Free Basic Electricity / Alternative Energy: oversight; Electrical Power Interruptions: solutions and strategies


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

The Committee performed oversight on the government policy and programme for Free Basic Electricity (FBE) and Free Basic Alternative Energy (FBAE). It requested briefings from stakeholders on the background to and mechanism of these programmes, their funding, implementation challenges and interventions, their current status and the sufficiency of 50kWh per month. Submissions were heard from the Department of Energy, the National Energy Regulator of South Africa, Eskom, the Financial and Fiscal Commission and the South African Local Government Association on Free Basic Electricity and Free Basic Alternative Energy. Members asked many questions which included how the FBAE subsidy worked; why electricity was cut by municipalities when other services were unpaid. The purpose of the FBE programme was questioned in the light of these cuts. Members asked what was FFC’s position on cross subsidization within the electricity pricing structure and if the FFC had done a study on the sufficiency of 50kWh per month. Also discussed were the Inclining Block Tariff and the progress made in the government’s target of achieving 92% electrification of all formal households by 2014.

The afternoon session looked at electrical power interruptions and solutions and strategies to manage supply
. National Treasury noted an increased need for electrical infrastructure. The contribution from national funding was increasing in proportion to the revenue generated at municipal level. Maintenance of the system was a problem, with maintenance often only happening on an emergency basis which was more costly. Local authorities needed to improve their budgeting. More realistic appraisals of costs and revenue was needed. The Treasury was concerned about giving access to the electricity grid for all citizens, maintaining that access and subsidising the poor. There was some dispute over the accuracy of figures supplied.

Members questioned the identification of the indigent. They asked how the spending of the conditional grants and equitable share formula was monitored. Under-pricing was a concern as it impacted on the capacity to maintain and upgrade systems. It was pointed out that electricity was not historically cheap for all users, but certain bulk users had benefited. Members questioned the price structures and the role of the National Energy Regulator of South Africa. Members suggested that the Department of Human Settlements should also be involved with electricity planning. Members were concerned that broader issues kept arising which limited the discussion on specific issues.

The Department of Energy briefed Members on its electricity supply interruption mitigation strategy. It had calculated that the peak shortfall between supply and demand would occur during 2012. There was still a dependence on coal-fired power stations. Aspects of the mitigation strategy included renewable energy sources and the construction of open cycle gas turbines to supplement the grid at peak consumption times. Other industries could also contribute power by utilising surplus steam to generate electricity.

Eskom acknowledged that the energy supply situation was tight. They had to maintain a balance between supplying electricity and carrying out maintenance. There was some co-operation with independent power producers to supplement Eskom's generating capacity. There had been a reduction in demand and the prognosis had improved. The target was to reduce consumption by 10%. It was important to understand the consumption patterns during the day, which depended on the weather. Good progress was being made with the new build programme while Eskom was also making a major investment into its transmission network.

Parliament was in the process of assessing its carbon footprint and devising a greening strategy. Members asked how industries could even out the demand by adjusting their hours of operation, and what benefit could be had from daylight saving time. The campaign to replace incandescent light bulbs was continuing. Eskom was communicating with the public in several ways.

Meeting report

Introduction by Chairperson
The Chairperson commented that the overall objective was to ensure accessible and affordable energy and electricity to all South Africans. Linked to this objective, government had introduced the policy of Free Basic Electricity (FBE) and Free Basic Alternative Energy (FBAE). Parliament had to oversee the effectiveness of these government policies. Other parliamentary committees invited were Human Settlements; Women, Children and People with Disabilities; Select Committees on Education & Recreation and Social Services.

Department of Energy (DoE) briefing
Mr Thabang Audat, DoE Chief Director: Electricity, spoke on the background to the Free Basic Electricity (FBE), mandates, funding, implementation challenges and possible interventions and current status. In 2000, the government announced a statement of intent on the provision of FBE and the implementation of the programme started in 2003. The FBE was intended to provide basic energy to poor households to alleviate poverty and minimize the health impact arising from the use of certain fuels. The DoE had made provision for both grid and non-grid electricity. Considering that FBE sounded unfair to un-electrified households and the lack of infrastructure for the provision of FBE necessitated FBAE guidelines for subsidizing alternative energy carriers. However, the provision of FBAE was more expensive than the FBE because most of the alternative energies were unregulated. The DoE introduced other programmes to complement the FBE to address the affordability issue around electricity. The major programme which complemented the FBE was the Inclining Block Tariff (IBT) which had the objective of protecting the lowest volume consumers. Eskom and local municipalities were the major partners with the DoE for subsidized electrification.

On mandates for provinces and municipalities on the provision of electricity, Mr Audat referred to Sections 104(4) and 139(1) of the Constitution. On the mandate of municipalities in respect of the FBE, the presenter referred to Section 156(1) of the Constitution.

FBE/FBAE policy
The current policy of the DoE on FBE allowed for the provision of free 50kWh of grid electricity per month to all households with concomitant blocked or stepped tariffs for electricity consumption beyond 50kWh. There had been suggestions that the 50kWh of electricity was small and needed to be increased. However, an increase in this amount had both advantages and disadvantages. The DoE had been giving subsidies to alternative energy sources. Examples of these FBAE given to indigent households included paraffin, candles, firewood, coal, low smoke fuel and biogas.

