Free Basic Alternative Energy/Free Basic Electricity; Bio-Fuel Strategy update

Energy

29 January 2013
Chairperson: Mr S Njikelana (ANC)
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Meeting Summary

The Committee was briefed by the Department of Energy on the ongoing Free Basic Energy and Free Basic Alternative Energy programme which was estimated to have about 70% implementation nationally. A study showed that an amount of 50 kWh was sufficient to meet basic standards of living and that this was the level that should be provided to each household.  It was explained that many indigent households do not have access to the electricity grid, necessitating the supply of various alternative energy sources such as coal or paraffin but that these sources sometimes were accompanied by health risks. The Department faced challenges in implementation of the programme such as lack of municipal capacity and a failure to collaborate with all stakeholders. As a result many provinces were failing to meet their minimum service targets. The Committee was dissatisfied with the failure to establish the programme in especially rural ones and emphasised that energy provision was central to alleviating poverty.

The Biofuel Strategy update noted the 2013 target would be missed. The target was 2% biofuels penetration (about 400 million litres per annum) into the national liquid fuels pool. However, the country was set to produce biofuels in excess of the original target when the regulations and pricing framework took effect. The major spill-over objectives for the industry were to reduce greenhouse gas emissions and create jobs. Although there were existing incentive schemes in the form of tax rebates and exemptions, the investment targets were not being met. There nevertheless existed substantial long term growth potential. Committee members expressed concern over the capping of market penetration, asking if this might not lead to a monopolised industry and also stressed that in order to be commercially viable, the industry would need to invest in transport and storage infrastructure. All agreed that the role of small scale farmers and crop growers should be protected for the industry to flourish at all levels.

Meeting report

Introduction
The Chairperson reflected on 2012, mentioning successes in public participation and stakeholder meetings that had proved enlightening to the Committee. For the year ahead, he suggested looking towards international programmes and emphasizing climate change. He noted that addressing the needs of indigent households who lacked access to the electricity grid was of fundamental importance. This was consistent with the global search for alternative energy sources. The strategy regarding biofuels was the result of a prolonged process but was finally available for public comment. The briefings would serve as a launching pad for Committee involvement.

Free Basic Energy or Free Basic Alternative Energy (FBE/FBEA) programme
Mr Matthews Bantsijiang, Director of Electricity Policy Analysis and Regulation for the Department of Energy, noted the programme began in 2000 with its focus being the provision of free basic water and electricity. Alternative energy was later introduced as a policy approach. Its main targets were not only the provision of energy to alleviate poverty but also to minimise health impacts. The provision of FBE was initially problematic given the infrastructure involved, necessitating FBAE guidelines for subsidizing alternatives, despite alternative energy being more expensive. Other programmes complementing FBE included the implementation of the Inclining Block Tariff.
The mandate for the programme stemmed from Section 104(4) of the Constitution which provides for provincial legislation in matters reasonably necessary for the effective exercise of power in a Schedule 4 issue. Section 139(1) allows for provincial intervention in the event that a municipality fails in its executive obligation. Section 156 ostensibly grants the municipality executive authority over energy markets, designating them as service authorities over energy related matters. They are also mandated to provide other forms of energy and this is in parallel with their health responsibilities and concerns over air quality.
A pilot study showed that 25 to 60 kWh/month was considered adequate electrical energy to meet lighting, media access, and limited heating needs for a poor household. Taking into account inherent cost restrictions, the final amount per month to meet basic needs was deemed to be 50 kWh. Provision of free non-grid energy was estimated at R48 per household that would manifest in sources like paraffin, candles, fire wood and coal depending on accessibility and appropriateness.

Challenges in implementation included:
∙ Disconnections as a credit control measure by Eskom and municipalites, often resulting in poor households being deprived of energy when falling into arrears with payments. The comment was made that the monthly Free Basic Electricity entitlement should only be lost if the household had tampered with the meter or had illegally acquired electricity.
∙ Funding was a critical challenge as the calculations done by Treasury showed that the money sent from Treasury was not always used in the way envisaged. This was due to non-prioritising of FBE by municipalities.
∙ There was a lack of capacity at municipality level despite national initiatives to support them in implementing their constitutional functions.
∙ There was a lack of indigent policies and registration procedures. Identifying intended recipients of FBE was therefore problematic.
∙ Token collection, enhancement and provision of free basic services tended to occur in contravention of policy, partly due to infrastructure problems.
∙ Lack of communication between stakeholders.
∙ Lack of reporting and monitoring systems and limited coordination. For this reason, many of the figures were unreliable.
In terms of funding allocation, National Treasury apportioned the amounts in line with FBAE guidelines and the costs of FBE provision were included in Medium Term Expenditure Framework allocation of the Department of Provincial and Local Government and municipalities have a revenue generation challenge. Where municipalities have been allocated with intergovernmental grants, they should pass on the benefits of such grants to indigent households as contemplated by the policy document for the relative financial year. However, it was noted that they should further allocate funds to supplement allocation to include all, and not just some, indigent households.

