Solar energy water heaters: rollout plans and opportunities for small business: Departments of Public Enterprises, Energy, Eskom, SA Bureau of Standards briefings

Small Business Development

05 November 2014
Chairperson: Ms R Bhengu (ANC)
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Meeting Summary

The Department of Energy (DOE), Department of Public Enterprises (DPE), South African Bureau of Standards (SABS) and Eskom briefed the Committee on the plans and progress in relation to the roll out of solar water heaters (SWHs) and how these plans specifically catered for the development of small, medium and micro enterprises (SMMEs) and cooperatives. The Chairperson pointed out, in her opening remarks, that the government had a policy to ensure 70% local procurement, which was directly linked to job creation, and this was most necessary since the current unemployment stood at 25% and percentage of those receiving social grants had risen. Public procurement was one way to ensure that more people were skilled to take on employment.

The DOE noted that the programme for SWHs had two aims; one to improve energy efficiency by switching household appliances to clean energy, and another to cushion the poor against rising electricity prices. The targets for conversion to SWHs were set at five million high income households, 9.6 million low to medium, and 4.6 low income households, and the systems should be installed for both high and low pressure systems. The 70% local content would mainly be directed to tanks and collector units. The background was described, and it was noted that a new contracting model had replaced the former rebate. DOE conceded that progress had been slow, and households found it expensive to pay the upfront costs, and then could not afford to maintain the systems. Some municipalities had signed agreements but there had been delays in rolling out local content verification. The majority of installations were for low pressure systems, and used imported units, and this did not lead to substantial energy reductions for local content. There was not sufficient economy of scale. Transformation was needed up and downstream. The DOE was now emphasising social upliftment and proposed to provide free installations with maintenance models. DOE would provide he implementation programme to Eskom which would enter into supply agreements with municipalities and have to meet SABS requirements, and installation agreements with registered installers. The Department of Labour would partner on training. A Green Economy Accord attempted to improve local content. SMMEs and cooperatives (Co-ops) had a vital role to play in participating in manufacturing and installation of SWHs. Local people were being trained to check that houses could support the weight of the units.

The DPE confirmed that this Department needed to find an independent implementation partner for energy efficiency, and remained fully committed to its oversight function.

Eskom confirmed that it was the implementing agent for the SWH programme, and its focus was similar to the DOE. However, the point was made that water quality was also important for the proper working of the units. If Eskom was able to roll out according to the proposals, 100 permanent jobs would be created on the manufacturing side, 2 000 temporary jobs on the installation side, and 1 000 permanent jobs in maintenance. There had been problems with initial tenders meeting the specifications, but the Further Education and Training (FET) colleges were now providing a  pipeline of skilled workers, whilst Eskom had trained matriculants to be energy auditors. It was anticipated that four people in a team would be able to install four to five systems a day. R4.3 billion had been allocated to the SWH programme, through the DOE. The largest portion of the SWH budget went to manufacturing, and 40% of that was ring fenced for black owned manufacturers. 100% of the installation budget would be set aside for installation by local SMMEs and Co-ops, and there were also supply and maintenance plans. The key objectives were summarised.

The SABS explained that its mandate of SABS was to protect the economy and protect SA jobs. It developed standards for the country and provided training to implement these standards. In order to tender for SWHs, the manufacturers needed to be able to provide proof of SABS marks, and the point was strongly emphasised that poor quality products in the past, without SABS approval, had hampered service delivery, were unsafe and posed risks of damage to property and people. Any Eskom-installed system would have been tested for quality assurance. There was still a problem in that local importers, often BEE companies, would try to persuade Eskom to use their products although this hampered localisation.  Promotion of localisation to become a global leader. Often, for SMMEs and Co-ops, funding was a major challenge, as well as lack of infrastructure.

