Solar Water Heater programme: update by Department of Energy, Eskom & Cennergi

Meeting report

Cennergi Clean-energy joint venture between Exxaro and Tata: briefing
Mr Thomas Garner, Chief Executive Officer, Cennergi, showed a two minute video clip to the members of the Committee to give an overall view on Cennergi. He explained that Cennergi was a company focused on cleaner energy in the Southern African region and that the company was concerned with action.

Cennergi was a joint venture between Exxaro, which was a South African based company, and Tata Power, which was an Indian based company. Exxaro was one of South Africa’s largest Black Economic Empowerment (BEE) diversified resource companies listed on the Johannesburg Stock Exchange, with a diverse and world-class commodity portfolio in coal, mineral sands and base metals, with exposure to iron ore through a 20% interest in Sishen Iron Ore Company. It was also the second largest South African coal producer, with capacity of 45 million tonnes per annum, and the third largest global producer of mineral sands.

Tata Power was part of the bigger Tata group, a US$100 billion entity in India. Tata Power was India’s largest integrated power utility, listed on the Mumbai Stock Exchange, bringing vast expertise and experience to the partnership. The company had diverse and world-class power generation, transmission and distribution businesses, with more than 5297MW of installed capacity in India, including coal, gas, hydro, solar and wind technologies, more than 3000km of transmission infrastructure, and more than 1.3 million customers in Delhi and Mumbai.

Mr Garner presented more facts on Exxaro. He stated that the market capitalisation in the hands of historically disadvantaged South Africans (HSDA) was quite large. In terms of the Minerals and Petroleum Resources Act, the target for 2014 was 26%, but it was in fact currently sitting at 55%. The market capitalisation of the company, as at June 2011, was R64 billion, and this had since increased substantially. The HDSA ownership of Exxaro stood at 55%, and the company was black controlled and managed. The dividends paid at the end of 2011 were R2.8 billion, which or R9210 per participant.

He outlined Exxaros’s human resource development, noting that an average of 430 engineering learners had received training each month, which made up 5.4% of all learnerships in the mining sector even though Exxaro employees only made up 2.5% of the industry. In 2011, 76% of learner intake was black (HDSA) and over the last five years Exxaro had qualified over 500 artisans and 108 engineers.

Exxaro spend around R223 million on community development from mid 2007 to September 2011, of which 17.59% had been spent on infrastructure, 8.99% on skills development, 1.80% on health and welfare, 11.18% on education, 21.48% on enterprise development, and 35.75% on sustainable development.

Mr Garner then presented more facts in respect of Tata Power, and refereed to the company as an integrated player with 51% of its operation in coal, 14% in gas, 7% in oil, 7% in gas production, 12% in hydro power, and 9% in wind. Tata Power’s international presence included a coal mine in Indonesia, technology investments in Australia, Hydro projects in Bhutan and Nepal and a logistics office in Singapore. Tata Power had various sustainability projects, including initiatives such as care for the environment which comprised programmes such as growth through renewables, clean / green energy; efficient technologies, investments in energy start-ups; emission, waste and carbon footprint reduction; green buildings; bio-Diversity conservation and resource conservation. The company initiative for Care for the Community comprised programmes such as principles of community engagement; programmes on livelihood, infrastructure and natural resources; helping communities become self-reliant and empowered; participatory development; and carbon neutral village clusters. Tata’s initiatives for Care for Customers comprised programmes such as energy clubs, customer care centres; demand side management, and energy audits, going beyond mere transactions. The company’s Care for People initiative included programmes such as safety and health; organisational transformation; employee learning & development; developing managers’ centric across domains/ functions; buildings and interiors  that were friendly, and helping to create the right culture.

