Electricity sector regulation: Department & National Energy Regulator briefings, Department's 1st quarter 2013 expenditure

Meeting report

Department of Energy 1^st quarter 2013 Financial and Performance report briefing
Ms Nelisiwe Magubane, Director General, Department of Energy, noted that both the financial and performance information of the Department of Energy (DoE or the Department) would be presented.

Ms Yvonne Chetty, Chief Financial Officer, Department of Energy, noted that the Committee had requested an update on rollover of the funding unspent in the last year. She reminded the Committee that the total money unspent as at 31 March 2013 was R75.5 million. The DoE had requested a roll-over of R69.3 million but only R28 million was approved by National Treasury (Treasury). She added that under Goods and Services, the DoE had requested a roll-over of R21 million, but Treasury did not allocate any funds to this programme, and the implication was that the DoE would have to bear the cost of this as well in the current financial year.

The total budget allocation received by the DoE for the 2013/14 financial year was R6.6 billion. During the 1^st quarter of 2013, the DoE had a budget of R1.24 billion available for its operations, of which R 907.45 million was spent, leaving the DoE with a budget under-spending of R328.94 million.

She set out the allocations of budget for each economic classification. Compensation of employees received R54 million, Goods and Services R23.72 million, transfers and subsidiaries received R828.7 million and payments of capital assets received R355 million. She explained that the top five major cost drivers were for Goods and Services were:
-Travel and subsistence (R8.5 million)
-Operating lease (R3.3 million)
-Consulting and professional services (R2.8 million)
-Communication (R1.5 million)
-Audit external (R1 million)

Ms Chetty continued by giving an overview of expenditure per programme, as follows:

•Programme 1: Administration – received an allocation of R50.3million for the 1^st Quarter and remained with an under- spending of R9.2 million.
• Programme 2: Energy Policy and Planning – received a R10 million allocation and remained with a R101 000 over- expenditure.
• Programme 3: Energy Regulation – received an allocation of R10.7 million and remained with an under-spending of R3.4 million.
• Programme 4: Electrification and Energy Programme Management – received an allocation of R 422.1 million and now remained with a R29.3 million under-expenditure
• Programme 5: Nuclear Energy and Regulation – received an allocation of R431.3 million and remained with an under-expenditure of R12.1 million
• Programme 6: Clean Energy – received a R311.6 million allocation and remained with a R274.8 million under-expenditure.

Ms Chetty explained that the main cost drivers in the Clean Energy branch were specifically undertaken for clean energy/ energy efficiency campaigns and audits. However, since the awareness campaigns commenced only in August 2013, the spending plan had therefore been adjusted. She added that the reported variance of R267.9 million under “transfers and subsidies” was as a result of the Energy Efficiency and Demand Side Management (EEDSM) Eskom programme, where the payment to Eskom could not be effected pending the finalisation of the funding contract associated with the implementation contract.

Ms Chetty concluded by tabling the 1^st Quarter Transfer Payment Schedule for 2013/14. The DoE had been allocated a total of R1.1 million for this, and had a remaining variance of R 299.6 million. The under-spending was mainly due to the following:

-EEDSM-Eskom: where the full R267.9 million planned for transfer to Eskom for the Solar Water Heaters / geysers programme could not be paid, due to delays in finalising the implementation contract with Eskom.
-INEP Non-grid: where R24.1 million remained unspent due to delays with the extension contracts.
-Payment to the Institute NRAWDI: where a R 7.8 million could not be transferred, pending the establishment of the proper management structure, and board of directors.

Performance briefing
Ms Magubane reminded the Committee that in April 2013, the DoE presented its 2013/14 Annual Performance Plan (APP), which was based on the strategic session held in November 2012. This presentation would indicate its priorities and performance on projects to date. The DoE had identified areas where it would be most likely and least likely to meet the intended targets.