Implementation challenges
The DoE identified these as:
▪ Implementation of FBE/FBAE programme was at the level of municipalities and Eskom and not DoE.
▪ Municipalities were in the practice of disconnecting electricity from households that failed to pay for other services. This meant households lost their FBE monthly entitlement when their electricity supply was disconnected. FBE did not accumulate and could not be claimed retrospectively.
▪ Limited funding as FBE accrued to a Poorest-of-the-Poor (POP) programme on a monthly basis subject to funding availability from a municipality.
▪ Inconsistency in policy application amongst municipalities and Eskom.
▪ Lack of indigent policies and registration and inadequacy of a central database to monitor management of indigents.
▪ Poor communication amongst stakeholders: CoGTA, DoE, SALGA, ESKOM and municipalities.
▪ FBE was structured on the prepaid metering system which is more expensive than the normal meter system. After the free 50kWh, the indigent would pay a relatively higher amount for electricity.
▪ Lack of reporting, monitoring and evaluation.

On the funding allocation, an apportionment had been made of the FBE and FBAE in line with the policies in force. The cost of providing FBE/FBAE was included in the Mid Term Expenditure Framework budget of CoGTA and it resulted in a generation challenge in municipal revenue.

On comparison between what was expected to be consumed under FBE and what was actually being consumed, actual consumption was less than what was expected.

As at 2011 the data results for FBE were informed by both the 2001 census data and data collected from municipalities. As per 2001 census, the total number was 5,532,782 of households and the total percentage was 69% of indigent households getting FBE. From 1996 to 2010, there was significant progress in access to electricity nationwide. This meant the National Integrated Electricity Programme was working well.

In conclusion, DoE estimated that the national implementation of FBE/FBAE was about 70% to all the qualifying indigents. DoE was committed to reviewing the policy to incorporate new developments and improve monitoring mechanisms to ensure accuracy in figures and supplies. DoE encouraged municipalities to use their policies to identify the recipients of the FBE. Poverty alleviation was an important challenge for the country and the links between poverty and energy were clear. As such the policy on FBE was an important key to uplifting the poor.

Ms G Borman (ANC; PC on Human Settlements) asked how the FBAE and the subsidy worked in financial terms. How can the system rectify the concern that the FBE was aligned to prepaid meters which were relatively more expensive to the very indigents offered free basic electricity?

Mr Thabang replied the prepaid meter pricing structure had some aspects which were relatively lower than the other meters. The pricing structure needed to be looked at from a general point of view.

Ms Borman asked for clarity why electricity was cut by municipalities when other services were not paid for. It did not make sense and challenged the purpose of the FBE programme.

Mr Thabang replied that municipalities were in a better position to reply to this question about the disconnection of electricity to enforce payment for other services. This was not part of DoE policy.

Mr J Smalle (DA) asked how often was research done to get information and how was municipal monitoring on the provision of electricity done to ensure accurate data. Was the funding allocation from CoGTA to municipalities R200 million or R300 million? Did municipalities have the discretion to change the FBE amount from 50kWh to a greater or smaller amount?

Mr Thabang replied that DoE was in the process of working with research institutions to upgrade the quality of the data used for the programme. There were limits to the amount of free basic electricity which a municipality could grant to indigent households.

Ms H Makhuba (IFP; PC on Women, Children and People with Disabilities) asked if there were any plans or time frames to ensure consistency and uniformity of the policy in all municipalities.

Mr D Ross (DA) noted that the overall objective was to provide affordable electricity not only to the poor but to all South Africans. Who was in charge of monitoring FBE and what implementation strategies had actually been put in place?  What had been done about the funding and revenue collection model for municipalities and proper co-ordination?

Mr Faber (DA; Select Committees on Education, Recreation and Social Services) asked what Eskom was doing about the outstanding bills at municipalities and did these outstanding bills affect the supply of electricity to communities.

Mr J Selau (ANC) noted that there were two types of electricity cuts. One was where the municipality owed Eskom and Eskom had to take measures against the municipality. However, the electricity cut in question was one where an individual owed the municipality rates and taxes and the municipality therefore cut the electricity for that particular household.

Mr Selau said that the entire DoE presentation was a problem statement as it exposed numerous challenges. He proposed that the questions should be answered after all the presentations were made as many of the questions would probably be answered by the other presentations.

Mr Thabang replied that policies were formulated by DoE and during the actual implementation of the policies, challenges were picked up and what DoE did was firstly to amend the policy. This meant that it was good to know what the challenges were so to identify the appropriate solutions. The objective of the presentation was therefore to outline the challenges identified during the implementation of the FBE/FBAE.

Mr E Lucas (IFP) said that a major problem was the monitoring and evaluation of electricity supply implementation strategies at all levels.

National Energy Regulator of South Africa (NERSA) briefing
Mr Mbulelo Ncetezo, NERSA Executive Manager: Electricity Regulation, presented, skipping over the background to FBE as this had been explained by DoE.

FBE Mechanism
The Free Basic Electricity mechanism was a tool used by NERSA to calculate the FBE charge out rate applicable to Eskom. The FBE charge out rate was determined by considering factors such as the number of customers supplied by Eskom (as indicated by the municipality), the number of months to supply FBE, the amount of FBE units per month per household, Eskom’s costs for supplying FBE, and Eskom’s approved first block IBT rate for that particular financial year. The rate charge was said to be a tariff at which Eskom charged the municipalities for supplying FBE on their behalf. These rate charges were determined and approved by NERSA on an annual basis.

