Department of Energy: Response to State of Nation Address & Budget speech

Energy

01 March 2012
Chairperson: Mr S Njikelana (ANC)
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Meeting Summary

The Department of Energy (DOE) briefed the Committee on its responses to the 2012 State of the Nation Address (SONA) and the Budget Speech, highlighting those areas that had a direct correlation to the work of the DOE. He noted that the DOE had revised its strategic plans to align them to the new Government Outcomes-based approach. One of the priorities raised in the SONA was the need to grow the economy, and this implied security of energy for infrastructure development, localisation of production and encouragement to local and international investment in the energy industry. DOE was a catalyst of job creation through procurement programmes, whilst the upgrade of refineries would create 1 000 jobs.  It was making attempts to improve the energy servicing of rural areas. The Department described the increased electricity capacity that the Energy Infrastructure Plan would achieve, set out the plans for construction of Independent Power Producer plants, and noted that although electricity shortfalls were predicted, the demand side would be eased by the introduction of solar water heaters (SWHs), and gas for cooking and heating. Refineries would be audited in 2012 but nuclear procurement plans were still being finalised. The progress on the integrated electrification programme and multi-purpose pipeline was described. New fuel specifications and standards were still being finalised and would come into effect in 2017. A new crude oil refinery was being developed in Coega, but the Project Mafutha of Sasol had been slowed down, pending further clarity on a number of issues. Independent Power Producers bids and requests for proposals had been done, but some signed commitments were still awaited. The DOE was working also on biomass and biogas, which presented potential in the rural areas. The SWH Programme had been allocated R1 million, but the initial proposals had been changed, and commercial and concessionary debt, repayable through a number of methods, would be sought to extend the initial proposals. A rebate scheme and standard offer would run concurrently for a period, and the standard offer would be administered by DOE. The Department also briefly outlined its Youth Strategy and Gander policies, noted the appointment of a new President to PetroSA, the governance structure of the National Energy Regulator and a review of the structure of the Central Energy Fund. On the international front, DOE’s policies were in line with country objectives, and it gave support to regional electricity interconnectivity.   

Members enquired as to the spread of the rural development programmes, and suggested that perhaps the SWH rollout should be prioritised in the small and less wealthy municipalities, rather than metros. Members asked about the relative costs of importing liquid fuels and building plants, asked about the review periods and subject of the review for the Integrated Resource Plan, and sought more details on the financing of the SWHs, suggested that the project should be prioritised and speeded up, and asked who the project was intended to benefit, who was responsible for maintenance. Members also asked why the costs of the multi-product pipeline were escalating and sought clarity on the point that it would transport diesel only, as they had been given another indication on visiting the site. Members also were interested in the demographics of the interns, asked where they would be employed, asked what opportunities existed for women in the industry, and what their current representation was, and questioned what industries were most likely to contribute to job creation. Questions were also asked as to the relevance still of the electricity affordability graph and noted that emphasis was placed on locally-produced products. Further questions were raised on the cost of delays at the Medupi plant, the allocations to the nuclear programme, plans for crude oil, contracts with neighbouring countries, the reasons for the lack of success in landfill gas and small hydro projects, and the need to adopt a model for energy efficiency. The Chairperson noted that further information was needed, later in the year, on international matters, the funding model for SWH, the
women and youth empowerment strategies, and the Cleaner Fuels and automobiles strategy.

Meeting report

Department of Energy responses to energy issues raised in 2012 State of Nation Address (SONA) and Budget Speech
Mr Ompi Aphane, Deputy Director General, Department of Energy, noted that one of the priorities identified in the 2012 State of the Nation Address (SONA) was the need to grow the economy. This included matters falling under the mandate of the Department of Energy (DOE or the Department), such as provision of energy security for infrastructural development, localisation of production, encouragement of local and international investment in the industry, increasing modern technology and skills.

The DOE was a catalyst of job creation through procurement programmes. Efforts were being made to improve the servicing of outlying areas with energy. The upgrade of refineries was expected to create 1 000 jobs.

The implementation of the Energy Infrastructure Plan would result in electricity capacity being increased to 51,422 MW by 2015/16. There were plans to construct Independent Power Producer (IPP) plants. The Medium Term Risk Mitigation Plan (MTRMP) had recorded an electricity supply shortfall, but the demand side management option included use of solar water heaters (SWHs). The Integrated Energy Plan served to guide infrastructure and policy development. It was noted that South Africa was not yet where it should be in terms of collecting data so this issue was being addressed. There were various scenarios set out to increase the use of Liquid Petroleum Gas (LPG) for cooking and heating.