Ms Magubane reminded the Committee that the key focus areas of the DoE for 2013/14 were:
• Implementation of the Integrated Resource Plan (IRP)
• Increasing the number of grid and non-grid connections through the Integrated National Infrastructure Programme (INEP)
• Rolling out Solar Water Heaters programme
• Energy Efficiency
• Finalisation of the Central Energy Fund (CEF) group restructuring process
• Finalisation of the Integrated Energy Programme
• Monitoring of Petroleum Compliance
• Conclusion of the Regulatory Account Process

One of the challenges experienced by the DoE related to the Solar Water Heaters. She explained that the DoE had set a target of distributing one million solar water heaters, but this target was not met, due to the fact that the quality of heater was contested, and they would be manufactured internationally. This did not take into consideration the local context and that international manufacturing would be costly to the South African consumer.

Ms Magubane indicated the six programmes of the DoE, but explained that senior management for the Nuclear Division were not able to be at this meeting, as they were accompanying the Minister to Vienna.

Mr Ompi Aphane, Deputy Director General: Energy Planning and Policy, DoE, took the Committee through the presentation on performance in Programme 2 (see attached presentation for details).

Ms Magubane took Members through the slides for Programme 4: Nuclear Energy.

Mr Robert Maake, Senior Manager, DoE dealt with the presentation for Programme 3: Energy Regulation.

Discussion
The Chairperson wondered why the nuclear programme seemed to be struggling to get off the ground, having met very few targets.

Ms Magubane noted that in respect of the radioactive nuclear waste disposal, the Cabinet memorandum would be circulated on 3 October 2013. The recent changes in Cabinet had resulted in delays and the initial memorandum had been “lost in translation”. Radiation Portal Monitors had to be installed at all ports of entry, by both the National Nuclear Regulator (NNR) and the DoE. The DoE was currently waiting on the authorisation of authorities in some of these ports, but was working closely with the South African Revenue Services (SARS). SARS was considering a Memorandum of Understanding (MOU); which would be presented to the authorities, but this still needed approval.

She spoke to the targets for the National Nuclear Regulation Act amendments, noting that the International Atomic Energy Agency (IAEA), together with the DoE, embarked on a study on the Integrated Nuclear Infrastructure Review to assess the readiness of the country for the nuclear programme. The DoE had to first analyse the country’s readiness independently, and thereafter invite the IAEA for a full assessment. A number of issues with the nuclear programme were identified, and this resulted in a need for the NNR Act to be amended. The IAEA report was only recently finalised, in the 1^st Quarter. The IAEA also made recommendations on the Nuclear Act.

In relation to targets for the draft Fund Bill for Radioactive Waste Management, she said that DoE had finalised its part, but the Bill was supposed to be presented by National Treasury to Parliament.

Ms Magubane noted that the issue of safeguards had also been raised in the Integrated Nuclear Infrastructure Report by the IAEA. In both cases it was suggested that the safeguard function on nuclear needed to be separated from that of the South African Nuclear Energy Corporation (NECSA),and that safeguarding needed to be a function of an independent body. The DoE was in communication with the Regulator, who would take the matter forward. She admitted that the Nuclear branch in DoE still had a lot to do, and more capacity was being brought in to ensure that all the work was achieved by the end of the 2013/14 financial year.

Mr L Greyling (ID) said there were a number of questions and concerns which he wanted to raise.

The Chairperson suggested that Mr Greyling only highlight some of his concerns, and that all other relevant questions be submitted to the DoE in writing.

Mr Greyling argued that the current platform was where Members had an opportunity to adequately engage the DoE on its successes and failures, and suggested that it made sense for all the key issues which had come up in the presentation therefore had to be interrogated.

The Chairperson conceded that this was so, and asked him to proceed.