Figures were shown of the percentage consumption of FBE for January 2012 according to province. It was noted that Eastern Cape, KwaZulu Natal and Limpopo had the highest demand but were not meeting the required levels of FBE or FBAE provision. In KZN only 26% of qualifying households was provided for, and the North West province only supported 22%. In Free State and the Western Cape, support was given to households that did not qualify as indigent but were still poor, resulting in greater than 100% provision. On balance, 69% of qualifying indigents on a national level were provided for, although this figure included the Free State and Western Cape overachievements. The criteria used to identify recipients required municipalities to apply their own indigent policies. The Department would review the policy in terms of incorporating new developments, especially minimum basic standards of energy costs and requirements. Although the R48 that was currently being used was out of date, it was likely that a more realistic figure would no longer be affordable for the poorer provinces that were already failing to provide for the minimum core of indigents.
Mr Bantsijiang ended by highlighting the link between energy access and poverty alleviation. There was about 70% implementation of FBE/FBAE. Inherent problems with monitoring mechanisms made it difficult to establish accurate figures and it was hoped that structural changes would remedy this.

Discussion

Mr J Smalle (DA) agreed that this was an issue dealing with the poorest of the poor. He asked if a cost benefit analysis had been conducted on renewable projects in rural areas. He noted that in such non-grid areas, clean energy could be a viable solution. He observed the emphasis placed on lack of implementation and reporting and suggested that such issues were due to failures in holding municipal authorities accountable. The involvement of the various departments was crucial to success, but he queried the convoluted approach being taken and queried why the involvement took so long and seemingly produced no changes. He asked what measures were specifically being taken to assist local municipalities such as incentive programmes and what time periods had been issued for progress to be made.  He expressed concern that figures for indigent households were derived from the 2001 consensus rather than more recent figures and asked if there was a more current estimate that could be provided.

Mr L Greyling (ID) suggested a rethink on various policies, as the issues around FBE touched on a number of different stakeholders. Electricity distribution relied on a variety of factors that needed to be brought under a single policy and vision. There was a clear need for a proper household energy policy that took into account provincial needs. There was a discrepancy between the households that needed energy and those that actually qualified. However, provision of infrastructure to facilitate clean and renewable energy, such as creation of solar farms, could easily be incorporated to aid these households and they could later be incorporated into the Eskom grid.

Mr K Moloto (ANC) noted that on a visit to the Eastern Cape the Committee had seen a solar farm that was unused and even vandalised. He asked if lessons learnt could be applied to future projects.

The Chairperson agreed that the policy itself needed to be improved, and not just its implementation.

Mr Bantsijiang responded to the questions by first saying that renewable energy projects faced a degree of opposition from traditional interests in rural areas. It was often seen as a temporary solution in lieu of ‘proper’ electricity and facilities often were subject to dilapidation or even theft. Rural communities needed to be desensitised to these energy sources and made aware of the problems involved in provision of mainstream electricity. Cost benefit analyses had been conducted to assess suitability of alternative energy provision and projects had been created but there remained areas that were neither on the grid nor within the scope of such projects. However, this needed to be an ongoing process. Certain areas were so isolated that only renewable or alternative energy sources were suitable. Municipalities faced implementation challenges but the Department was not authorised to take over their responsibilities, only to advice and facilitate their duties. However, a permanent advisory position could be created for longer term coordination. The 2001 Census figures, although out of date, were the best ones available at the time of report compilation. The 2011 figures would be used going forward.  

Mr Smalle agreed that the economic situation of various provinces created rollout problems, especially taking into account cross boundary urbanisation. He asked if local authorities were being empowered to provide advice for households who did not have access to energy. He asked if loss of electricity through illegal actions was accounted for or if the victims had to absorb the loss.