Members enquired how the various presenters saw the space for SMMEs and Co-ops and urged that these be specifically considered. They asked how skills development was to be enhanced and what engagement there had been with the Department of Small Business, who should also be asked to brief the Committee as the lynch-pin between the various initiatives. They questioned whether the tender process was user-friendly, and what SABS was doing to assist small business development. They wanted to know how partnerships with the provinces were progressing, and how accessible the information was to the public. Members expressed concern at the missing of some targets, and sought clarity where the majority of jobs were likely to be created. One Member asked whether Eskom's mandate was to produce cheap and efficient energy, or whether it did in fact have a developmental or social focus. Emphasis was placed on the need to have a consistent and certain policy environment, and to monitor the local content target to ensure that there was no fraud. Members asked why there seemed to be a focus only on SWHs and not on solar voltaic cells for other areas of the house, why there was not more emphasis on flat-panel systems, whether the targets for numbers of installations per day were not too ambitious, whether the five-year lifespan of the SWHs justified the costs and whether the locally-produced units could be exported to Africa and overseas. They commented that the budget for research and development needed to be increased, as South Africa needed to move up the value chain in intellectual property. Members were also concerned whether houses, particularly in rural areas, would be able to support the units, and what plans there were if they were not,  and whether Eskom planned any memoranda of agreements for new contractors, whether SABS testing also involved other departments. Members wondered whether the DOE, SABS and Eskom were taking co-ops seriously, suggested the need for more specific policies directed to them alone, and urged that inter-departmental duplications must be found and eliminated. They also urged that there should be more emphasis on compliance by the municipalities.

Meeting report

Chairperson’s opening remarks
The Chairperson noted that the use of solar water heaters (SWHs) and their potential for small businesses (SMMEs) and cooperatives was being discussed today as a link to the ANC policy on public procurement. The National Development Plan (NDP) provided a blueprint on certain areas for development. This Committee focused on the fact that SMMEs must be empowered. The South African (SA) government had a 70% local content procurement policy, which related to job creation. The percentage of the population receiving social grants had increased from 12.7% in 2003 to 30.2% in 2013. Government expenditure would increase in this area. The unemployment rate reached 25% in 2014. The need for local content and job creation was dire. The Committee needed to understand who was actually unemployed, and to note that the majority of these people were presently unemployable, and the government needed to up-skill them through public procurement. There was ongoing discussion around how and whether ESKOM had opened up spaces for job creation in the solar water heater space. When the Committee spoke  about SMMEs, it was also talking about manufacturing. Eskom’s strategy implementation plan for SWHs had also been discussed and SABS would be asked to share its strategy and vision on the topic.

Rollout of Solar Water Heaters: plans and opportunities
Department of Energy briefing

Mr Khanyiso Zihlangu, Project Manager,  Department of Energy, said his presentation would outline how the Department of Energy (DOE) intended to open up business for small, medium and micro enterprises (SMMEs) in the sector for solar water heaters, and to share with the Committee some of the progress made and the opportunities identified.

The background was briefly set out. The SWHs were one of the interventions that looked to improving energy efficiency, under the DOE's National Energy efficiency strategy. The DOE aimed to reduce energy demands by switching from conventional energy usage to clean energy for kettles, geysers and other household appliances, and had a target that five million high income households should convert to SWHs, as well as 9.6 million low to high income households and 4.6 million low income households. The DOE needed to cushion the poor against increasing electricity tariffs and make sure that access to SWH was universal. It had been able to create local jobs by localising the manufacturing and technology for SWHs. The target was not less than 70% local content, mainly by way of the tanks and collectors for SWH units.

He described the process to date. This had been started with a specific budget vote for SWH projects in 2009, and in the same year a conference on the topic was held. In 2011, the Green Economy accord was signed. In 2012 there was also a SWH budget appropriation and at the end of 2012, a rebate programme was ended by Eskom. In 2013, SWHs were designated for local content. In 2014,National Treasury (NT) had signed off instruction notes for local content. A new model of contracting had replaced the rebate programme.

Mr Zihlangu conceded that progress thus far had been very slow. For the homeowner, it was too expensive to pay for upfront costs in SWHs, which cost between R10 000 and R15 000. The DOE had a list for the Members, indicating which municipalities have taken up the new strategy.

Mr Zihlangu described some of the implementation challenges, as follows:
- There had been delays in rolling out local content verification on the basis of the Memorandum of Agreement (MOA). The SA Bureau of Standards (SABS) had created a standardising measure for local content, but this took some time
- Transformation needed to happen, upstream and downstream
- Although over 417 000 installations had been achieved, the majority were low pressure systems, which did not lead to massive energy reductions or efficiency. Most of these installations were imported and no technology consistency was used
- The home-owner was responsible for his/her own geysers and maintenance, but since many of the house-owners had a low income, this often led to poor lifecycle maintenance

Mr Zihlangu then described the approach to the implementation of the SWH project. The DOE was emphasising social upliftment. DOE would provide free installations, which had a full life-cycle model attached to them, to cover maintenance. Installations would relate to both low pressure and high pressure geysers. For the low pressure geysers, the SWH would be an "add on" to assist a normal geyser, whereas with the high pressure systems, the SWH would be a complete replacement of the traditional geyser.