Mr Greyling asked why the IEP needed to be updated at the same time as the IRP. He asked that the DoE explain what the process for updating the Integrated Resource Plan (IRP) was, and how this process related to Coal 3. He argued that institutional restructuring was very frustrating, seeing that the electricity industry would also need to be restructured. However, the DoE still did not have a plan or roadmap for electricity as an end state. The fact that legislation had also not been completed by the Electricity Regulation Act (ERA) 2006 also created a lot of confusion.

Mr Aphane said that the DoE was busy with the IRP consultation process, where the plan would be taken on a road show around the country to deal with all assumptions. Noting the question on the “electricity as an end state”, he said the DoE had taken a phased approach and the notion of an end state was tricky. Amendments to the legislation had been discussed, and these outlined an idea of where the DoE was going. He made reference to the Independent System Market Operator (ISMO) Bill, which aimed to separate generation and transmission.

Mr Greyling asked what the delays were with the finalisation of the nuclear build programme cost report, when that report would be completed, and when Parliament would receive a copy.

The Chairperson said, in relation to Coal 3, that the focus of the meeting was on quarterly reporting and there needed to be a balance with the questions. He said the Committee would provide a separate platform for a specific briefing on Coal 3.

Ms Magubane said, in relation to Coal 3, that a presentation on regulatory regime outcomes was approved in the IRP during the 2010 adjustment. The DoE was still anticipating the use of coal in the IRP 2013, so coal fired power plants were therefore still included in the IRP. About 2600 MW of coal have been approved by the Minister, although the IRP did not specify the locations of these Coal 3 power plants. There was no contradiction between the IRP and what was announced by Cabinet.

Ms Magubane responded to the question of the readiness report, noting that the integrated nuclear infrastructure review was finalised in May 2013. The DoE analysed it and made recommendations to it. Cabinet had been requested to consider the recommendations first, before making the report public. The DoE had completed its work but Cabinet still needed to address the issues brought forward in the recommendations before making the report public.

Mr Aphane added that the IRP was adopted in March 2011 and would be updated on a three-year basis, seeing that its assumptions were likely to change, especially on electricity demand projections. The DoE had undertaken to update the IRP in 2013, and that update was complete. Demand projections had been updated by replacing the projections from 2010. DoE also made assumptions about operating costs, fuel costs of producing electricity and other costs, such as the capital costs for technology. The IRP took forward new developments around all costs and demand projections. He said the 2010 IRP had used a transparent process, and nuclear capital costs were escalated by 14%, but these were an underestimate. DoE would therefore be engaging stakeholders in the coming weeks so that a better update, which included costs from different scenarios, would be given.  He said the 2013 IRP would reflect on new nuclear cost both on low road and on high road. The IRP would project an electricity path, which would give a sense of the implications of implementing the IRP and then provide a more efficient approach for its implementation. All work by the DoE would be completed in the coming quarter. He concluded that the IEP was not a stand-alone plan, it was an umbrella plan for electricity, gas and coal. The IEP consultation process would show the impacts of the plan on other plans such as the IRP.

Mr Greyling was also concerned about the energy efficiency. Part of the problem was that funds were being taken away from Eskom and were being allocated to the DoE. He asked to what extent the DoE had fully budgeted for the programmes previously undertaken by Eskom. He argued that the implementation of solar water heaters was another problem, and asked who was now responsible for enforcement. He thought that there was clearly a problem with regard to the local content. In preparation for the manufacturing of these solar water heaters, many local manufacturers had indicated that they were prepared to undertake manufacturing of high pressure units. However, preference seemed to be given to low pressure units, which would be manufactured internationally. He wanted to know what plan DoE had to improve the localisation element. In addition, he thought there needed to be a central authority that would assist municipalities with implementing these solar water systems.