The Chairperson expressed dissatisfaction with the approach taken by the Department and municipalities in the provision of energy for the poorest of the poor. Energy was included in the services that had to be provided to all at a basic level not only according to the Constitution but also due to the general theme of transformation. He asked which fuels raised health concerns. He inquired after the minimum level of kilo watt hours that had been determined by a pilot study, especially how much awareness had been raised in communities regarding the limitations to this minimum level. The level was based on limited heating requirements, but it was unclear if these limited requirements were being adhered to or were even actually implemented. He observed that FBE was not accumulative if unused by a household, but asked if the same applied to FBAE. Finally he requested an explanation for why particular provinces were performing so poorly in their provision of FBE while others were exceeding their targets. He noted that accountability and monitoring measures should be conditions of budget allocations.

Mr Bantsijiang addressed the complications arising from urbanisation. He said that it was clear that bigger cities would find it more difficult to keep track of qualifying households and that this would impact on service provision. As there was usually a correlative increase in squatter camps, FBAE would be more suitable for service delivery. The issue of health concerns related mostly to those energy sources, such as coa,l that were not considered ‘clean’ energy. There were linked issues such as carbon monoxide poisoning, as well as environmental factors, that made such energy sources less advisable for use - but in some cases the risks could be mitigated. This was why cost benefit analyses had to be conducted in each area to determine, on balance, which energy source was most suitable. The FBA programme relied on provision for the poorest of the poor, but this was a vague concept. The 50 kWh was being applied in lieu of a clear benchmark and this took into account the lifestyles of those most in need. However, heat was in certain cases not necessarily required for basic quality of life which is why it was only considered in a limited capacity unlike amounts required for cooking and cleaning. An indigent register was a serious challenge facing municipalities. Not all municipalities even had registers, let alone effective ones.

Biofuels Industrial Strategy briefing
Ms Mokgadi Modise, Chief Director of Clean Energy at the Department of Energy, commented that the biofuels strategy was not yet available for public comment but that the presentation constituted an update. She then introduced the strategy, saying that its primary requirement was to create a link between the first and second economies which entailed creating jobs in under-developed areas. They required incentives to be cost competitive, they also accounted for benefits such as balance of payments saving and fairly stable economic growth. These factors contributed towards better quality of life across the country. A 2006 feasibility study revealed that the targeted 2% biofuels scenario could create about 25 000 jobs. Only those projects involving expansion that assisted in achieving this target would be allocated producer incentives. The 2013 target was 2% biofuels penetration into the national liquid fuels pool. Objectives include improving energy security, reduction of greenhouse gases, and facilitation of rural job creation and integration of historically disadvantaged farmers.

An update on licensing of manufacturing facilities was provided according showing what companies had been granted licences as a result of meeting all the requirements, and which had been granted only conditional licences. The facilities aggregated more than a billion litres per annum capacity. The existing incentives included the full exemption of bioethanol from fuel tax, a rebate for biodiesel manufacturers of 50%and accelerated depreciation allowances over three years. These incentives had not proven to be sufficient to lure investment and a more supportive regulatory framework needed to be developed.

The biofuel sector was described as being multi-disciplinary and were relevant to various departments that were not present. Draft mandatory blending regulations were released in September 2011 following which a stakeholder workshop was held and the final regulations were gazetted in August 2012. Once the incentive scheme was finalised with the assistance of National Treasury, the regulations would come into effect. The pricing framework had been similarly subject to various studies and workshops. A biofuels support mechanism was nearing the final stages of development. Refinery ethanol blending occurs at the six refineries in South Africa so as to minimise the investment in the industry. Depot blending was limited to two large depots for each of the seven oil companies. Following the indicated preferences of the oil companies, it was assumed that two companies would blend at the refinery and the remainder would blend at depots.

A bioethanol/biodiesel comparison with an incentive of 15% return on assets showed that bioethanol (sorghum) would result in a reference plant capacity of 158 million litres and would create 8 247 jobs whilst reducing greenhouse gas emissions by 30%. Biodiesel (soya beans) would create 20 067 jobs, 113 million litres and save 50% of greenhouse gas emissions. Some ongoing and outstanding
Biofuels Task Team (BTT) activities were discussed per department. These included updating research findings, supporting emerging farmers in negotiating contracts with biofuels manufacturers, broadening the general public’s knowledge and acceptance of biofuels and providing technical support to emerging farmers.

