were 82% complete. The initial cost was projected at R11 billion, though that number had now increased to R22 billion.

Possible risks on the project were divided into three categories: costal end, line fill, and security of inland supply.
The costal end risks included construction delays in coastal terminal and feeder lines from oil companies. The solution could be found through “tight lining,” which meant injecting the material straight into the main line. The second risk involved the line fill. NERSA estimated the costs for the three branch lines and trunk lines at R1.1 billion. Sasol had paid, but the question of who ultimately carried the bill was not yet resolved. The worst case scenario was that the NMPP would be finished, but with no line fill.

With regard to security of inland supply, there was a gap between the projected demand and the available supply. The period of highest risk would be from June to December, after which the pipeline would be in partial operation. The strategy was to use both the old and new pipelines in parallel, in conjunction with road and rail transport.

There were also data challenges with regard to the estimates of how much fuel transportation via road and rail would be needed for the inland markets. NERSA estimated that the road and rail traffic would have to increase from 47 road tankers daily to 117 daily, to meet the demand.

There had also been increases in the tariffs, and there would be more increases to pay for capital investments that had been made.

Renewable Energy Feed In Tariffs (REFIT)
Mr Tembani Bukula, Regulator: Electricity, NERSA, continued the briefing with a presentation on renewable energy feed-in tariffs (REFIT) review.

He noted that in 2003, a White Paper on Renewable Energy had been published, setting a target for 10 000 gigawatt hours (GWh) of renewable energy by 2013. NERSA looked at different methods of funding and different technologies that could be used. It hoped to use the knowledge gained, in conjunction with the guidelines on Renewable Energy Feed-in Tariffs (REFIT).  NERSA had later introduced new generation regulations, which centred on the REFIT and IPP programmes for conventional power, on NERSA's development of selection criteria and standardisation of the PPA, and on Eskom's purchase according to the selection criteria.

In 2010, R12.3 billion was set aside to ensure that 1 025 MW, over the three-year period, was catered for. The preliminary results appeared to show positive results.

Mr Bukula noted that the National Energy Regulator Act noted that NERSA was the custodian and enforcer of the National Electricity Regulatory Framework, and it would provide for licenses and connected matters. The Electricity Regulation Act listed many of the functions of NERSA, including the mandate of NERSA to issue rules designed to implement national government's electricity policy framework, to regulate prices and tariffs, and to make guidelines, rules, and codes of conduct, after consultation with interested parties, and make license conditions relating to the setting of prices.

In 2009, when NERSA set out the REFIT guidelines, these were based on levelised costs of electricity (LCOE), which were required to stimulate investment. There needed to be a long-term plan in order to have capacity. The technologies selected were wind, landfill gas, small scale hydro, biogas, biomass, and solar. There would be annual reviews for five years, and reviews every three years thereafter, to determine the tariffs applicable to new projects. This differed from other countries, such as Germany, Spain and Denmark, who used a reduction rate, reducing the tariffs each year until they would not apply to the products. However, NERSA recognised that South African conditions were different, and had decided not to use predetermined figures, but rather to have annual reviews. It settled on a 17% return on reasonable and attractive projects that fitted the guidelines.

NERSA then looked at selection criteria, giving preference was given to technologies and plants that would contribute to economic development, were in compliance with legislation in respect to the advancement of historically disadvantaged individuals (HDIs), and demonstrated the ability to raise finance. In addition, small distributed generators were preferred over centralised generation, whilst other preferences were accorded to those with shortest commissioning times, projects that promoted network integration and stabilisation, while minimising transmission losses, and those receiving enviromental approvals.

The implementation stage began after finishing the consultation paper, which was in line with the decision made by the energy regulator. NERSA’s tariffs would be based on the figures available, and they would be applicable in the next phase.

There were some outstanding matters that still needed attention. Firstly, the Minister still needed to make the determinations in accordance with section 34(1) of the Act, which related to a decision on the generation capacity for security of supply, the types of energy sources, the manner of purchase and selling the electricity produced, tendering procedures, and how to provide for private sector participation. NERSA would need to concur, and this was set for finalisation on 30 June 2011. After that, the request for the proposal (RFP) would be issued, and this would state the tendering process.

Ms Khuzwayo thanked the Committee for the opportunity to present the information, and noted that electricity regulation had matured. A balance was required when there were three dissimilar  industries needing to be regulated.

Renewable Energy Programme: Department of Energy briefing
Mr Ompi Aphane, Deputy Director-General, Department of Energy, gave a briefing on the status of the Renewable Energy Programme (REP) . It had several objectives, including job creation, localisation of technologies, skills development, energy security, and mitigation of adverse climate change by effective energy use. It was hoped that the renewable investments would generate an additional 17.8 GW of energy for South Africa. The DOE had identified wind and solar as the primary drivers of the renewable energy (RE) market, with the remaining projects comprised of biomass, hydro, landfill gas, and biogas.