Mr Aphane noted that, in relation to funding, the Multi Year Price Determination (MYPD) 2 made provisions for energy efficiency under the control of Eskom, and this was funded by the tariff. A parallel fiscal allocation was given to municipalities for energy efficiency. The bulk of the funding allocated for energy efficiency was with Eskom until 1 April 2013. It was understood that DoE did not have all the funding for energy efficiency, as R4.7 billion had been allocated for solar water systems. Eskom Integrated Demand Management (IDM) allocation was R 5 billion, as opposed to the solar funding for the DoE. The solar water heating programme was therefore largely a Division of Revenue allocation, and was not an energy efficiency allocation but rather a social programme funded through the fiscus. He said the low pressure solar water heaters were run on an incentive system, and high pressure units did not need to be subsidised. There were other barriers which stood in the way of solar water heaters such as high costs of manufacturing.

The Chairperson noted that the contracting model for clean energy was between the DoE and Eskom, but wanted to know more on the position of municipalities. Since the Clean Development Mechanisms (CDM) process had been completed, he asked what were the next steps, and commented that in this area, DoE was moving slowly.

Mr Aphane agreed that the funding agreement was between Eskom and the DoE, but added that in order to improve localisation, the new funding model would have an agreement which included municipalities as well. He said basic installation standards by municipalities had been ignored and this needed to be rectified. Funding had been secured for artisans dealing with installation of solar water heaters at municipal level, but coordination between various municipalities was still a challenge.
Mr Greyling asked why the DoE had not mentioned the South African Renewables Initiative (SARI) and said it seemed that the institute had been pushed off the agenda completely. If so, he wanted to know what other mechanisms were being set up to access green energy funding.

Mr Aphane said that in relation to SARI, there were three components to consider; renewable technologies, localisation by the Department of Trade and Industry (dti) and the financing of renewable energies by Treasury. SARI was therefore an agreement between these three bodies, with a legitimate mandate. It had also received about ₤1 billion of funding from the British government.

Ms N Mathibela (ANC) asked about the new smart metering boxes which were being rolled out in Johannesburg, and whether DoE had plans to distribute them country-wide. If so, what were the timelines?

Mr Aphane said that there were two electricity metering, programmes; prepaid and smart metering. Prepaid customers were requested to pay upfront in order to improve municipal revenue collection. Smart metering were a pilot project which was recently rolled out at Johannesburg metros. Smart meters were therefore very appropriate, but they were also more costly than prepaid.
The Chairperson asked about the six new bulk sub-stations and upgrades and whether DoE, Eskom or the municipalities was responsible for these. Eskom was responsible for major installations, and he needed clarity.

The Chairperson asked that DoE provide the Committee with the electricity price path document, as this was a major area of interest.

The Chairperson asked about the outcomes of the South African Development Community (SADC) workshop in which DoE had participated.

Mr Aphane responded that the outcomes of the SADC workshop indicated that the African continent was lagging behind in Clean Development Mechanisms and workshops around awareness for renewable energy projects. South Africa was the only country which had a strong focus on renewable energy programmes. Most African countries could not afford these programmes.

The Chairperson asked that the DoE explain what the difference between phase 2 and phase 3 of the Human Resource plan, the relationship between them, the training targets, and why these were not presented. He said capacity constraints in vetting were a concern, and they needed to be addressed. In relation to corporate services, he asked what the DoE’s internal capacity was on legal drafting and research.

Mr George Mnguni, Deputy Director General, DoE, replied that the integrated Human Resource (HR) plan related to the work done within the DoE. The new strategic plan ensured that there would be the right strategy for HR resources, and structures outlined in the HR plan. The HR plan needed to be implemented in phases, as there was limited funding at the DoE’s disposal. The DoE was still a new department, and HR implementation was done in line with the DoE’s strategic plan; so that before phase 3 could be implemented, a review of phase 2 was conducted. In relation to labour relations training, he said the reason why there was no target for the 1^st Quarter was that the focus of the DoE in this quarter was more on planning, and it was limited in target-setting by current capacity.

Mr Mnguni agreed that delays in vetting were a concern; he said a meeting with the senior management of the National Intelligence Agency had taken place and the DoE building had its first vetting. In relation to the DoE’s legislation team, he said there needed to be new ways to build capacity, and the DoE planned to introduce three legal heads to the team.