Mr Garner stated that Exarro and Tata Power had decided on a joint venture because there was a massive challenge in South Africa, and Africa in general, in terms of energy, and because of the belief that the private sector could play a massive role in bringing infrastructure to the continent. He quoted a statement of Sipho Nkosi, the Chief Executive Officer of Exxaro, to the effect that “the partnership with Tata Power will add the skills and capabilities necessary to create a world class energy company in this region with enormous growth opportunities. Cennergi has been created by companies from developing nations to serve developing nations. We expect Cennergi to play a key role in the African electricity generation market”.  The Managing Director of Tata Power, Mr Anil Sardana, had said that “Tata Power is happy to explore new avenues in the international space by partnering with good local entities. The joint venture is consistent with our strategy of pursuing exploration opportunities for energy development in growing markets.We look forward to working together with Exxaro to jointly develop efficient, high-quality and sustainable projects that will bring significant benefits to the region as well as local communities”. Finally he quoted Ms Dipuo Peters, Minister of Energy, that “I strongly believe and am convinced that we want to change the picture of Africa from being the darkest continent at night with no access to energy. In the near future it should not be that we are still deliberating that only 42% of Africa’s population has access to modern energy, with the rate for sub-Saharan Africa as low as 31% - the lowest regional rate in the world  - which is unacceptably low”.

The vision of Cennergi was to be the leading cleaner energy independent power producer in Southern Africa, serving an expanding energy market and with an aspirational target of 16GW by 2025. Cennergi was all about power and progress and was born of the efforts of Exarro with Tata Power later coming to collaborate with the effort. The present projects in development were the 30MW Solar project in Lephalale, 11MW Solar project in Letsatsi, 40MW wind project in Tiqua, 139MW wind project in Amakhala, 95MW wind project in Tsitsikamma Community. The company’s social and economic development plans strove to create benefit for people, shareholders, the environment and the economy.

Discussion
Mr K Moloto (ANC) asked how the objectives of Cennergi, which was an energy company, fitted into the broad business strategy of Exxaro, which was a resource company. He stated that he understood Tata Power’s involvement with Cennergi, considering the fact that it was an integrated power company and was focused on establishing its footprint in Africa but he was surprised by Exxaro’s involvement with Cennergi.

Mr L Greyling (ID) stated that he had a similar query.

Mr Greyling further asked if the current regulatory environment in South Africa was conducive to meeting the ambitious target of Cennergi.

Mr Greyling enquired if Cennergi would be establishing factories to produce some of the wind turbines and equipment that would be used for the projects to be embarked upon, or if the technology would be imported into the country.

Mr D Ross (DA) stated that he was impressed with the targets set for the longer term but wanted to know the objectives that Cennergi wanted to meet in the shorter term, especially in respect to supply. He was pleased to hear that there were private role players who were willing and interested in taking steps to reduce the shortage of energy supply.

Mr Ross asked for Cennergi’s opinion in respect of the fuel supply situation and further sought its views on fuel pricing .

The Chairperson interjected to point out that fuel pricing was not part of the matters to be discussed at the meeting.

Mr Ross asked if fuel pricing was not relevant to the fuel aspirations of Exxaro.

Mr Garner replied that it was not relevant at that stage for Cennergi but that he could comment on the question.

The Chairperson pointed out again that the issue of fuel pricing should not be addressed because it was not a matter for discussion

Mr Ross further noted that it appeared that the Free State had been excluded from the development programmes of Cennergi and asked if it would be possible to include the province in the programmes in the near future.

Ms N Mathibela (ANC) asked which provinces were included in the BEE plans of the company.

Mr Ernst Venter, Executive General Manager: Business Growth, Exxaro, responded that there were three reasons for Exxaro forming an energy company. Exxaro was a South African domiciled mining company that was predominantly mining coal, with interests in iron ore and mineral sand. Exxaro had growth aspirations and therefore the first reason for forming Cennergi was for the purpose of securing energy for Exxaro. The second reason had to do with the increasing cost of energy, which meant that Exxaro sought to be self-reliant on some of its own energy. The third reason was the issue of carbon footprint in relation to climate change. Exxaro had a carbon footprint of 2.7 million tonnes of CO2, and the company would like to participate in cleaner energy projects so that it could be seen as a responsible citizen.