The audit of South African refineries was prioritised for 2012. There were still certain issues that needed to be dealt with, in regard to the nuclear procurement plans. The Integrated National Electrification Programme (INEP) would continue as part of the total electrification programme. The Transnet Pipeline construction was under way, and this was projected for completion by December 2013. It would transport diesel only, while other products would be transported via other routes.

Mr Aphane noted that the total infrastructure development drive was to focus on electricity generation capacity, the electricity distribution infrastructure, investments and the nuclear build programme.

The refinery infrastructure upgrade was being done to meet new fuel specifications and standards. These standards were still being finalised and were due to come into effect in 2017. A new crude oil refinery (Project Mthombo Refinery) was being developed by PetroSA in the Coega Industrial Development Zone, Eastern Cape. Current studies were being done into revising the capacity of the proposed refinery, to be in line with the liquid fuels supply / demand balance of South Africa, and it was expected that the study would be completed by mid-2012.

Sasol had decided to slow down on its Project Mafutha, because it became apparent that it would not be able to progress into the feasibility phase within the originally envisaged timeline. Further clarity was needed on the large-scale coal gasification tests, and the provision of a commercially viable carbon capture and storage solution. Sasol had also indicated that the progress of the project was dependent on the alignment of  fiscal policies of South Africa, climate commitments, and imposition of tax on carbon emissions currently being investigated by the National Treasury.

The request for proposals under the IPP Bid Programme had been made. The DOE was still awaiting bidders’ commitment in writing to a 20-year programme. So far, 28 bidders had responded. There was an implementation agreement in place, in order to carry out the programme successfully. There was a shortfall on biomass and biogas, and this presented the DOE with some useful solutions for penetration into rural areas.

The SWH programme had been allocated R1 million for rollout of the water heaters, and this was to be regarded as a social programme. A Standard Offer Concept would be introduced to ensure the success of the programme. However, an amount of R40 billion was needed in order that this concept come to fruition. This money would be sought through commercial and concessionary debt. The Standard Offer Concept was based on the energy savings to be derived from an initiative, irrespective of the technology that was applied to achieve such savings. This was therefore an outcomes-based intervention, and incentives would follow the intervention, subject to the electricity savings being verified. The SWHs would have a deemed savings value. It was expected that the debt would be covered by repayments from the fiscus, carbon credits, grants and the users/owners of the systems.

Mr Aphane then explained this in more detail. The fiscus had already provided funding into the programme. The Carbon credit income stream had been proven, and was already benefiting specific solar water heating programmes locally. There had been discussions on grant funding with specific donors. The user/owner system presupposed that the user would pay a nominal and affordable amount, and the money would be derived from a multi-year price determination (MYPD).

The intention was to use MYPD funding from the start of the programme. However, Eskom had committed the available MYPD2 funding. The Standard Offer would, therefore, run on a smaller scale until the new MYPD cycle started. The Eskom rebate currently comprised an up-front capital subsidy that was available for about 260 000 units.

Discussions with numerous players in the industry had highlighted the need for a transitional period between the approaches. The rebate scheme would run side-by-side with the Standard Offer for the remainder of MYPD2. The Standard Offer programme would be administered by the DOE, as a demand side initiative, similar to the IPP Bidding Programme.

Mr Aphane tabled graphs showing the budget allocation, affordability of electricity prices, and cost analysis of solar water heating (see attached presentation).

Mr Sandile Ntanzi, Chief Director: Office of the Director General, DOE, said the Department was currently developing a Youth Strategy and Gender Policy for the energy sector. The draft Youth Strategy was expected to be finalised by the end of March 2012. The Gender Policy would be completed by the end of April 2012. The Minister and the Deputy Minister of Energy were leading the Clean Energy Empowerment and Education Project. The Annual Learners Focus Week Programme was to be staged in Bloemfontein, and he noted that three learners from three different provinces would be selected. Learners from different provinces were always invited to learn about work opportunities in the energy sector.

Mr Ntanzi noted the appointment of a new female President, Ms Nosizwe Nako, as President of PetroSA, the national oil company. He noted that the governance and operational structures of National Energy Regulator South Africa (NERSA) were in place. The structures of the Central Energy Fund (CEF) Group of companies would be reviewed. The South African National Energy Development Institute (SANEDI) was now operational. This entity was assisting in energy efficiency championing, and carbon capture and storage.

The International Relations Strategy of the Department embraced the African continent and the Southern African Democratic Community (SADC) region, in line with the policy of the Department of International Relations and Cooperation (DIRCO). The September 2011 Declaration acknowledged the urgent need for secure, affordable and accessible energy for the continent. DOE also supported the promotion of regional electricity interconnectivity, and gave support to the Southern African Power Pool (SAPP) and related projects.