The Chairperson asked if the sports day activities run by DoE were only at head office, or also at regional level.

Mr Mnguni explained that the sports day currently took place at the head offices in Pretoria, and all regional offices close to the head office could attend. However regional offices in other provinces had their own sports day.

The Chairperson suggested that the DoE also install data lines at a faster pace, especially at regional offices.

Mr Mnguni responded that the data lines project for regional offices  was run by Telkom, but there were still serious challenges to access which needed to be addressed. This would be completed by the end of the financial year.

The Chairperson asked how the regional offices were established and what identity they assumed in relation to the head office.

Dr Wolsey Barnard, Deputy Director General, DoE said the structure for regional offices had recently been changed because of the restructuring within the DoE. The focus now was on broad based energy programmes at local level. The job description of these staff in the region had also changed, to either Project Manager or Project Coordinator. The focus of activities was previously more on petroleum and petroleum regulation. Staff were now being trained to operate different energy efficiency programmes.

The Chairperson thanked the DoE, and asked that a 3-page report on SARI be forwarded to the Committee, as well as a report on Coal 3.

Regulatory Regime in South Africa: National Energy Regulator of South Africa (Nersa) briefing
The Chairperson explained to Members that the briefing on the regulatory regime would prepare Members for amendments to the legislation that were to be introduced.

Mr Charles Geldard, Regulatory Specialist: Electricity Regulation, National Energy Regulator of South Africa, noted that the regulatory context for the National Energy Regulator (Nersa) was derived from the National Energy Regulator Act of 2004. Nersa was established on 1 October 2005 by the Nersa Act. Nersa was an statutory, independent regulator responsible for the regulation of three energy industries: electricity, piped gas and petroleum pipelines. Some of the major pieces of legislation that governed the industry were the Electricity Regulation Act, 2006, the Gas Act, 2001, and the Petroleum Pipelines Act, 2003

He described the composition of Nersa, as designated by the Minister of Energy, as including:
•One part-time member as chairperson
•One part-time member as deputy chairperson;
•One full-time member as the Chief Executive Officer (CEO)
•Three full-time members to be primarily responsible for each of the regulated industries.
•Three other part time members

Mr Geldard explained that the budget for the regulation of the three industries was ring-fenced in order to reflect the cost of regulating each industry appropriately, as required by the Act. The budget was funded by the three sectors, through levies.

Energy regulation meetings were open to the public, subject to the Protection of Access to Information Act. In relation to electricity regulation, Nersa was required to take into account considerations around governance, efficiency and long term sustainability, in order to safeguard the interests and needs of present and future customers. Nersa also had the responsibility to facilitate investment in the Electricity Supply Industry (ESI), to ensure universal access to electricity and a fair balance of interests of all stakeholders. Nersa’s three tasks pertaining to energy regulation were the diversification of energy resources, promoting the efficient use of energy, and promoting competitiveness with regard to customer choice.

The Electricity Regulation Act outlined some of Nersa’s functions, which included:
- Licensing of Generation , Transmission, Distribution ,Trading, Import and Export
- Regulation of tariffs and price structures
- Issuing rules to implement national government's electricity policy framework, the Integrated Resource Plan and the Act
- Gathering and storing industry information
- Setting of licence conditions  and standards

For regulation of electricity prices, Nersa used a Revenue Requirement Methodology based upon the wording in the Act, which in turn led to a rate of return methodology. With regard to licensing and compliance monitoring, the Electricity Regulation Act required that anyone who was involved in Generation (Gx), Transmission (Tx), Distribution (Dx), Import/Exports and Trading should be licensed by Nersa, and within Nersa, the Electricity Licensing and Compliance Department was responsible for these functions.

