Minister and Department of Energy on its Annual Report 2010/11

NCOP Economic and Business Development

31 October 2011
Chairperson: Adams, Mr F (Western Cape, ANC)
Share this page:

Meeting Summary

The Annual Report 2010/2011 presentation by the Department of Energy to the Select Committee on Economic Development happened to coincide with a national increase in the price of liquid fuels and at a time when the country was experiencing a shortage in Liquefied Petroleum Gas (LPG). The LPG market was failing the country and delivery of fuel had an impact on the economy of the country. DoE was ultimately responsible for security of supplies, together with the Department of Transport and DoE said it was resolving the crisis as quickly as possible by consulting with oil companies and supply managers on an ongoing-basis.

DoE was likely to make the largest contribution to the Millennium Development Goals through the eradication of energy poverty through the National Electrification Programme, energy diversification and affordability.

In terms of effective service delivery, DoE had improved turn-around time for petroleum licensing and had cleared backlogs. To ensure energy security, DoE had completed
the Integrated Resource Plan 2010-2030; started the process of developing the Integrated Energy Plan; and contributed R3 million toward the new multi-product pipeline from Durban to Johannesburg. In terms of universal access, DoE continued to implement the Integrated National Electrification Programme (INEP) and to relieve the cost of electricity for the poor through inclining block tariffs for domestic and residential customers. Jobs had been created through the INEP Programme. The Solar Water Heating Programme had been implemented and DoE had hosted a Solar Park International Investors Conference in Upington to assess the appetite for solar heating investment in South Africa by the international community.

Partial progress was achieved with the Renewable Energy Feed-in Tariff (REFIT) and fossil-fired power generation, as well as Energy Efficiency Demand Side Management (EEDSM). Since May 2009, 115 000 solar water heaters had been installed against a target of 200 000. However, the challenge being addressed was that the solar water heaters were being installed in areas where there was little energy saving potential. The Standard Offer incentive scheme was expected to accelerate uptake of solar water heaters.

The Compliance Audit on the Liquid Fuels Charter had been finalised and the 7th Integrated Energy Centre (IEC) in Qunu had been launched. Another important achievement was that SANEDI had been institutionalised and would play a critical role in energy efficiency going forward.

In an attempt to secure new supply relations, DoE had engaged with Venezuela, Egypt, Ghana, Algeria and Angola. It had also approved development of a Renewable Energy Strategy for SADC and finalised alignment of regulatory policies to ensure trade and investment in SADC.

Challenges faced by the DoE in its first year included lack of investments in the energy sector; urgent need for integrated plans to address security of energy supply; the need to respond to climate change and global warming; regulatory uncertainty and price volatility in the liquid fuels industry; capacity challenges - in manufacturing (refining) and distribution in the liquid fuels sector; and challenges in the electricity distribution industry.

Only 2 460 out of a target of 3 660 licence inspections had been conducted and a total of 360 out of 600 lodged petroleum licensing applications were processed. Although the entire R1.5 billion for the Multi-Products Pipeline was transferred to Transnet in terms of the Grant Funding Agreement, there had been delays in the installation of the pipeline due to inadequate funding.

Despite the challenges related to the establishment of the new department and Audit Committee and with limited resources, both the DoE and all its state owned entities obtained an unqualified audit opinion.

Members asked why the Strategic Plan had changed during the year; why quarterly reports were not submitted to National Treasury within 45 days; if the Annual Report was a true reflection of what happened on provincial level. Members also asked for a breakdown of the organogram; how many vacancies remained and when they would be filled; which positions women occupied and how many people with disabilities were employed; and how internal processes were monitored for competence.

Members further asked how DoE would overcome the challenge of a workable funding mechanism for completion of the Multi-products pipeline; how block tariffs were monitored to ensure that beneficiaries in fact qualified for them; how procurement procedures were monitored to prevent irregular expenditure; how the fuel shortage had been overlooked; how spending of municipal grants was monitored; and how DoE would address the INEF project funding issues.

Members were also interested in what the status quo was for investment in the Solar Park in Upington; what the alternatives were for irrigation farmers in the Northern Cape who were struggling to afford the unit price of electricity; and to what extent DoE could influence forging ahead of energy security.