Finally, he noted that the DOE had revised its 2011/12 to 2015/16 Strategic Plan to align it with the new government Outcomes based approach. The Annual Performance Plans for 2012/13 had taken into account the SONA, government priorities, delivery agreements signed by the Minister (under Government Outcomes: 2, 4, 6, 7, 8 and 10), and the commitments under the Millennium Development Goals (MDGs).

Discussion
Mr J Smalle (DA) wanted to know how the R50 billion earmarked for rural development programmes would be spread across the country, and when these programmes would be started.

Mr Aphane explained that there was quite a wide geographical spread of these renewable energy projects across the country, and reached six provinces, with the exclusion of Mpumalanga, Gauteng and KwaZulu-Natal. The projects mainly relied on wind and photovoltaic (PV) power. The Eastern and Western Cape had plenty of wind. The Northern Cape had plenty of PV resources. The money for running these projects would be disbursed over the next six months.

Mr Smalle asked if it was cheaper to import liquid fuels, rather than to build plants.

Ms Tshilidzi Ramuedzisi, Chief Director: Energy Planning, DOE, stated that imports were superceding the refinery capacity. It was important to look at different options, to consider which would be the most beneficial, as well as to consider how the different methods could contribute to job creation.

Mr L Greyling (ID) enquired as to how regularly the Integrated Resource Plan (IRP) would be reviewed; he recalled that there was mention made that it would be reviewed periodically.

Mr Aphane responded that this IRP had been promulgated in March 2011 and it would be reviewed in 2012. The demand that was originally projected had not materialised, so the review would focus on the assumptions made, and would not necessarily address the entire IRP.

Mr Aphane commented generally on progress in energy matters and said that there were various governance structures that had been set up to shape the plans of the DOE. Some tools, for instance, had been designed specifically for the Integrated Energy Plan (IEP) and there would be a determination into what was available before undertaking new initiatives.

Mr D Ross (DA) commented on the Eskom methodology, suggesting that the addition of the SWHs was inflating the prices of building Medupi. He noted that the MYDP2 was coming to an end in the following year, so MYPD3 was the only option. However, Eskom had also made an application to NERSA for funding of MYPD3 and NERSA had turned it down.

Mr Aphane responded that the Department was not aware of the refusal by NERSA to fund MYPD3, just because MYPD2 is coming to an end. MYPD rules impacted on methodology. All aspects of the methodology were legislated so that NERSA could issue licences. The solar water heating project was included in MYPD precisely so that Eskom could supply solar water heating.

Mr E Lucas (IFP) commented that he thought the solar water heating project was to benefit those who could afford it, not those who could not afford it.

Mr Aphane said those who could not afford the SWHs out of their own pocket would get the units out of the R4,7 billion allocation. However, this did not address the electricity supply and demand of the country. The Department had not yet dealt with those that could afford to purchase the systems on their own.

Mr Lucas asked why the costs of building the multi-product pipeline were escalating.

Mr Aphane said that most of the escalation related to the prices of the equipment. This was not the kind of project that was implemented frequently.

Mr S Radebe (ANC) enquired about the demographics of those on the internship programmes, and asked if the internships would be undertaken within the DOE or in the state owned companies.

Mr George Mnguni, Deputy Director General: Corporate Services, DOE, explained that already the Department had some interns and it had exceeded the targets that it had set for skills development. The Department was working with Sector Education and Training Authorities (SETAs) within the energy sector.

Mr Radebe asked when the electricity affordability graph was compiled. He noted that by 2012, the economies of scale were different. He enquired as to which industries that would participate in job creation.

Mr Aphane explained that 2009 was the year set as the base for the price trajectory, and that each of the different technologies present in South Africa, which presented opportunities for the value chain, would partake in the job creation process. The greatest emphasis was being put on locally-produced products. Those companies who manufactured wind turbines would be protected. Project developers were being asked to make firm commitments on what they would be bringing to the country. The local content requirements were being raised, and the target was presently sitting at 60%.

Ms Tinto asked the Department to comment on the status of women in the energy sector.

Mr Mnguni said that he would forward a more detailed document to the Committee that indicated the opportunities available for women in the energy sector.

Ms B Tinto (ANC) commented she was happy with the R1 million allocation for SWHs, and asked if it was possible to fast-track the process.

Mr Aphane stated that the process would be speeded up over the next four years. R4,7 billion had been allocated for these projects, and the Department was hoping that municipalities would act swiftly and efficiently on the process. However, he cautioned that it would be important to strike a good balance and try to ensure that use was made of products made locally, and that jobs must be done by locals, rather than simply using imported material and having the work done by foreigners.

Mr Radebe asked who would be monitoring progress on this project, and who would be responsible for maintenance of the SWHs. He thought that the SWHs perhaps should not be installed in the metros, who had large budgets and allocations, but preference should rather be given to the poor municipalities.