Giving an overview of the programme, he noted that there was a small market in SA, which meant that manufacturers did not have the economies of scale. DOE provided the implementing programme to Eskom, via a MOA. Eskom had a supply agreement with manufacturers that needed to meet SABS requirements. Eskom would enter installation agreements with registered installers, alongside municipalities. The Department of Labour would be engaged to partner on training.

He added that a Green Economy Accord had been signed to improve local content, and to roll out one million units. Most companies were happy with importing products. However, the importance of local content had been firmly stated. SMMEs and cooperatives (Co-ops) had a vital role to play in participating in manufacturing and installation of SWHs. DOE had tried to rebalance the skewed allocations across provinces, with the Eastern Cape and Gauteng taking the largest portion of the "budgeted pie".

He noted that the SWHs weighed over 100 kilogrammes, and so local people were needed also to conduct feasibility studies to see if houses' current structures could support the SWHs. There was an opportunity to train people to conduct these studies. Mobile devices could be used, via an application, to report on installations. Over one year, maintenance would be provided, conducted by a local company.

Mr Zihlangu emphasised again that the high upfront costs created a barrier to entry to the widespread roll out of SWHs. However, jobs would be created at various levels of the value chain, through this new approach.

Department of Public Enterprises (DPE) briefing
Mr Lesego Molatlhwe, Chief Director, Department of Public Enterprises, apologised in advance that he would need to leave the meeting early as he had another meeting for which he must prepare. He noted that the SWH programme was fully funded, externally. The biggest question for the Department of Public Enterprises (DPE) was how to find an independent implementation partner in the area of energy efficiency and SWHs. The DPE remained fully committed to doing oversight in relation to this programme (as the lead department for the State Owned Companies). 

Eskom briefing
Mr Andrew Etzinger, Senior General Manager: Integrated Demand Management, Eskom, noted that Eskom was the implementing agent for the SWH programme. His presentation shared many points of similarity to that of DOE. He suggested that he should make a brief oral submission on the points that the Chairperson had raised, and then hand over to his colleague, who would discuss the commercial angle.

The SWH project was also concerned with water quality and availability of water, since poor quality water could damage the SWHs. In terms of the jobs created, Mr Etzinger noted that if Eskom rolled out according to its proposed model, this would result in 100 permanent jobs being created on the manufacturing side. The majority of jobs would be created in relation to the installation of SWHs, with about 2 000 jobs, which would be temporary, but 1 000 permanent jobs could be created to deal with the maintenance of SWHs.

He noted that when the initial tender went out for SABS-approved procurement, no tenders were adequate. presently, the Further Education and Training (FET) colleges were training people on SWHs, and providing a  pipeline of skilled workers. Eskom had trained up two cohorts of energy auditors, and 100 matriculants had become energy auditors.

He explained that the essential difference in systems was that the low pressure system used gravity to feed the water, and the high pressure system used direct pressure to force water through. Buckets were vital in the system to keep water flowing through the system. Only one manufacturer currently made the glass tubes for SWHs, so the challenge was to get this certified as a local content, to pass tender requirements. The 270 municipalities needed to apply to the DOE to roll out the programme. Investigations had to be done to ensure that the roof on a structure would be able to support the weight of the SWHs. Often, a team of four people would be able to install four to five systems a day. R4.3 billion had been allocated to the SWH programme, through the DOE. 

Stakeholders included Eskom, SABS, the municipalities, manufacturers and installers. He confirmed that the main opportunities for SMMEs and Co-ops lay in the maintenance side. Like the electric geysers, the expected e life cycle of SWHs was around five years, thus there was a big opportunity for maintenance work.