Meeting report

Introductory Remarks
Ms Dipuo Peters, Minister: Department of Energy, said that her presence at the meeting was in support of her team which would present the Annual Report. The meeting happened to be on the eve of an increase in the price of liquid fuels and also at a time when the country was experiencing a shortage of Liquefied Petroleum Gas (LPG). This did not sit well with DoE in view of the fact that it had policy on LPG; the LPG market was failing the country; and delivery of fuel had an impact on the economy. While DoE did not wish to get involved with the contracts between
Airports Company South Africa (ACSA) and jet fuel suppliers, DoE was ultimately responsible for security of supplies, together with the Department of Transport. 

Other issues were that the Electricity Pricing Policy would be addressed in the near future, as requested by government; and there had been a delay in concluding the 20-year Liquid Fuels Infrastructure and the Integrated Energy Plans. On a lighter note, in March 2011, the
Integrated Resource Plan (IRP) 2010-2030 had been promulgated with a target of 42% renewable energy; 23% nuclear energy; and 6% hydro importation, with bias towards clean energy use and reduction in green house gas emissions. DoE had tabled before Cabinet the DoE proposal for the Nuclear Plan and the structures that would be required. DoE was fully in support of the initiative for carbon capture and storage and underground gasification to ensure continued use of coal as an energy source in an environmentally sustainable manner. DoE acknowledged Eskom and Sasol’s role in the initiative by the South African National Energy Development Institute (SANEDI) initiative for carbon capture and storage.

In conclusion, the Minister congratulated the DG and the newly-formed DoE team, which in its first year, received an unqualified report. The report included findings - controlled issues - which were being addressed. She thanked the Committee for their valuable input.

Ms Nelisiwe Magubane, Director-General: Department of Energy, opened by indicating that the serious jet fuel shortage at O.R. Tambo airport had been alleviated to the extent that five-day stock was expected by the end of the week. Currently, at least thirty service stations in the North West province were without diesel and Bloemfontein was fast following suit. DoE was trying to resolve the crisis as quickly as possible by consulting with oil companies and supply managers on an ongoing-basis.

Some of the challenges faced by the DoE in its first year included recovery from the 2008/9 economic meltdown; lack of investments in the energy sector; the urgent need for integrated plans to address security of energy supply; the need to respond to climate change and global warming; regulatory uncertainty and price volatility in the liquid fuels industry; capacity challenges in manufacturing (refining) and distribution in the liquid fuels sector; and challenges in the electricity distribution industry.

The newly formed DoE capacity grew from 41% in April 2010 to 52% by year end. The majority of funded posts was transfers from the Department of Minerals and Energy (DME) and did not address most of the critical post requirements. However, vacant positions were filled within four months and most senior positions in Support Services were filled by year end. Blacks represented 93% and women represented 54% of the total staff. A critical resignation during the year was that of the Acting CFO. It was important that funding was allocated for training and internships for the young staff.

Ms Magubane outlined the DoE contributions to the Millennium Development Goals (MDGs) and performance against predetermined objectives key focus areas (see slide 16 to 21). DoE was likely to make the largest contribution to the MDGs through the eradication of energy poverty through the National Electrification Programme, energy diversification and affordability.

To ensure energy security, DoE completed the IRP 2010-2030; started the process of developing the Integrated Energy Plan; and contributed R3 million toward the new multi-product pipeline from Durban to Johannesburg. In terms of universal access, DoE continued to implement the Integrated National Electrification Programme (INEP) and to relieve the cost of electricity for the poor through inclining block tariffs for domestic and residential customers. The Solar Water Heating Programme had been implemented; the Compliance Audit on the Liquid Fuels Charter finalised and the 7th Integrated Energy Center (IEC) in Qunu had been launched.

DoE had also regulated the LPG supply to residential customers; published the road-map for clean fuels; tabled the Independent System and Market Operator (ISMO) Bill to Parliament; and finalised the new generation
and Independent Power Producer (IPP) Capacity Regulations. In terms of effective service delivery, DoE had improved turn-around time for petroleum licensing and had cleared backlogs. It had also improved turn-around time for filling of vacancies; and embarked on intensive national and international stakeholder engagements.