On FBE implementation, 243 municipalities contracted to provide FBE and 1,308,357 customers had been approved by municipalities for FBE. The presenter said that Eskom was in the best position to confirm these figures.

FBE Implementation challenges
A major implementation challenge was the FBE implementation approach. FBE policy required municipalities to provide FBE to indigent households only. However, some municipalities applied a basket approach thereby providing FBE to all households. This resulted in revenue shortfalls causing the municipality to try to rectify the shortfall by having tariffs higher than the municipal tariff guideline.

Multiple dwellings per meter stand was another challenge to FBE implementation. The supply of electricity to multiple households led to some of the households not benefiting from FBE because these free units were supplied per meter stand and not per household or family.

The data which informed the budgeting were 2001 statistics thereby causing municipalities to supply to a limited number of the households eligible for FBE.

ESKOM briefing
Ms Tsholofelo Molefe, Division Executive: Customer Services, said the 2003 policy on the Electricity Basic Services Support Tariff (EBSST) prescribed an allocation of 50kWh per month to all low income households funded through the local government equitable share. The obligation to identify low income households to receive FBE remained with the municipality even in places where Eskom was the direct supplier of electricity. The FBE was funded through an “unconditional grant” given to municipalities to assist them in providing basic electricity to low income households. No funding was directly provided to Eskom from national government but Eskom claimed the funding for FBE from municipalities in terms of a funding agreement between Eskom and each municipality. Eskom supplied electricity to 245 municipalities and it had signed FBE agreements with 243 of them. The remaining two municipalities said that they did not have any indigents. Eskom had about 1,15 million customers approved to receive FBE.

Challenges in implementing the programme
Five challenges were identified by Eskom and they included:
▪ The national average of customers collecting FBE tokens was 76% and in some provinces collection rates were as low as 58% due to collection sites not being easily accessible to customers in remote and rural areas.
▪  There needed to be improved regular interaction between Eskom and regional energy forums and municipalities with FBE consistently on the agenda.
Coordination and information sharing between Eskom and municipalities was a major challenge.
▪ There were inconsistencies in the identification of low income households as indigent by municipalities.
▪ There were challenges to FBE reaching farm workers as the farmer generally held the contract of supply. This was critical and needed to be addressed.

Eskom envisaged some solutions to the challenges faced which included:
▪ The exploring of mobile sites in remote and rural areas to improve the collection rate;
▪ Ensure the equitable share was a conditional grant so that it was used for this specific purpose;
▪ Eskom to provide municipalities with the FBE status reports and municipalities to discuss results at all levels;
▪ Municipalities to update their indigent registers annually and confirm correctness;
▪ Regular workshops to be arranged including representatives from Eskom, municipalities and government where ideas could be shared and to strengthen relationships;
▪ Quarterly meetings to be held with representatives from Eskom, CoGTA, NERSA, SALGA, DoE and all other energy stakeholders to share challenges and solutions to problems faced;
▪ The formation of a joint task team to explore mechanisms to provide FBE to farm workers.

Sufficiency of the 50kWh FBE per month
In 2010, Eskom gave inputs to the Inter Ministerial Committee on Energy Work Group: Protection of the Poor and Free Basic Electricity. The aim was to develop a report that addressed, amongst others, the evaluation of the FBE policy and identification of other possible options. It was recommended that the 50kWh was sufficient.

To date, there had been no change to the policy. Eskom’s recommendations to the IMC was that having considered what usage level certain appliances use, the average monthly consumption of an average indigent household was between 50 and 100kWh. With 2 million Eskom customers consuming up to 50kWh per month, it was concluded that 50kWh per month was sufficient.

Inclining Block Tariff (IBT)
This was a mechanism where tariffs rise in stepped increases according to the amount of electricity used. This benefited poor consumers who used less electricity and thus paid the lowest rates, while customers who used more electricity paid incrementally higher tariffs as their electricity consumption increased. This structure was commonly used to charge for water usage. The tariff was divided into four consumption blocks and each subsequent block had a higher price per kWh of electricity. The amount payable was the sum of consumption per block multiplied by the energy rate/price per unit associated with each block. The selection of the blocks, the limits and the prices per unit had been set by NERSA and were required to be implemented by Eskom and municipalities. The tariff was for both prepayment and conventionally metered customers. In addition to the low price of electricity in the first two blocks, the poor also received 50kWh of free basic electricity from the government.
The IBT was successful in providing subsidized electricity for low income households with low consumption but had a number of unintended consequences:
1  The IBT structure was difficult to understand and complex to administer resulting in many customer queries. The prepayment vending system which preceded IBT was not designed to deal with these complexities.
2  The tariff resulted in cross-subsidies with large customers subsiding residential customers. Also, not all municipalities had enough of a large customer base to provide the cross-subsidies through electricity tariffs.
3  Large low income households or single stand households with multiple dwellings did not necessarily benefit as their consumption was high.
4  Affluent households could afford energy efficient technologies benefiting further from low consumption.
5  Not all municipalities implemented IBT due to their own challenges.
In conclusion, Eskom recognized the challenges and was committed to supporting government initiatives and policies to protect low income households against increasing prices of electricity.

Financial and Fiscal Commission (FFC) briefing
Mr Bongani Khumalo, FFC CEO and Acting Chairperson, noted that FFC’s role was not focused on policy issues, yet the presentations and discussions which had taken place were directly focused on high-level policy issues. However, the FFC had to ensure that municipalities had sufficient resources to carry out the responsibilities assigned to them in accordance with national policy.

Mr Khumalo said the FFC presentation was based on figures and information obtained from the key role players and stakeholders in the FBE/FBAE programmes. On the funding arrangement and the equitable share versus the conditional grant, the FFC held that the equitable share was given to municipalities to assist them carry out their constitutionally assigned mandates. Although FBE was the mandate of municipalities, many other issues had to be considered such as the allocation of resources amongst the three spheres of government, the allocation across the municipalities, and the allocation for FBE in the budget of the municipality.

Dr Mkhululi Ncube, FFC Head of Local Government Budgets, focused on access to FBE and FBAE, financing and implementing FBE/FBAE, electricity cross subsidies, whether 50kWh was sufficient and the FFC views on block tariffs. On access, Mr Ncube stated that South Africa had pro-poor electricity policies and strategies such as electrifying low income areas and rural regions and universal electrification as a national goal. FBE improved livelihoods of the poor and energy access was critical for accessing basic necessities of life. With FBE, expenditure on energy was reduced, thereby increasing income for other basic human necessities. FBE/FBAE also enhanced the abandoning of environmentally unfriendly fuel alternatives for cleaner electricity.

In metros and secondary cities, all municipalities were implementing FBE. The problem was in rural municipalities where out of 70 municipalities, only 56 were implementing FBE. This problem was also noted with access to energy where only 65% of rural municipalities had access to electricity.

On the funding allocation for FBE/FBAE, the total electricity allocation was R8 482 996 488. Of this, R6 562 683 058 was allocated for FBE and R1, 920,313,430 was allocated for FBAE.

Four methods had been used for the implementation of FBE:
1  Targeted approach which involved the use of indigent registers.
2  The broad approach which used stepped/block tariffs.
3  The technical approach which involved the use of prepaid metering.
4  The geographic approached which targeted poor areas and regions.
FFC research suggested that the method used impacted on municipal expenditure and revenue efficiencies. The targeted approach was a good reflection of targeted individuals or households. The prepaid metering was the most efficient as it ensured efficient expenditure of resources; better debt recovery and revenue raising efficiencies and it addressed social implications because self-elimination was possible.

On 50kWh sufficiency, a report by Earthlife Johannesburg stated that four 60W light bulbs used for four hours a day for a month would consume 20kWh. Based on its research, the FFC was of the opinion that 50kWh was insufficient. It noted some municipalities provided more than 50kWh / month.

In conclusion, Mr Ncube noted that FBE was critical for people’s livelihoods and therefore required proper targeting. Electricity had to be provided efficiently, electricity leakages had to be minimized, illegal connections had to be eliminated, energy savings by households and industry plus adequate repair and maintenance had to be enhanced. 

South African Local Government Association (SALGA) briefing
Mr Sandile Maphumulo, Head of Electricity: EThekwini Municipality and SALGA’s expert on energy and electricity, remarked that the meeting came at a time when DoE had just held an Electrification Indaba in Durban focusing on progress made on government’s target of achieving 92% electrification of all formal households by 2014. Difficulties encountered in electrification had caused this target to be moved from universal access by 2012 to the qualified one of 92% by 2014.

In 2000, government announced its intention to provide free basic services to indigent households. In 2003, FBE was launched by DoE with the aim of supporting indigent households in meeting their basic energy needs. DoE also found the need to support indigent households that resided in un-electrified areas with FBAE. Since it was the local sphere of government that was tasked with discharging the electrification services, there was a need to strike a balance between a number of factors including but not limited to availability of energy sources and allocated funding.

Mr Maphumulo said that the implementation of FBE was not without challenges. There were challenges both for municipal distributors, who were the service authorities mandated to provide this service (funded from the equitable share), and for Eskom who were the implementing agents on behalf of the municipalities. In terms of the grid connection, the challenge in getting municipal information was that there was no formal repository of information about the number of customers receiving FBE within a municipality.

Relating to implementation of FBE by Eskom, it was noted that local government remained responsible for the provision of basic services in its area of jurisdiction. Eskom was providing a service on behalf of municipalities. Even in these cases, municipalities were still responsible for funding the provision of the free basic service. In situations where government grants were paid to municipalities, these were to be paid to Eskom to cover the cost of providing free basic electricity to the targeted households. Information from Eskom performance indicated that of the 283 municipalities in the country, 243 had signed formal FBE provision contracts with Eskom. As at 31 January 2012, the total number of customers configured was 1 125 022 and the total number of consumption customers was 810 949. As at 22 March 2012, the aspiration was to have coverage of 100% but the actual coverage was 72%, giving a variance of 28%. For non-grid connections, DoE contracted a number of service providers deploying solar home systems within concession areas.

Mr Maphumulo stated some points for consideration:
▪ Without access to energy, poor households were unable to access basic necessities such as cooking, heating, studying, lighting and communication.
▪ Government had acknowledged the relationship between having energy and alleviating poverty which led to the development of the FBE policy. The data obtained was analyzed and used to illustrate that 50kWh per month was insufficient. 

Looking at the effectiveness of the national indigent policy, there was the need to focus on the approaches of broad based targeting and self-targeting. Section 74(2)(b) of the Municipal Systems Act was quoted to point out that a tariff policy must reflect that poor households have access to at least basic services through tariffs that cover only operating and maintenance costs; special tariffs or life line tariffs for low levels of use or for basic levels of service; or any other direct or indirect method of subsidization of tariffs for poor households. On this basis, municipalities and Eskom within their tariff structure had tariffs which catered for the poor. This structure was said to be working well.  NERSA had introduced IBT as the tariff aimed to protect the poor. While some municipalities and Eskom had implemented the tariff under duress from NERSA, most of the municipalities had not done so with the excuse of sustainability challenges and that IBT would not protect the poor.

On the sufficiency of 50kWh of electricity per month, Mr Maphumulo said it was difficult to ascertain what the appropriate level of allocation of FBE was. To answer this question, it was necessary to consider what the poor household could afford.

Mr Maphumulo outlined the following implementation challenges associated with FBE:
▪ Inconsistency of application amongst municipalities and Eskom.
▪ The lack of local government capacity remained a big obstacle.
▪ Within municipalities, confusion seemed to exist as to whose responsibility it was to administer FBE.
▪ In some municipalities, there were no structures to roll out FBE.
▪ Communities were often unaware of the availability of FBE. This was because local authorities and  Eskom do not provide sufficient information about the technologies. As such, there was inadequate communication and education on the technology and service options available for communities.

Mr Maphumulo said it was better to listen first to all the presentations and discussions on the FBE/FBAE before any solid recommendations could be made. 

Mr D Ross (DA) asked what was FFC’s position on cross subsidization within the electricity pricing structure.

Mr Khumalo replied that cross subsidization was an objective issue which was informed by the balancing of social imperatives. It was not supposed to make only economic sense. The issue was about the cost for higher income earners and business. It was more an issue of balancing and the FFC could not clearly say if it was a good or bad thing.

Ms G Borman (ANC) asked if the FFC had done any in-depth study on 50kWh per month which would indicate its sufficiency.

Mr Khumalo replied that the FFC had not done so. What the FFC had done was to base its advice on what had been done by the institutions in charge.

Ms N Mathibela (ANC) asked whether the encouragement of paraffin would not lead to more accidents and increased threats to the environment.

Mr Selau asked how the FFC related FBE to electricity leakages having to be minimized, illegal connections eliminated, households and industry energy savings plus adequate maintenance.

Mr Ngcube replied that there were a lot of inefficiencies in the system and the rectification of these inefficiencies would result in a lot of electricity being freed for FBE.

Mr Smalle asked what the role of the FFC was in ensuring efficiency in the implementation of FBE. What was the role of the FFC with regards to debt recovery in the various institutions? What was the position of the FFC on the Block Tariff system as presented by Eskom?

Mr Ngcube said that the aspect on efficiency in implementation was not within the competency of the FFC. On Block Tariffs, there may be some advantages but there was the fact that it could hurt families which were big and required more electricity as they would be pushed into higher blocks and pay more.

Afternoon session

National Treasury briefing
Ms Marissa Moore, Chief Director: Public Finance, National Treasury (NT), said that the fiscal framework consisted of transfers and grants on the one hand and municipal revenue on the other. These sources contributed to the municipal operating budget. There had been historical under-funding for electricity. The equitable share had grown substantially since 2007. There had been increased growth in conditional grants. The combined amount was R70 billion. NT was working steadfastly on the consolidation of municipal budgeting to a common format. Where there were transfers from national coffers, support was given for financial management.

Ms Moore said that there was a continuing demand for infrastructure expansion. In rural municipalities there was still a large backlog component. Capital funding in 2010/11 was 51% national funding. Municipalities were finding it increasingly harder to fulfil their obligations. There was increased private funding.

Ms Moore said that generally municipalities underestimated costs and overestimated revenue. This had to be addressed. The second problem lay with asset management. There was a lack of skills which impacted on maintenance. Spending was on emergency maintenance, which was a higher cost than a preventative maintenance programme. There was an increasing reliance on national transfers. Municipal tariffs were not covering capital expansion programmes. Banks were reluctant to finance projects as a result. The taxpayer was paying more than the user.

Ms Moore said that municipalities were owed R62 billion by the end of 2010 and the trend was increasing. Less money was available for maintenance. Some municipalities were seeing excessive distribution losses, over 10% in some places. This was well above international norms.

Ms Moore listed some of the spending priorities over the Medium Term Expenditure Framework (MTEF). There was a lot of support for capital investment, ranging from new power stations to the solar water heating project. She estimated that R20 billion was collected in excess of the costs of generating power. It would be futile to raise tariffs beyond the means of the poor. When Eskom's tariffs had been increased some R6.7 billion had been added to the equitable share allocation to assist municipalities in making electricity available to the poor.

Ms Moore said key aspects were providing access to electricity, which was more expensive in the rural areas, maintaining access and subsidising consumption. She was concerned that NT had different numbers on consumer units to those put forward by the Department of Energy (DoE). According to NT, some 35% of households were receiving free basic electricity. There was still a decline in capital expenditure. This could not be the case with the old infrastructure that needed upgrading. Municipalities were seeing different thresholds for poverty alleviation. These estimates ranged from R900 to R1 800 per month.

Ms Moore said that block tariffs were not correct according to NT. The more a consumer used electricity the less the infrastructure costs. In poor areas there were not enough high-usage consumers to subsidise low-usage consumers. The current situation was not cost-reflective, but this went against the policy. Some concerns had been raised over surcharges. There was legislation to allow for surcharges and to guide municipalities in their implementation. She hoped that regulations would be complete within the following one or two years. A surcharge should be placed on the cost of a service once it had been installed and maintained.

Mr J Selau (ANC) still had unanswered questions from the morning meeting. He asked what the differences were between budgeting at national and local government level. Money should then be spent according to the request. The same did not seem to apply to local government. The municipality would decide how the equitable share budget was spent. He asked the National Energy Regulator of South Africa (NERSA) about block tariffs. The NERSA study had been widely challenged. There were three areas pertaining to Eskom. These were the rural infrastructure, benefits for the indigent and infrastructure for farm workers. He asked what progress was being made in these areas.

Ms Moore said municipalities did not have many options if their figures did not work out as planned. There should be better budgeting for maintenance. Budgets started off being unrealistic. Local councils were responsible for authorising spending shifts. There were clear frameworks for the conditional grants. Unspent funds went back to the National Revenue Fund (NRF). The more allocated by NT the less was gathered by the municipalities themselves. NT did not monitor performance on the equitable share transfers. This was a local responsibility.

Ms N Mathibela (ANC) said that government had established ward committees. It was up to these structures to identify those poor enough to qualify for subsidised electricity. This did not seem to be happening. The committees should collect the data.

Mr E Lucas (IFP) was concerned over the issue of underpricing. A disaster was looming if municipalities continued to make a loss on electricity sales through incorrect pricing. Maintenance was not being done.

Ms Moore said that underpricing had led to a situation where the country had been taken unawares by the costs of capital expenditure. There was a need for ring-fenced funding.

Mr D Ross (DA) asked what role NERSA was playing in the setting of prices. It was unfortunate that the Department of Co-operative Government and Traditional Affairs (COGTA) was not present. The R62 billion debt was staggering. This could fund the whole capital expansion policy. Funds were being mismanaged. Corruption levels were reflected in the NT report. He asked what NERSA was doing to ensure that funds were set aside for maintenance. He was relieved to hear that NT was preparing guidelines and looked forward to their implementation. He was not sure if electricity was always so cheap for all users. Cheap prices had been made to major users such as Billiton.

Mr J Smalle (DA) was concerned at the backlog in maintenance and the reduced capital expenditure. At present R550 million had not been paid over by municipalities. Eskom would not be able to fund their projects if these payments were not forthcoming. He asked if there were checks and balances on the equitable share formula. He asked if targeted funding was actually reaching those who needed to share the benefits. The discrepancy in the figures needed to be explained. Regarding block tariffs, he asked how much was being lost by selling in the incorrect block. He asked if NERSA was happy with the price structure requested by Eskom.

Ms G Borman (ANC) did not understand the list given of free basic electricity allocations in the different provinces. She was also worried about the indigent registers. Without a correct database the issue could not be addressed. The South African Local Government Association (SALGA) needed to take more responsibility for what was happening at local level. She wondered if the Department of Human Settlements (DHS) should also attend the quarterly meetings held by Eskom with the different role players.

Ms Moore said that the imposition of surcharges was a constitutional right. NERSA had put out guidelines on spending. Accountability was needed at local level. At present 45 municipalities were not adding across the line of the table presented. This was probably due to poor reporting.

The Chairperson said there was not enough time to answer all the questions. Written answers would be requested.

Ms Tsholofelo Molefe, Division Executive: Customer Services, Eskom, said that COGTA had facilitated a workshop in 2009 regarding the upcoming challenges. Not much had resulted from that workshop. Regional energy forums would have monitored the situation at a lower level. This had not happened. Eskom recognised this as a key area. The focus would have been to identify how many qualified before identifying free basic electricity (FBE). Many farm workers had been left out. Farm workers had to benefit. A number of options had been raised and a business plan had been drawn up. She agreed that DHS should be part of the quarterly meeting.

Mr Kannan Lakmeeharan, Division Executive: Office of the Chief Executive, Eskom, said that Eskom was negotiating the special prices with bulk users. More revenue was generated through these arrangements to cross-subsidise other users until about 2008.

Mr Sandile Maphumulo, Head: Electricity eThekwini Municipality and SALGA representative, had noted the questions and would respond in writing.

Mr Mbulelo Nceteko, Executive Manager Electricity Regulation, NERSA, said that NERSA was aware of the challenges and had re-opened the debate. He agreed with the reporting mandates as discussed by NT. NERSA did undertake compliance monitoring, but was limited to imposing financial penalties. This would not help where the defaulting party did not have money to pay such penalties.

The Chairperson noted that any discussion on alternative energy supplies had been avoided. Too often broader issues had intruded on the discussion of more specific issues. The Committee would work with all the agencies that had attended the meeting. Parliament also had a role in assisting organisations, not just oversight.

Department of Energy briefing
Mr Thabang Audat, Chief Director: Electricity, DoE, said some 182 municipalities were licensed to distribute electricity together with Eskom. A transmission planning proposal had been submitted by Eskom. His main concerns at present were distribution and generation. There was an Integrated Resource Plan covering a twenty year period. A shortfall had been identified in the medium term. Some key assumptions had been made. The first, that demand would grow at a percentage linked to economic growth, had not materialised. In the medium term there was a focus on projects which would generate power between 2010 and 2016. The analysis indicated that the peak of the gap between supply and demand would be in 2012, at 1 000 MW.

Mr Audat gave an outline of the planned building projects. There was a 97% dependence on coal-fired stations. Eskom had identified some major projects such as Medupi. Medium term projects had not been included in the presentation. From approval of a project, it could take up to ten years before the project went into production.

Mr Audat said that there were two phases of the mitigation plan defined in 2010. The first phase was assessment and planning, and the second implementation. The Department was now in the implementation phase. Some programmes that had been introduced were the Renewable Energy Programme. Construction was expected to begin during June 2012, and the project would supply 1 400 MW. The teams were busy assessing bids from the market. Interest was gaining momentum. Delivery of power should commence in mid-2013. The market had the technology available but did not how to best utilise them.

Mr Audat said the second programme was the open-cycle gas turbine (OCGT) project. These devices only operated during peak demand hours. Construction was expected to start in June 2012 and should last just more than a year. They had looked at co-generation options. A factory could use steam for their own processes, but could use surplus steam to generate electricity. The paper and sugar industries were particularly suited to such an arrangement. There had been a slow uptake on the solar water heating programme. Service providers would install the geysers and be paid back by the municipalities. There were certain rules regarding energy conservation schemes. Industries must not be forced to reduce production as jobs could be lost. The right incentives were needed. A tax incentive was one of the options.

Mr Audat said that on the grid side of matters, it was a discussion on the transmission network.

The Chairperson said that members wanted to focus on the interruptions to supply

Eskom briefing
Mr Lakmeeharan apologised for the absence of Chief Executive Mr Brian Dames, who had been called to a meeting with Minister Gigaba. Eskom had worked closely with the DoE. The situation would be tight for the following two years. One of the ways Eskom had maintained the balance was by shifting non-critical maintenance programmes. It was no longer sustainable to delay these operations. During summer the system had been run at a high risk level. Demand was lower, but the peaks were higher due to affluence such as the increasing number of air conditioners. Due to a lack of maintenance some of the stations were less reliable. The same applied to the power supplies from the Cahora Bassa Dam. The OCGT plants in the Cape were being run to balance supply but these were not a cheap option.

Mr Lakmeeharan said that there were concerns at three stations where sustainable solutions were needed. While generation performance had to be increased this had been difficult. Targets had been exceeded in the medium term power production programme (MTPPP). Many independent power suppliers (IPPs) had bought into the programme. More maintenance had been done than in recent history. A significant amount of work had been done.

Mr Lakmeeharan said that on the demand side there had been a substantial reduction in demand. A power buy-back programme had been initiated. Some 827 MW had been obtained. Eskom had consulted with many stakeholders.

Mr Lakmeeharan said that the actual status had been worse than expected recently. More maintenance had been pushed through, but the OCGTs also had to be used. There had been problems with the quality of coal being supplied and other factors such as inefficient cooling in hot weather had led to partial losses of generating capability.

Mr Lakmeeharan said that better communication with customers was now happening. The coal stockpiles had been replenished. There was better visibility with government. Response time had improved. Since 2008, some 2 537MW of new capacity had been added. IPPs had supplied 1 025 MW. Better storage facilities had been obtained for diesel. On the demand side there had been 1 634 MW of verified savings. There had been 177 projects to upgrade electrical equipment at various industries and mines. An awareness programme was being aired on all television channels, including DSTV.

Mr Lakmeeharan described how capacity had to be kept on line during the day. Demand was higher during the day due to air conditioning units. In the winter there were morning and evening peaks. Demand increased by 600 to 700 MW for each degree the temperature dropped.

Mr Lakmeeharan said that Eskom wanted to maintain their system. A proper maintenance plan was needed. At mid life periods for the stations major maintenance was needed, such as replacement of steam pipes. This could take up to three months. More risk was being taken to keep the maintenance programme running. There was a backlog of 36 units waiting for appropriate maintenance, which had been reduced to 25. The choices were to do the maintenance, or to shift to quieter periods. There had to be some risk assessment.

Mr Lakmeeharan said that demand had been below expectations, but the summer peaks had been higher. The gas turbines had been used more.

Mr Lakmeeharan said that in the short term another 1 000 MW was needed and another 2 000 MW in reserves. A task team had been set up to investigate the options.

Mr Lakmeeharan said that power purchase agreements had been signed with municipalities of Johannesburg and Tshwane. Some customers had volunteered to reduce consumption during peak periods. Cross-border generation options had been identified. Some levers had been secured in the previous two months. Voluntary conservation measures had been agreed to by 133 customers, including 95 of the largest consumers. Some of these were saving up to 6%. There was an opportunity to save without losing production.

Mr Lakmeeharan said the prognosis had improved since December 2011. More still had to be done to make the situation safe.

Mr Lakmeeharan said that Eskom was looking at partnerships, one of them being the 49M campaign which looked to persuade all South Africans to save energy. The situation for the next two years would still be tight. Eskom wanted IPPs to come on line and would give its support. The high level target was to save 10% of consumption.

Mr Lakmeeharan said that the capacity expansion programme's target was to add 17 090 MW of capacity. Of this, 5 381 MW capacity had already been commissioned. Of a target of 4 700 km, 3 531 km of transmission network had been built already. By the end of 2012/13 all the mothballed stations would have been returned to service. After that Medupi would be the priority. The wind farm was in progress and funding had been obtained for a solar energy plant. The cost for the Medupi project was within international norms. R10 billion would be spent per year on upgrading the transmission network. Investment would continue to be significant.

The Chairperson sensed there was still a fragmented approach to energy efficiency. Parliament would soon be launching a greening campaign. Members would be shocked to hear what Parliament's carbon footprint was. A start had been made, inspired by COP17.

Mr Smalle said that some generating plants were not cost effective. He asked if any such plants would be closed. He realised that Eskom was trying to improve its maintenance schedule, and some power had been bought from other sources at exorbitant costs. There needed to be a restructuring of the private sector to distribute their hours of operation. This would lessen the load during peak hours. There had been such incentives in the past but they had been discontinued.

Mr Ross asked about the completion dates of Medupi and Kusile. He asked if the former would be completed during 2014 or if there would be further delays. This was critical to bridging the gap between supply and demand. He said that Eskom had a 12% reserve margin. This was below the international standard. He asked if there was a way to give the public a concrete understanding of the figure of 1 000 MW. He asked what the nature of the voluntary agreements with the major customers was.

Mr Lucas asked about power purchase agreements (PPAs). He asked if these had been concluded. He asked if the plans were environmentally friendly. He asked about the efficiency. Everybody should be aware of efficient use of power. He asked if daylight saving had been considered. He asked if technology would not change during a twenty year planning cycle.

Ms Mathibela said that the saving campaign had started in 2006 with energy saving light bulbs. These were hard to find in the shops and were expensive, especially in the smaller towns.

Ms Borman had seen the presentation at another Committee. Eskom had been warning the country for some time. A question had been put the Cabinet, of whom only four of 34 had responded to date. It was important for Members to promote the savings campaign as they moved around in public.

The Chairperson asked about the stakeholder plan. He asked if there was any role for national and provincial legislatures. Public representatives could make an impact both at a public level and by the examples they set in their private lives. He questioned the continued availability of the old incandescent light bulbs. Information was not always forthcoming from the media so it was good to get the correct information from Eskom.

Mr Lakmeeharan said that Eskom had pages on Facebook and Twitter. There was also a regular progress report published on the Eskom website. This could be displayed by province. There had been visits to each province, but perhaps not enough time had been spent at Parliament. Eskom had been responsible for the biggest CFL roll-out in the world. Some 47 million bulbs had been supplied. There was no legislation against incandescent bulbs. Eskom was trying to engage with retailers to stop them from stocking incandescent bulbs, but this was difficult. Various other initiatives, such as geyser switches, were also been offered to the public at no charge.

Mr Lakmeeharan said that there had been studies on daylight saving. Previous studies had not shown any great benefit, but this could be re-investigated.

Mr Lakmeeharan said that the PPAs and IPPs mentioned in the presentation were only those where contracts had already been signed. Some power buy-backs did reduce carbon emissions. The goal of Eskom and the country as a whole was to reduce relative and absolute emissions. There were many trade-offs. The lead-times in the industry were long, and technology might improve in the interim. Eskom was shifting to a more distribution-oriented industry. Demand market participation was a trend that had started overseas. Customers could provide cheaper non-generation. Eskom had been taking this approach with larger customers since 2003.

Mr Lakmeeharan said that the completion date for Medupi was expected to be late 2013. There were concerns over the delivery of the boilers. The request for proposals (RFP) called for first commissioning in April 2013. The target date was still late 2013. Kusile was due to come on line in December 2014 and this was still the plan.

Mr Lakmeeharan said that there were incentives to shift production times. Some of the 4.3 million customers had made arrangements in this way. There was an option for municipalities but this made billing intricate. The majority of major consumers fell under municipal distribution networks. Gas turbines were quick to build but expensive to run. They should only be run for an hour a day as peak time top-up. They wanted to move to gas as this would be more economical than diesel. There was no plan to change the life-cycles of any existing plants.

Mr Audal said that DoE was working on a gas strategy. The plan was to replace diesel fuel with gas. There was no co-ordinated strategy on using gas as a fuel to produce energy.

Mr Selau noted that Members were approaching alternative forms of energy from a different angle. While national government wanted to see lower usage and renewable energy, municipalities were concerned about loss of revenue.

Mr Lucas asked if all mothballed stations would be returned to service.

Mr Lakmeeharan mentioned the three stations that had been mothballed. Others had been decommissioned and sold as scrap. Camden was already back in commission. The other two should be back by the end of the 2012/13 financial year (FY). The estimated life span was 23 years.

Mr Robert Maswanganji, Executive Director, City of Tshwane, said that there was a PPA in place between the city and Eskom. He did not have a figure at hand. The city was rolling out solar water geysers and the retrofitting of street and traffic lights to decrease consumption.

The Chairperson said it was a pity that Johannesburg was not represented. The municipalities would be invited to the four day sessions that lay ahead. Some caution was needed on the plans. It seemed that Eskom was on top of things. He was reassured that updates would be more frequent. The issue of PPAs would be addressed in more detail at a later meeting.

The meeting was adjourned.

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