Mr Matshela Koko, Acting Group Executive: Technology and Commercial, Eskom, said that the question was how to get co-ops and SMMEs into the Eskom value chain. The largest portion of the SWH budget went to manufacturing. 40% of the manufacturing budget would be set aside or ring fenced for black owned manufacturers. 100% of the installation budget would be set aside for installation by local SMMEs and Co-ops. Eskom,for the last three to four years, had been looking at internal policies and making sure that Eskom was aligned with the government targets and plans. There were challenges and Eskom had identified strategies to target SMMEs and Co-ops in particular. He noted that all procurement in Eskom was derived from a government mandate. Designing for the local procurement and market was done at all levels including engineers, technology, specifications and maintenance. Eskom would be earmarking 40% for local manufacturers. It had developed a supply maintenance plan, including 42 operational and project spend focus areas, which made up 89% of its procurement spend.

He outlined five of the key objectives, for localisation, skills development (with a target of 2 500 skilled workers in 2014/15, and another 2 500 skilled workers in 2015/16), job creation (16 334 jobs in 2014/15 and 8 317 in 2015/16), industrialisation, and enterprise/supplier development Key performance indicators (KPIs) were noted for each (see attached presentation) and were embedded in the processes.

South African Bureau of Standards briefing
Dr Boni Mehlomakulu, Chief Executive Officer, South African Bureau of Standards, noted that the Bureau for Standards (SABS) was over 70 years old. She wanted to speak in the main to issues of quality assurance. The main mandate of SABS was to protect the economy and protect SA jobs. It developed standards for the country and provided training to implement these standards.

She explained that in order for SWHs to be available for tender, the manufacturers needed to have a SABS mark. The costing often involved talking about a rand amount, but it must be remembered that a costing exercise should also take into account the cost of job creation and development. Procurement of poor quality products had hampered service delivery. The quality specifications were often not used in the tender process. In the past, some municipalities had implemented SWH installations without any standard and without going through SABS. The systems installed were often unsafe or had defects, with hot water leaking through the system, and posed potential risks of harm to people and property. No system would go through Eskom without being tested for quality assurance. She too emphasised that water quality was important.

Dr Mehlomakulu said that cheaper overseas products may in fact be more expensive in the long-term, as they would often break and deteriorate quicker than SA products. The problem with localisation was that normally there was a BEE contact who acted as a facilitator to bring in products that were manufactured from an overseas country. This BEE contact would want his 10% commission,and thus might try to persuade Eskom to rather use "his" product, which in fact prevented localisation. In order for localisation to happen, there was a need for a strong technology foundation. SA needed to move up the ladder to become a global intellectual property leader.

She noted that SABS started testing the SWHs in 2006. The focus then was on megawatts and not industry development. He reiterated that the main challenges were that innovators did not comply with standards, and local content verification was often snubbed.

Mr Frank Makamo, Executive: Certification, SABS, noted that there were time constraints and said that he would only briefly present the slides in his presentation (see attached document for full details). The perception was that SMMEs and Co-ops were not up to scratch to deliver on the project. The SABS's focus was on strategic partnerships with agencies and other departments. Funding was the biggest challenge. There was also a clear lack of infrastructure, with quality assurance not being a requirement in some government departments.

Dr Sadhvir Bissoon, Executive: Standards, SABS, noted that the process for verification was quite straightforward.  Documentation was submitted by an organisation, to check for local content. The SABS had conducted verification on 59 SWH systems. Financial auditors checked the bill orders, and technical auditors verified the actual build. An extension of the supplier chain for SWHs would dilute the local content, but there were also a number of exemptions available for local content.

Mr X Mabasa (ANC) asked, in relation specifically to industrialisation, how the DPE saw SMMEs and Co-ops playing a role and creating their own space.

Mr H Kruger (DA) asked how the DPE was going to be involved in skills development.

Ms R Bhengu (ANC) queried whether there had there been any engagement between the Department of Small Business (DSB) and DPE, in regard to job creation and development.

Mr Molatlhwe answered that the DPE applied a procurement process and localisation programme that would support SMMEs and Co-ops. There was engagement between the DPE and DSB, and the two departments were in the process of finalising a framework. Further details would be provided as this unfolded.

Mr Kruger (DA) asked what  Eskom had done about business skills development. He noted that in order to find and deposit documents in tender boxes, applicants to the tender process often had to travel quite far. Small businesses needed to have feedback on their tenders. He asked what Eskom was doing to help them in this regard. 