To ensure sustainable development, DoE had launched a Solar Park International Investors Conference in Upington to assess the appetite for investment in South Africa by the international community.

Other achievements were that SANEDI, which would play a critical role in energy efficiency going forward, was institutionalised and jobs had been created through the INEP programme.

Twenty-six employees were awarded bursaries and a total of 55 graduates had participated in the DoE internship programme.

Ninety-seven percent of the 2010 budget had been utilised and the Internal Audit Function Committee, Audit Committee, Strategy and Risk Committee,
Bid Adjudication Committee and HR Committee had been established.

Mr George Mnguni, Deputy Director-General: Chief Operations Officer; Corporate Services; Department of Energy presented the performance of the Strategy and Risk Management branch, which had started up with less than 10% capacity. However, the governance structures were established and the DoE 2011/12 MTEF five year plan was tabled in February 2011. The first DoE strategic planning session was held in November 2010, where the new outcome-based planning approach was introduced and implemented. The branch had the responsibility of oversight on State Owned Entities (SOEs) reporting to the Minister; ensuring that SOE Boards were fully capacitated by appointing board members for Central Energy Fund (CEF), PetroSA and National Energy Regulator South Africa (NERSA); DoE strategy alignment; and monitoring of performance against approved plans. Following Cabinet’s decision to discontinue the Regional Electricity Distributor process, the branch was leading the process of winding up Electricity Distribution Industry Holdings
(EDIH) in collaboration with the appointed Administrator and EDIH Board.

DoE transferred grants to the EDIH, the
South African Nuclear Energy Corporation (NECSA) and the National Nuclear Regulator (NNR). NERSA was fully funded by levies from the regulated industries. The CEF Group of companies was mainly funded by income generated from operating activities.

In terms of international co-ordination, focus had been on capacity building for clean energy and climate change; building relationships with international financial institutions such as the World Bank; DoE’s role in the Southern African Developing Community (SADC) and the African continent; and participation in international bodies. A number of South African companies had signed international business agreements which included skills development, technology transfer and localisation imperatives.

In an attempt to secure new supply relations, DoE had engaged with Venezuela, Egypt, Ghana, Algeria and Angola. DoE had also approved development of a Renewable Energy Strategy for SADC, finalised alignment of regulatory policies to ensure trade and investment in SADC, conducted capacity building workshops on CDM and promoted regional electricity interconnectivity.

Mr Muzo Mkhize, Chief Directorate: Hydrocarbons; Department of Energy, provided an overview on the Hydrocarbons programme. He noted that the fuel supply shortage situation, which was currently being dealt with by DoE, would not be reflected in the presentation. There were three chief directorates within the Hydrocarbons and Energy Planning branch: Hydrocarbons - which developed policy and regulations to manage petroleum, coal and natural gas; the Petroleum Controller - a sub-programme of the branch responsible for administration of licence dispensation for the liquid fuels sector, including compliance monitoring and enforcement; and Energy Planning - which promoted the sustainable use of energy resources through Integrated Energy Planning (IEP).

Progress of the Hydrocarbons and Energy Planning branch included development of a draft LPG Strategy to encourage greater use of LPG in place of electricity; a Clean Fuels 2 discussion document had been published for comment in March 2011; SANEDI had been established; an infrastructure database report had been completed; a draft Strategic Stocks Policy had been developed and associated regulations had been drafted to enable use of public funds for the construction of storage tanks by government.

The Integrated Energy Planning Strategy documents for poverty stricken areas had been finalised but had not been yet been approved by Cabinet. While an IEC had been established in Qunu, the target of establishing a second centre in Mbizana had not been completed.

Only 2 460 out of a target of 3 660 licence inspections had been conducted and a total of 360 out of 600 lodged petroleum licensing applications were processed.

The Regulatory Accounting System for ring-fencing regulated versus unregulated pricing of fuel had been submitted internally but had not been implemented.