Mr Aphane noted that several issues were involved. Firstly, the feed-in tariffs were relatively expensive compared to wholesale tariffs because of subsidy requirements. The Department of Energy (the Department or DOE) wanted to avoid mistakes made in Spain and India, and had designed the funding so that it would derive from tariffs, and bid prices would not be the only determinant as to which developers were preferred. Approximately R12 billion was available for allocation. Industry leaders had raised some concerns. They wanted to keep the tariffs at the 2009 level, with no price competition, and some investors had threatened to pull out their investment if South Africa moved away from predetermined tariffs. The government needed to intervene in relation to NERSA's discussion paper on REFIT. That paper raised the possibility of reducing levels by up to 40%, and the financial models indicated returns above that, which were viable.

The threat of a legal challenge was also raised, and the Department was seeking a legal opinion on the matter. In designing the RE programme, the Department had taken its objectives into consideration, as well as the need for a sustainable programme extending beyond the 1025 MW in the first phase. Procurement legislation was also a key consideration, in addition to the impact that the programme would have on the national revenue fund. The Department had settled on a two-stage procurement evaluation process that would address the major risks experienced in India and Spain. This process would ensure that the qualifying criteria were met, based on economic development requirements and evaluation of the price of the bid. Multiple phases of bidding were necessary in order to accommodate the lessons from the previous phase. The procurement process was set to be launched in June 2011. There had been adequate mitigation of risks.

Discussion
Mr Moloto said he understood what was said about predetermined prices and the procurement legislation, but wanted some further clarification on the two-stage approach.

Mr Moloto also asked for more information about license acquisition from NERSA.

Mr Moloto asked if there was adequate information provided by the municipalities, in order to set appropriate tariffs.

Mr Buluka responded that there were 184 municipalities, each with different structures. Most municipalities received guidance on their duties and responsibilities as an electricity distributor. NERSA's guidelines worked well with Eskom and most of the municipalities, particularly with the inclining block tariffs (IBTs). However, this was not a one-size-fits-all approach. There were certain difficulties around enforcement. Fines did not seem to be the right tool for seeking compliance.

Mr Greyling said the process was frustrating. He had been involved in the REFIT process, but noted that no projects had actually received funding since the programme began in 2009. He now perceived that the DOE was moving away from REFIT. He urged that renewable energy must be set up and running to strengthen energy security in South Africa, and he was tired of observing excuses, stalling tactics, and changing rules. While he understood that the DOE was concerned to try to avoid mistakes that hampered Spain's programme, the market in South Africa was different. Spain had offered high prices for renewable energy projects, and had run out of money. South Africa had looked at costs and developed a rate of return. Those rules had been set, but now they were being changed again. He also noted that while the DOE stated that NERSA could not set predetermined tariffs, the real issue was that there needed to be an assurance that there would be a competitive bidding process.

Mr Morgan further wondered why legal problems with REFIT were not fixed earlier. There now seemed to be even more uncertainty. No projects were awarded funding, and then the DOE proposed changes, and he was fearful that this would kill the market before it even started.

Mr J Selau (ANC) asked who determined the 2009 tariff levels.

Mr Buluka briefly discussed a legal opinion that was given regarding the bidding process and tariff-setting, saying that this had suggested that REFIT had not complied with competitive bidding requirements, nor with the preferential procurement policy. NERSA did not have the power to predetermine tariff levels.

Mr Aphane added that the DOE would make the legal opinion about REFIT available to Members. He noted that the DOE wanted to follow a path of “least regret”. It wanted to avoid risks of legal challenge. The two-stage approach was a tried and tested approach in South Africa. The DOE wanted RE in the system and wanted to get the market going. Some people believed that REFIT was better, but others disagreed.

With REFIT, there were certain problems, and the DOE could not rush into it. For example, the predetermined tariff structure was one problem, but the DOE wanted to move forward with something that did not carry the same legal risks

Mr Ross wanted to know if money was being set aside for multi-year project development. He also wanted to know how NERSA and the DOE could enforce compliance and monitor licensees of municipalities.

Mr Buluka said that NERSA monitored the programme. In April 2011, there should have been R7.1 billion set aside for renewables.

Mr Selau wanted to know if there were plans to address electricity theft.

Mr Selau noted that the issues surrounding historically disadvantaged South Africans were serious. He wanted to ensure that these people were given advantages in the RE programme.

Mr Selau expressed concerns about an energy shortage in 2011 and the expected tariff increases over the next six years.

Adv H Schmidt (DA), a member of the Portfolio Committee on Mineral Resources, wanted to know how open would be the bidding process for the RE Programme.

Adv Schmidt wanted to know how REFIT would operate in the future.

Adv Schmidt recognised the need for renewable energy, but believed that wind and solar power did not make economic sense. Moreover, the perception of changed rules would cause concern for potential investors.

Mr Crompton addressed concerns about tariffs and the new pipeline project. He said the current situation was akin to purchasing a new car, after driving an old car for so long it was hard to remember paying for it. New developments were expensive, and someone had to pay. The instruction from Parliament was that NERSA needed to give a reasonable return to the investor, and that the users should pay for it. The price tag seemed to be a big jump, but in context, it was not in fact out of line.

The Chairperson thanked the delegations. He stressed that South Africa must harness all available energy in future.

The meeting was adjourned.

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