Mr Peter Leopeng, Manager: Renewable Energy, Exxaro, responded to the questions relating to which provinces would be included in the programme and the BEE status of the company. There were five projects, three of which were wind projects and two that were solar projects. The biggest of the wind projects was the Amakhala project and he outlined how much would be spent on the project, noting that 65% would be directed to broad-based black economic empowerment (BBEEE). He also quoted figures for spending on Qualified Small Enterprises(QSE) and Emerging Micro Enterprises (EME) during construction and spending during operations, of which 80% of this would go towards BBBEE companies.

Mr Garner interjected to note that the figures quoted were sensitive and asked that they not be reported in the press.

The Chairperson replied that that they were sensitive enough for the time being but that the press was at liberty to enquire later if the quoted figures had been realised.

Mr Leopeng stated that there was no project in the Free State at present but that there would eventually be some projects there in the future.

The Chairperson quipped that Mr Ross would definitely monitor the situation to see if indeed projects would be done in the Free State.

Department of Energy (DoE) progress update on Solar Water Heating Programme
Ms Mokgadi Modise, Chief Director: Clean Energy Division, Department of Energy, provided a progress report on the Solar Water Heating (SWH) programme of the Department (DoE). The Department’s strategic plan was aligned to the outcomes of meeting demand, efficiency and implementing diversified energy mix programmes. To this effect, the Minister of Energy had announced a target of one million Solar Water Heaters (SWH) to be installed by 2014/2015. The overall programme focused on both tariff and fiscal-funded programmes in residential and commercial sectors. The programme had a slow start, but had picked up by mid-2010. The fiscally-funded SWHs had been rolled out, via the Division of Revenue Act (DORA), through both schedule 6 direct transfers to municipalities, and through schedule 7 transfers from Eskom as an implementing agent.  By 2012 the President reported that 220 000 solar units had been installed. It must be noted that this figure did not include February and March status reports.

Ms Modise then provided a progress report on the implementation of the programmes. In the 2011/2012 financial year, the SWH programme started from a baseline of 55 000 units installed, with a target of 250 041 units.  There was an overlap on implementation from 2010/2011 for completion of a roll out with Tshwane, Naledi and Sol Plaatjie municipalities. In all the three municipalities, implementation was through Schedule 7 of the DORA.. Specific statistics on the implementation overlap in the municipalities from 2010/2011 to 2011/2012 were provided. In total, 295 jobs had been created through the implementation process.

Installations had been completed in Sol Plaatjie and Tshwane municipalities. However, Naledi municipality had not yet completed its implementation. Several challenges relating to the quality of water were highlighted as reasons for the incomplete implementation. Some households had no access to water, but this was resolved by providing funds for water reticulation. There were problems with roofing structures and old pipes that could not be tapped into, and also the prevalence of hard water in the area which impacted on the functionality and lifespan of the SWHs. Two solutions had been presented, either removal of calcium and iron mass, or chemical treatment of the water through reverse osmosis. The solutions suggested had high cost implications, and it was clear that the costs associated with water quality would make the project non-viable in these areas; the cost breakdown for the first solution was R9.36 million, and the cost breakdown for the second solution was R88.4 million.  For these reasons, the Naledi project was terminated and the SWH units were moved to Maluti-a-Phofung. Eskom had already submitted a report confirming that a feasibility study was under way prior to the start of the actual installations.

Ms Modise then went on to provide an update on the 2011/2012 SWHs installation. Emfuleni (Sedibeng) , Musina and Umsobomvu were approved for 2011/2012 financial year. An allocation of R54.4 million was approved for each, under schedule 7 of DORA, whilst the R60 million was allocated to Umsobomvu municipality, in terms of schedule 6. In the first two quarters of the financial year, there would be a focus on finalisation of the business plans and contracts. A feasibility study was undertaken in each municipality, to allow clear remedial actions prior to the start of the roll out. Musina Municipality appointed Roschcon to undertake the feasibility study and Umsobomvu  also finalised the appointment of a service provider for a feasibility study. Sedibeng was undertaking the feasibility study itself instead of appointing a service provider. Eskom had provided the municipality with terms of reference for feasibility so that it was in line with the requirements.

Graphs detailing total installations to date, including installations received but not yet processed, were provided. These included both Eskom funded and DoE funded installations. The highest number of installations were recorded in Gauteng whilst Limpopo and Mpumalanga had the least.