Mr Geldard described the industry structure as one that was vertically incumbent, with Eskom dominating. Eskom was responsible for the generation of 96% (~26 Power stations) of electricity in the RSA and 60% of distribution. There were 188 licenced distributors, including Eskom distribution. These included 174 municipalities, 13 private distributors and Eskom. About 93% of South Africa’s electricity was generated by coal.

Some of the challenges faced by Nersa pertained to:
- Municipal tariffs, which included the cost of supply studies, issues of structure at municipal level and the fact that municipal revenues still needed to be funded by rates
- Resellers, since a Constitutional Court decision made property owners responsible for paying service charges
- Accuracy of information, as Nersa recognised that much information it received from municipalities was unreliable, meaning that workshops on information management therefore needed to be held for municipalities
- Information Asymmetry with Eskom

Regulatory Regime in the Electricity Supply Industry: DoE briefing
Mr Ompi Aphane said that he would not repeat the information already given by Nersa, but would focus on a few remaining issues.

Mr Aphane agreed that about 97% of South Africa’s electrical power requirements were supplied by Eskom ,and 10 out of 11 of base-load power stations were located in Mpumalanga. The rationale was that the power stations needed to be close to the primary fuel input, which was coal. Power was therefore transported throughout the country through transmission (TX) and distribution (DX) networks. This was referred to as Centralised Power Generation.

He said 40.9% of South Africa’s electricity was consumed by the industrial sector, 36.8% by the residential sector, 11% by the commercial sector, 2.7% by transportation and 8.1% by other industries. South Africa therefore needed over 45 600 MW new generation capacity by 2030, in order to meet the country’s electricity demands. With regard to electricity production, 92.6% of the electricity was from coal, 5.7% from nuclear power, 1.2% was pumped, 0.5% from hydroelectric power and 0.1% from gas turbine. South Africa therefore had a plant mix made up of 27 stations, whose total generation capacity was 44 175 MW.

South Africa was the fifth largest coal producing country in the world, with coal reserves of 30 408mt (3.68% of world total). It had only one nuclear power station at Koeberg, Western Cape. The DoE’s intention was that nuclear power would comprise about 17%of South Africa’s base load energy mix by 2030. DoE was also busy with the construction of a Renewable Energy Programme, and was also looking into importing hydro power.

Mr Aphane outlined that the electricity supply industry (ESI) legislative framework included the Electricity Regulation Act 2006, Nersa Act, Eskom Act, the Companies Act, and the Public Finance Management Act

Mr Aphane discussed the difference between Feed-In tariff and Bidding tariff. A Feed-In tariff was one at which power was sold to the grid, before the bid stage. Determination of such a tariff was theoretically based. For example, if the tariff was too low the market would not be responsive, but if the tariff was too high the consumer would overpay. Nersa did not have the legislative mandate to prescribe tariffs up-front. The Bidding tariff, on the other hand, was a tariff where power was sold to the grid through a competitive bidding process. Tariff caps were set, based on market sound requests and proposals. Nersa issued individual generation licences based on the proposed funding model which determined tariff output. If the individual tariff was too high, the individual bid might not be selected.

He reiterated that Nersa regulated the pricing regime, and set its tariffs based on its Multi-Year Price Determination Methodology (MYPD). In November 2008, the Government approved the Energy Pricing Policy (EPP), which set the determination of regulated revenues for the future. The EPP aimed to reach cost-effective tariffs that would reflect the full economic cost of supplying electricity to a customer. EPP determined a 5-year transition period, which would end in the 2015 financial year, to reach cost-effective tariffs. The DoE was mainly responsible for electricity generation planning via the IRP, which determined electricity generation capacity requirements in South Africa. The main objective of the DoE was to develop a sustainable electricity generation capacity over the next 20 years.

The Chairperson thanked Nersa and DoE for the presentations, which were helpful. He noted the time constraints and thus asked that Members forward any questions in writing to the bodies. He also asked that information on best practices be sent to the Committee by Nersa, in writing.

The meeting was adjourned.