Mr Aphane explained that maintenance was an operational charge imposed on the user. Provision was made in the tariff for the maintenance of infrastructure, and this would be recovered from the user over the life cycle of the asset. Unfortunately, municipalities did not always use the money as it was intended. Mr Aphane went on to state that so far, 22 000 SWHs had been installed, and he stressed that this should not be seen as “a game of numbers”. Under the original model, a rebate would be given, based upon guarantees related to the project. That had now been changed, and under the new rebate programme, Eskom would contract on a much larger scale and would award a contract over the life cycle.

He explained that the poor municipalities were covered under the R4,7 billion project, but there were certain conditions imposed relating to use of local skills and products. He further noted that Parliament approved the appropriation and it would be difficult to exclude some metros, unless there was an active attempt to call for a larger portion of the allocation to be given to the poor municipalities, and lesser allocations to the metros, although he pointed out that even the large metros also had problems. He said that the DOE was trying formulate and fund a strategy for municipalities to achieve the best possible results from them, taking into consideration skills transfer and job creation.

Mr Smalle asked if the delays in the Medupi plant were costing the government any money.

Mr Aphane said he was aware of the delays at Medupi, but did not have enough information on the financial implications that he could share with the Committee.

Mr Smalle enquired about progress on the R300 billion nuclear plan.

Mr Aphane responded that it was not correct that R300 billion was to be granted for a nuclear programme. That amount of money was needed to renew nuclear infrastructure. He added that the National Nuclear Executive Energy Coordinating Committee (NNEECC) was set up by Parliament in 2011. Decision-making and financial arrangements rested with this body.

Mr Smalle wanted more details on the country’s plans for crude oil.

Mr Mnguni replied that this matter fell under DIRCO, but information on it could be provided later to the Committee.

Mr Greyling commented that it would be good to achieve energy efficiency. In the 1990s there were several “stranded” assets, but currently the country was operating within energy constraints. He note that there were worldwide models around energy efficiencies, and he believed that South Africa needed to adopt such a model. He thought that it would be a major risk for the economy of the country to build nuclear stations.

Mr Aphane agreed with Mr Greyling’s comments and said that energy efficiency should be seen as “a way of life”, and that it could never really be quantified, nor could a country ever say that it had achieved goals in energy efficiency. Most of the energy efficiency initiatives could be deployed in a much shorter time than it would take to build a power station. This was a tactical matter. He added that appropriations were being distributed to municipalities, to improve energy efficiencies and performance, and build programmes were continuing. Other initiatives were introduced, some of them were in the process of getting public participation and comment. Conservation schemes were yet another instance. He noted that the energy efficiency approaches ranged across domestic, industrial and commercial sectors.

Mr Lucas enquired about the relationship that South Africa had with neighbouring countries and wondered if there were long-term contracts involved.

Mr Aphane explained that there were no long-term contracts and where contracts existed, they were limited to one to five year import contracts, other than Mozambique, with whom there was a longer term contract.

The Chairperson asked why the Transnet multi-products pipeline was transporting diesel only until the following year and asked for comment on that, saying that this was not the impression given to the Committee when it had visited the area.
Ms Ramuedzisi explained that the reason for transporting diesel only was that the terminals, until 2013, would be used for storing and channeling diesel. When that came to an end, the pipeline would then be used for transporting other fuels.

The Chairperson asked the Department to comment on the landfill gas and small hydro projects, as there was an indication that no progress had been made.

Mr Aphane confirmed that the Department had not been successful in the proposed projects for landfill gas and hydro. This was mostly because the DOE found it difficult to develop resources that were still owned by the state. The main challenge was that the municipalities owned the landfill sites, and there was municipal legislation governing those sites. In relation to the hydro projects, it had been difficult for the DOE to secure water licences, but the DOE was engaging with the Department of Cooperative Governance and Traditional Affairs (COGTA) and National Treasury on these issues. He commented that the Cities of Durban and Cape Town had not managed to deal properly with the issues, because these were not purchase agreements, and there were specific guidelines set out in respect of management of municipal finances.

The Chairperson noted that the International Affairs Unit of the Department should update the Committee on its progress on international matters.

The Chairperson felt that the SWH project should be integrated with energy efficiency programmes, and he hoped that the DOE had worked on a convincing funding model. The Committee would like to spend a good amount of time on the issue.

The Chairperson asked that the Minister and Deputy Minister should brief the Committee further on the women and youth empowerment strategies.

The Chairperson asked the Department to prepare further documentation on the Cleaner Fuels 1 and 2, and also prepare a detailed update on automobiles. He would like these matters to be presented in the third quarter of the year.

The meeting was adjourned.

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