The Cabinet resolutions of 26 October 2011 were summarised, these were with the purpose of unblocking investments in the biofuels industry. To this end it was noted that the mandatory blending regulations would be published imminently and that explicit conditionalities should be linked to subsidies and licensing. Most of these steps were still in progress due to technical investigations. The 2013 target was expected to be missed but the country was still set to produce biofuel in excess of the original annual target when the overall enabling and supporting framework took effect. There was substantial long term potential for growth.

Discussion
Mr Smalle commented that diversification of the liquid industry should be pursued but that risk should be minimised. However great the possibilities for financial income, sustainable job creation should remain a primary concern. The growth of the industry relied on successfully producing, storing and exporting excess production. What plan existed to develop transport methods to make the industry commercially viable and at what stage were the plans? The 2% possible blending into existing liquid fuel posed the question of whether a monopoly might be created and he queried the steps that could be taken to avoid that. He asked what the opportunity cost of tax incentives was and where the money came from to subsidise those incentives.

Mr Moloto asked why there was a divergence of opinions around blending in the past and how this had been resolved.

Mr Greyling said that the complex issue of biofuels seemed to have stagnated and observed how strange it was that the blending requirements had taken so long to be gazetted. He asked if the refinery upgrading scheme would include compensation for refineries of if they would only be supported through other incentives. The refineries that had been granted licenses where not appearing in the former Transkei area where there appeared to be high potential for small scale biofuel production. Those communities faced problems with transport to markets and he asked what work had been done around that.

Ms Modise said that the storage and transportation of biofuels were guided by the mandatory regulations. She claimed that the strategy gave provision for review so as to avoid creation of a monopoly. The outcome of how the first phase went would have given an indication of market distribution. An improvement to 4% would necessitate review of quality issues. It had previously been considered too ambitious, especially as the 2% threshold was not itself being met. During public consultation it was revealed that the sector was very willing to be involved and that once the funding schedule was finalised this collaboration would be evident. The job creation estimates dated back to the drafting of the strategy and the actual figure needed to be reviewed. Current estimates were based more on international success rates and projections. When investment was discussed there were high capital costs involved and risk analysis is central to acquiring investment. At stakeholder workshops many matters relating to such risk, including water scarcity, were discussed. The concerns over negative impacts on water scarcity were not serious as the water requirements would fall within already allocated amounts for irrigation. It was hoped that the financial scheme would be finalised by Treasury by the end of the financial year and that this would help attach environmental concerns to incentives. Ms Modise emphasised that job creation should be focussed in poor and rural areas. Former homelands were seen as the key areas for commercial development.

Mr Robert Maake, Director at the Department of Energy, added that on the blending issue, the industry had provided an initial figure for blending costs and upgrading costs. However, it was necessary to investigate costs for specific refinery and this had taken additional resources. Transportation costs were also unclear until routes and fixed depots were finalised.

Mr Smalle expressed concern over the mandatory 2% threshold, saying that the industry should be allowed to uptake the product so that over production could still be within the incentive programme. He commended the move to grow biofuel  crops in poor areas but stressed that the isolation of these areas would often make production less commercially viable and that the incentives should accommodate for that.

Mr Greyling asked if there had been progress in the Cradock facility as it had been intended as a flagship facility. He said that a focus on the former homeland areas was not materialising. Getting products to the market was the main concern but the project did not appear to be designed for actual productivity and should be wary of simply subsidising production without a view to the market as a whole.

Mr Moloto asked what requirements were outstanding from the facilities that had not been granted licences.

Ms Modise said that she was not at liberty to outline all the requirements for licensing but that the outstanding facilities had been given conditional licences pending completion. She said that at the time the 2% penetration threshold was developed there had been issues of food security that affected the list of crops which would be covered by the strategy in terms of the feed stock and that it was necessary to review those policies so as to reach a wider range of small scale farmers. There were a number of concerns taken into account when taking the decision to regulate production at that level. She nevertheless accepted Mr Smalle’s suggestion that the limit be less regulated. She then explained that the Cradock facility was at an advanced stage of development.

The Chairperson observed that it was necessary for the committee to do a follow up on the matter, especially as many policy documents were not available yet, being still under review. He expressed that there remained questions over the production and feasibility of biofuels. The members remained concerned over the level of market penetration, transport issues and the precise structure of the incentive schemes. Although the delegation has provided answers to their best ability, there had been no finality. There remained conflicting priorities, not least of all with food security. Nevertheless, the matter was firmly on the committee agenda and progress would be forthcoming. He said that advice from the department regarding relevant parties would be welcomed. He thanked the delegation and the committee members and concluded the meeting.

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