Although the entire R1.5 billion for the Multi-Products Pipeline was transferred to Transnet in terms of the Grant Funding Agreement, there had been delays in the installation of the pipeline due to inadequate funding. However, the construction had subsequently continued and commissioning of the 24-inch trunkline was expected in January 2012.

Mr Ompi Aphane, Acting Deputy Director-General: Electricity, Nuclear and Clean Energy, explained that the Electricity, Nuclear and Clean Energy programme provided the policy and regulatory framework for the Electricity Chief Directorate, Nuclear Chief Directorate and Clean Energy Chief Directorate. Objectives were to ensure well-managed, efficient and safe electricity, nuclear and clean energy industries and to promote the sustainable use of electricity to achieve a 100MW saving over the MTEF period.

Progress was achieved on the EDI Restructuring process across all provinces and also on finalisation of the IRP 2010-2030 which was the blue-print of power generation options for the country for the following 20 years. Partial progress was achieved with regard to the Renewable Energy Feed-in Tariff (REFIT) and fossil-fired power generation, as well as Energy Efficiency Demand Side Management (EEDSM). Since May 2009, 115 000 solar water heaters had been installed against a target of 200 000. The majority were funded through the tariff based rebate system. However, the challenge being addressed was that the solar water heaters were being installed in areas where there was little energy saving potential. Promulgation of the Standard Offer incentive scheme was expected to accelerate uptake of solar water heaters.

The infrastructure database report identified critical infrastructure maintenance and rehabilitation requirements on the distribution networks and further detailed municipal allocations towards maintenance, with the consequence that an implementation plan to manage electricity distribution asset management could be developed.

Ms Nonhlahla E Tshabalala, Director: Financial Planning & Management Accounting, said that despite the challenges related to the establishment of the new department and audit committee and with limited resources, both the DoE and all its state owned entities obtained an unqualified audit opinion.

DoE’s total spending for the year was R5.51 billion of the allocated R5.65 billion. Under-spending totaled R143.28 million (2.5%). National Treasury had approved R88.22 million as rollover funds. Unused funds were due to R49 million in transfer payments not being disbursed. The major reasons for under-spending were: delays in transfer payments for INEP non grid electrification projects – R114 million; transfers to REFSO – R
20 million; outstanding transfer payments to EDIH – R5 million; and delays in the procurement of capital assets and vacancies.

The reason for low purchase of assets (R3.32 million) was due the fact that DoE received assets with an estimated value of R17.41 million from DMR.

Emphasis of matters indicated by the Auditor-General were: unauthorised expenditure – R14.86 million; irregular expenditure – R110.99 million; and irregular expenditure – R1.37 million. The unauthorised expenditure of R14.86 million was due to the transfer payments paid to municipality using an incorrect vote. These funds were part of the 2009/10 vote. Due to the rejection of the transactions on the system, the payment was disbursed in the 2010/11 financial year. Irregular expenditure of R110.99 million was as a result of transfer payments to NECSA that was voted in the 2010/11 financial year. The transfers were approved by Parliament and National Treasury but the actual payment on the system was not approved by the delegated official. The irregular expenditure (R1.37 million) was as a result of non compliance with procurement process. DoE had addressed the Auditor-General’s findings.

Discussion
Mr A Nyambi (Mpumalanga, ANC) asked why, according to the Auditor-General’s finding, DoE had failed to submit its Annual Report within the required time.

Mr Nyambi asked for an explanation as to why the Strategic Plan was different to how it was described in the Annual Report.

Ms Magubane replied that the Strategic Plan was initially based on the assumption that structures would be fully funded. Targets had to be adjusted during the year and the changes should have been tabled to Parliament at the time.

Mr Nyambi asked why, according to the Auditor-General’s finding, the quarterly reports were not submitted to National Treasury within 45 days.

Mr Nyambi asked if the Annual Report was a true reflection of what happened at provincial level. For example, the report did not specify in which province the internships were awarded.

Ms M Dikgale (Limpopo, ANC) asked how many vacancies remained and when they would be filled.

Ms Dikgale commented that the report did not specify the percentage of staff who were not black, nor how many white women, which positions women occupied and how many people with disabilities were employed.

Ms Dikgale asked how DoE would overcome the challenge of a workable funding mechanism for completion of the Multi-products pipeline.