Mr Kruger asked what SABS was doing to assist in small business development.

The Chairperson noted that the Department of Small Business Development (SBD) needed to be invited also to address the Committee as it would act as the link between the different initiatives on which there had been presentations today. She wanted to challenge Members to ask questions targeting departmental agreements and try to remove departments' duplication.

Ms N November (ANC) asked for clarity on Slide 8 and whether the proposals were still under way.

A Member from another Committee made the point that it would be necessary to form strategic partnerships with provinces, and asked if this was progressing. He wanted to know how accessible was this information to the public, and how regular was the interaction between Eskom and the SMMEs and Co-ops.

Mr T Ramokhoase (ANC) stated that a number of targets had been missed and were not reflected in the presentation. He asked what was the basis for the plans to alleviate poverty. He noted that when municipalities were involved, they were expected to perform certain duties. He asked about the budget for municipalities and how they were given targets and agreements. He noted the comment from Eskom that the majority of the jobs could be created in maintenance, but another of the presenters had suggested jobs in manufacturing, so he wanted more clarity on this.

Mr R Chance (DA) asked whether it was Eskom’s mandate to produce the cheapest electricity, or hot water, or whether it had a developmental focus. He believed the mandate of Eskom should be to provide energy efficiency, not get involved in social agendas. The building structure, ceilings and insulation of houses were more important than SWHs. A consistent and certain policy environment was needed. He further indicated that there was a tender problem, and the 70% local content target had led to many companies fraudulently claiming local content. The City of Johannesburg spent millions on SWHs that were poor and shoddy. He wondered what sanctions there were that were geared to protecting local content. Mr Chance asked why only one million was the target for contracted SWHs, and asked why the use of solar voltaic cells was not being looked at for other areas of the house.

Mr Chance also wanted to ask if DOE had set targets in terms of energy efficiency. Looking at the SWHs, he asked whether a five-year lifespan was enough to justify the substantial investment. He also thought the target to instal four to five systems each day was very ambitious.

Mr Chance noted that Slide 19 set out the expenditure planned for the next years, and asked what had been the outcome of this expenditure, what the life cycle was of the installations, and why there was an emphasis on glass tubes rather than flat panelled systems. He also wondered whether a plan for exporting SWHs into Africa and overseas had been formulated. He said that redefining intellectual property to be part of local content was vital. Increasing the budget for Research and Development (R&D) was required for the knowledge economy.

Mr S Bekwa (ANC) asked how poorly constructed rural houses were to be incorporated in the SWH rollout, given that the systems were so heavy.

Mr M Mulaudzi (EFF) asked how an SMME could get into the procurement side, and wondered if Eskom could enter into any MOA for new contractors.

Mr Mabasa asked what the results of the engagement with National Treasury were thus far.

Mr Mabasa asked whether the SABS had contractual engagements with other departments, with a view to testing products. Following up on an earlier comment he said that for many rural areas, where roofing was weak or was asbestos, any leaking water would damage rooves. He asked what specific strategies were intended to ensure that these poor households benefitted from SWHs.

The Chairperson asked why Co-ops did not appear to be part of the mindset of Eskom. She asked whether Eskom and SABS understood the difference between an SMME and a Co-op, pointing out that a Co-op was a group of people with a common problem and a common need.

Dr Mehlomakulu replied that SABS was already dealing with Co-ops and fully understood the differences between Co-ops and SMMEs. In relation to the problems cited with municipalities, he said that if contracts were awarded without SABS having been involved, SABS itself had no mandate to step in or stop municipalities from using other suppliers. This was a policy gap, and needed more thought.

Mr Koko stated that Eskom has a mandate from the shareholder, the government, as it bought goods and services. It did thus have a social mandate but it would have to balance this with reducing energy costs. The process for tenders had changed recently; there used to be a closed tender database, but now this had been changed to ensure that the medium for tenders was accessible to all types of companies. In each Eskom provincial office, there was now a tender office. In relation to the work that Eskom was doing around poverty nodes, he noted that these were traditionally found around the power plants.

Mr Etzinger added that if government did not buy SWHs, the local manufacturing for these would collapse. Therefore the main job focus needed to be on the maintenance side.

The meeting was adjourned.

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