Ms Modise then went on to present on the Standard Offer Model. The total number of units installed was 244 964.  The concept was based on the energy savings to be derived from an initiative, irrespective of the technology applied to achieve such savings. The interventions were outcome-based, with the incentive flowing after delivery of the intervention, and subject to verification of the savings. The solar water heating system would have a deemed savings value. It was envisaged that the rebate would be attractive initially, in order to kick-start the market. Over time, it was predicted that costs would be reduced through economies of scale. The concept Standard Offer (SO) Model had been finalised. A one year Business Plan for the SWH pilot phase had been completed and was ready for approval and implementation in the current financial year. It still had to be decided by the project steering committee whether the SO Model would be implemented with the roll out of the allocated R1 billion.

The funding requirements for the programme were outlined. The total funding required for the SWH units would include cost of installed units and interest on debts. This was to be obtained from commercial debt and concessionary debt. These were to be serviced by the owner or the user, the fiscus, through carbon credit, multi-year project determinants and grants.

The Green Economy Accord signed by Government with the social partners recognised that the installation of SWH systems could help with climate-change goals and increase the number of South Africans who had access to hot water, while also creating jobs in manufacturing and installation. Business was committed to working with government to develop, establish and then publicise a sustainable funding plan to support the installation of one million SWH systems. It was noted that the success of localisation within the Green Economy Accord depended on its implementation together with other accords, such as Local Procurement Accord, National Skills Development Accord and Basic Education Accord, because of cross cutting elements. A number of localisation issues were addressed under the Green Economy Accord.

The first issue was to increase the rollout to one million units. In order to achieve the targets for SWH installations, financing, enterprise development, training and policy were required, coordinated across all stakeholders. Business had committed to working with Government to develop, establish and then publicise a sustainable funding plan to support the installation of one million SWH systems.

The second issue was to improve localisation of the components. All parties were to be committed to the drive to increase localisation of the components of the SWH systems. Government was committed to ensuring that incentives and regulatory measures were in place to promote greater local manufacturing of components of the SWH systems. Specific opportunities for localisation were to be identified to support localisation.

The third issue was to secure support from the industry for replaced units.  Approximately 200 000 electric geysers were replaced annually by householders, through payments via the insurance industry, to promote the use of locally-manufactured SWHs for the replacement of damaged electric hot-water geysers.

The fourth issue was to secure guarantees on installed units. The parties identified a potential risk with the guarantees on the SWH units, particularly in respect of start up companies who might no longer be in business when warranties needed to be honoured. Business, government and various funding institutions, including Eskom, were engaging to develop proposals on warranty systems, standards and funding mechanisms to address this risk.

The fifth issue was to promote the marketing of SWH systems. The parties recognised that consumers must embrace the technological shift to SWH. Business was therefore committed to developing, in cooperation with government, organised labour and community organisations, a national communication campaign, linked to local community initiatives and campaigns like Lead SA, Proudly SA and 49m, to educate South Africans about SWHs and their benefits. The Energy Efficiency Campaign Strategy had been completed and signed at NEDLAC in December 2011, and currently resources were being mobilised.

The sixth issue was to promote uniform technical and performance standards for SWHs. The parties recognised that, given South Africa’s unique climate conditions, there was a need to develop local standards for the different component parts of SWH, both to support local technological development, and to also ensure facilitation of the introduction of imported technologies for local manufacturers. Government was committed to developing the standards for the different components that made SWH units, through South African Bureau of Standards. Business undertook to support the development of local standards for SHWs at component level.

The progress to date was that the Department of Trade and Industry (dti), together with the Industrial Development Corporation (IDC) , had appointed a service provider to undertake a SWH designation study. The objective of the study was to designate the SWH industry or certain SWH products in terms of the Preferential Procurement Policy Framework Act (PPPA). Sector designation meant a sector, sub-sector or industry that had been designated by the dti in line with national development and industrial policies for local production, where only locally produced services, works or goods, or locally manufactured goods, would meet the stipulated minimum threshold for local production.

IDC, the Development Bank of Southern Africa (DBSA) and Eskom had been exploring various funding models in an effort to get the most appropriate funding model for both Low Pressure(LP) and High Pressure(HP) systems. IDC had already funded companies to the tune of approximately R150 million in support of the sector. Solar Water Heating Project Steering Committee was led by the Economic Development Department (EDD).

Accreditation work was in progress, through  the Department of Higher Education and Training, in collaboration with the Sector Education and Training Authorities (SETAs). This would ensure that all work was done within the approved accredited requirements. Work in progress, which needed to be finalised soon, included a decision on how the allocated funding would be used, taking into account all of the localisation issues, identification of beneficiaries, a Service Level Agreement between Department of Energy and Eskom, a possible solution for CDM Maintenance and sustainability, a phase of handover from the rebate  programmes to contract programmes, after September 2012. and continuation of new registrations for low pressure system rollout.

In respect of the SWH allocation for 2012 to 2015, an amount of R4.7 billion had been allocated to achieve one million SWH units by 2014/2015, while R1 billion had been allocated for the current financial year.

Ms Modise noted that it was evident, from her presentation, that the cumulative target of 250 041 installations for the current financial year was achievable, given that about 244 964 of the targeted units had been installed. Budget had been allocated to achieve one million SWH units by 2014/2015. Commitments already made with respect to the Green Economy Accord, to address the localisation issues to create more jobs and work, had already been undertaken. That work was in progress, and all stakeholders were committed to intensifying the work to achieve localisation. Energy savings would only be improved through penetration of high end market, through the Standard Offer Concept.

Eskom’s Solar Water Heating Programme
Mr Andrew Etzinger, Senior Manager, Eskom, outlined the Eskom solar water heating programme .He reiterated that the government target was to install one million systems by the end of 2014. Approximately 230 000 systems had been installed through the Eskom rebate programme and the DORA funded programme. There was a balance of 800 000 systems, and this would require roll-out of 22 000 systems per month. The programmes would be overseen by an Inter-ministerial Project Steering Committee, chaired by the Director General of the Department of Economic Development. He also reminded Committee members that there were both low pressure and high pressure installation programmes.

Mr Etzinger said that the rate of installations were very low between 2008 and 2009, and the programme boomed in 2010. In total there were 48 941 claims received for high pressure installations, and 171 730 for low pressure installations under the Eskom programme. For the DoE funded projects, claims of 24 293 low pressure installations had been made. In total, there were 244 964 SWH installations. There were over 650 listed registered companies. However, this number was expected to go down due to the re-registration process currently under way. The  total cost of claims to date was R1.1 billion. This amount included claims received but not yet processed, and excluded DoE programmes.

A graph similar to that presented by DOE was provided, showing the total number of SWH installations to date of both the DoE and Eskom funded programmes. (See slide 8).

Several lessons had been learnt from the exercise. Firstly, electricity savings were low in relation to the cost of solar water heating, so the project was more for job creation and service delivery. Also, the quality of installations was not always up to standard and re-working was required in many instances. In addition, rigorous process controls were required and contracts for on-going maintenance of low pressure systems were needed. Finally, it was discovered that safety was non-negotiable.

Mr Etzinger went on to describe the future plans. The low pressure rebate programme was to be replaced by a contracting approach. This would involve three key role players, being government, market participants and implementing agents. Government would play several roles, including job creation and sustainability, supplier development and localisation, and ensuring the equitable share per province. The market participants would cater for predictability and certainty of the programmes and their financing. The implementing agents would ensure rigorous controls and governance, quality of installations, system sustainability and safety.

Rollout targets for the low pressure and high pressure solar water heating units were presented (see attached presentation). Mr Etzinger noted that the key parameters for future roll-outs were set. These included setting up contracting options, which involved turnkey contracts, separating contracts for the manufacturers and those of installers, and also having contracts with co-operatives. There was also a need to set up methodology for contract allocations, which would be in the form of open tenders, and the conversion of municipal Memoranda of Understanding (MOUs) into contracts. Allocation systems had to be put in place, and these were to be completely ‘open’, subject to equitable shares across provinces. There would be allocations to designated communities and co-operatives, based on local submissions. There would be a localisation of roll-outs, which would have no local content specification, and there was to be a minimum level of local content in systems and weighting in tender evaluation. Finally there were parameters set around sustainability of the systems, including the retention of payments for three to five years, a requirement for guarantees or provisions, a contract for system maintenance for installers, and leveraging of  ‘carbon’ revenues.

Another key aspect involved ensuring that system specifications and installation requirements were met. There was a need to ensure compliance to the Occupational Safety and Health Act and Eskom safety requirements. There was also need for compliance with national standards set by South African National Standards authority. Installations were only to be done on lower living standards houses, and SHWs were to have a maximum size of 150L, must carry the SABS mark of approval, and, if necessary, rooves must be reinforced. Permanent water connections must be ensured at the dwellings and the water quality had to be within acceptable parameters.

Finally, the scope of work for installers was provided. They were to be involved in the installation and maintenance of solar water heaters, and they must ensure the development and execution of a five-year maintenance plan. They would also be involved in the development of installers and execution of a training plan. A minimum of 70% of local community labour was to be trained and employed for the installation. The installers had to manage quality assurance and audit the SWH system. They were to establish and operate call centres. They also had to provide progress reports, collect databases and deal with administration.

Discussion
Ms N Mathibela (ANC) observed that the number of units of heaters supplied to Limpopo was very low. She also asked if there would be localisation of the manufacturers.

Ms Modise stated that financial resources were inadequate to ensure that all municipalities would get access to the required units, and this accounted for the reason why enough units were not available in Limpopo.

Mr Etzinger added that there was inadequate water supply in Limpopo and this affected the supply of units. In fact, even the Chief in one area did not have running water in his house.

Mr L Greyling (ID) observed that the energy saving been presently were not large because there was a concentration on the use of the low pressure systems for socio economic reasons. The problem was the failure to increase the number of high pressure systems, and there was a need to deal with this. Most of the low pressure systems were imported from China, while the actual manufacturing capacity in South Africa revolved around the high pressure systems. He stated that the result was that some of the South African companies were closing down because the demand for the high pressure systems was small, and he wondered how this demand could be boosted to protect South African companies.

Ms Modise responded, in respect of localisation, that the whole value chain was being examined. A study was being conducted to look into the potential for job creation at all points. This study was examining the current capacity within the country, comparing it to what was being imported, the capabilities within the country and the components of equipment which could be manufactured locally. In response to the two types of systems, she said that the matter o increasing demand for high pressure systems was being debated at the Project Steering Committee level and that the issues agreed upon would be presented before the Committee at the next briefing.

Mr Etzinger added that there was more than enough production capacity to produce millions of the systems each year, and that a number of factories had been set up. However, the problem was how to keep those factories busy if only one million units were being bought from the factories, who could supply well in excess of this figure.

Mr J Selau (ANC) stated that he had observed that the quality of work in respect of the roll out was low, a fact also confirmed in other quarters. He stated that the alleged reason for this low quality was that people opted for the cheaper installations, which were of lower quality. He was concerned about lack of maintenance plans, and asked how Eskom intended to address this problem.

Mr J Smalle (DA) asked if a study was conducted by Eskom to determine the success of the programmes, and also asked if roll out had happened, and when it should be completed. He also asked how the issue of maintenance was been addressed by Eskom.

Mr Etzinger responded that In respect to the issue of maintenance, he stated that up until recently the vast majority of suppliers had been diligent in ensuring maintenance of the systems. SABS would be assisting with the inspection of these systems, in collaboration with other Government agencies.

Mr Selau called for an explanation of what constituted hard water.

Mr Etzinger explained that the hardness of water was measured by the presence of heavy minerals in the water; and had nothing to do with water cleanliness or safety, or with bacterial presence.

Ms Modise confirmed that this was correct, but that the presence of certain heavy minerals might reduce the efficiency of the functionality of the heater, and reiterated that it had nothing to do with the presence of bacteria or viruses in the water.


The Chairperson stated that there was a need for accreditation of the companies involved in the roll out programmes. This area demanded serious monitoring, because of low quality of service of the companies affected the credibility of the programmes.

The meeting was adjourned.