Mr B Mnguni (Free State, ANC) said that unfortunately the report had only been distributed to Members the previous day and he would have liked to have more time to read and analyse it. It appeared, according to the Auditor-General’s report, that DoE was still finding its feet. Objectives had been changed during the year and long term and priority issues were not clear.

Ms B Abrahams (Gauteng, DA) asked for a breakdown of the organogram. With a staff component of 54% female and 93% black, it appeared that there could be some discrimination.

Ms Abrahams said that some communities such as Kliptown had not yet been electrified. She asked when the Outcome 2 for healthy living would address all communities in the country.

Ms Abrahams asked how block tariffs were monitored to ensure that beneficiaries in fact qualified for them.

Ms Abrahams suggested that many people would want to install solar water heating if subsidies were introduced.

Ms Abrahams asked how procurement procedures were monitored to prevent irregular expenditure. She also asked how the fuel shortage had been overlooked.

Mr K Sinclair (Northern Cape, COPE) said that it appeared that the DoE had been snoozing while the world drive for more formalised alternate energy environments sped forward. Lesotho had taken the drive seriously and had engaged with the Chinese and already established a facility. He asked if the REFIT model would address speeding up establishment of an alternative energy environment in South Africa.

Mr Sinclair said that DoE should announce that Eskom had failed to address challenges due to Eskom being too closely aligned with government. He felt that if the role of IPPs did not increase, unfortunately the electricity dilemma would not be addressed.

Mr Sinclair asked what the status quo was of the Solar Park in Upington. It was evident that although there was interest in it, there were many reasons not to invest in it.

Mr Sinclair said that there were a number of municipalities which had not spent one cent of their grants (page 156 of the Annual Report) and others which had only spent 15% or 20%. He asked if this was the fault of implementing agencies and what DoE was planning to do about the situation.

Mr Sinclair commented that although he was enthused by the solar heating targets, his concern was how quality of installation and maintenance of the solar heaters from China and India would be monitored.

Mr Sinclair said that while Eskom’s capacity to generate electricity was not an issue, the ability of the grid to distribute the electricity was a concern. He was also concerned about irrigation farmers in the Northern Cape who were struggling to afford the unit price of electricity. He asked what the alternatives for these struggling farmers were. He encouraged DoE to engage with the smaller IPPs on energy alternatives. His concern was that the focus was on the bigger IPPs, yet there was a market between Eskom, the big IPPs and the smaller IPPs (farmers).

Ms E Van Lingen (Eastern Cape, DA) asked how DoE would address the INEF project funding issues.

Ms Van Lingen asked to what extent DoE could influence forging ahead of energy security. There were many issues such as shortages of jet fuel at OR Tambo, problems with Koeberg, delays in the Multi-purpose pipeline and critical infrastructure. The regulations and ISMO Bill were not in place, nor was the extent to which Eskom would be placed in relation to DoE.

Ms Van Lingen asked how internal processes were monitored. Only 60% of licensing inspections and processing had been conducted by HR; municipal grants had not been implemented at municipal level; there were no MOU agreements on nuclear contracts with international funding. She was also concerned about the target for the Upington Solar Station to be completed by 2012.

Ms Magubane answered questions before Members had to adjourn the meeting due to Mr Nyambi’s book launch. The remainder of questions would be answered at a meeting the following day.

Ms Magubane said that Lesotho was putting pressure on South Africa to purchase power from them but South Africa was not yet in a position to engage on the issue. Regarding nuclear contracts, any decision on nuclear energy required proper stakeholder engagement to gain the support of the public before procurement and contract processes proceeded.

With its current resources, DoE was not adequately addressing energy security. Through regulation and funding for full capacity, DoE would better fulfill its mandate and hold contracted suppliers accountable for the fuel shortages.

The status of Eskom was that it was a fully-fledged SOE and the state had oversight on it.

The Chairperson thanked the DoE for the presentations and apologised for having to terminate the meeting prematurely. He indicated to Members that the Director-General would not be present at the meeting the following day which would precede the DoE’s presentation on LPG.

The meeting was adjourned.




Share this page: