Department of Energy on its 2016 Annual Performance Plan

NCOP Economic and Business Development

05 April 2016
Chairperson: Ms E Makue (ANC; Gauteng)
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Meeting Summary

The South African economy relies heavily on energy. South Africa was dependent on imported crude oil and was increasingly importing petrol and diesel. The petroleum sector employs about 90 000 people with an annual turnover of about R270 billion. The electricity industry (Eskom) employs approximately 46 000 employees with an annual turnover of R77.8 billion. To date 12 012 jobs have been created by the Renewable Energy Independent Power Producers and direct investment from IPPs is R120 billion. The 2015/16 highlights were:
- Country’s 20 year plan integrated resource planning for electricity with deliberate bias towards cleaner energy
- Renewable Energy Independent Power Producers
- Regulatory certainty, which will bear fruit through significant investments in energy infrastructure
- Improved access to energy services in rural communities
- Nuclear Build Programme
- Solar Water Heaters
- Implement National Infrastructure Plan (NIP) through PICC
- Revision and submission of legislative and other mandates to Cabinet/Parliament
- Grand Inga Project
- Capacity building and targeted training in the Energy Sector.

The Department of Energy identified the following challenges:
- Recent crude oil price drop and exchange rate fluctuations impact on biofuels implementation
- Clarity on end-state of electricity industry is delaying progress in new entrants and regulatory reform
- Transmission access and bottle-necks
- Lack of upgrading, refurbishment and extension of existing distribution network infrastructure for the last 15 years by municipalities and Eskom resulting in a R70 billion backlog
- Eskom build programme adherence to timeframes that result in budget overruns.

Members asked if load shifting was equivalent to load shedding; on the certainty of time frames for Eskom’s build programme; why DoE bases its reduction on a wish list than rather than on allocations given by National Treasury; why it hires communication consultants; if the Grand Inga project was progressing to ensure energy security as it was part of Agenda 2016; where money will come from for the Grand Inga project, how much will it be and what amount was South Africa contributing. The 14% reduction on the solar water heating project was very unfortunate. Members asked if DoE has ventured into gas exploration in Mozambique and how much was budgeted for the exploration; how much power was expected from the solar plants for the grid; and how increases in crude oil were affecting the DoE budget.

Meeting report

Department of Energy Strategic Plan and Annual Performance Plan 2016/17
Mr Lucas Mulaudzi, Acting Deputy Director General: Corporate Services, said the South African economy relies heavily on energy. South Africa was dependent on imported crude oil and was increasingly importing petrol and diesel. The petroleum sector employs about 90 000 people with an annual turnover of about R270 billion. The electricity industry (Eskom) employs approximately 46 000 employees with an annual turnover of R77.8 billion. To date, 12 012 jobs have been created by the Renewable Energy Independent Power Producers (REIPP) and direct investment from IPPs is R120 billion. The previous year’s strategic highlights were:
- Country’s 20 year plan integrated resource planning for electricity with deliberate bias towards cleaner energy
- Renewable Energy Independent Power Producers
- Regulatory certainty, which will bear fruit through significant investments in energy infrastructure
- Improved access to energy services in rural communities
- Nuclear Build Programme
- Solar Water Heaters
- Implement National Infrastructure Plan (NIP) through PICC
- Revision and submission of legislative and other mandates to Cabinet/Parliament
- Grand Inga Project

Mr Mulaudzi  identified the Department’s challenges:
- Recent crude oil price drop and exchange rate fluctuations impact on biofuels implementation
- Clarity on end-state of electricity industry is delaying progress in new entrants and regulatory reform
- Transmission access and bottle-necks
- Lack of upgrading, refurbishment and extension of existing distribution network infrastructure for the last 15 years by municipalities and Eskom resulting in a R70 billion backlog
- Eskom build programme adherence to timeframes that result in budget overruns.

Ms Yvonne Chetty, DoE Chief Financial Officer, said the Department’s budget allocation for 2016/17 is R7.54 billion. Earmarked transfer payments to public entities, municipalities and other implementing institutions amounts to R6.80 billion which is equivalent to 90.15% of the Department’s total budget. The remaining budget of R743 million or 9.85% is for operational expenditure, inclusive of payments for capital assets.  This is consistent with the trend of the budget for the past five years. The implemented reductions required a review of the Department’s performance targets so that they can be aligned with the funding received, specifically for the three projects which were significantly reduced. The spotlight has been placed on the compensation of employees. The funding reductions will impact on how the Department deals with its natural attrition over the MTEF period.  A freeze on certain vacant positions has been recommended by National Treasury. Specific measures to manage personnel expenditure and to develop tools to reduce personnel numbers in 2017/18 and 2018/19, are to be announced by the Ministers of Finance and the Public Service and Administration.  Prior to this, departments are required to manage the staff establishment to keep within the Compensation of Employees budget ceilings. A total of R200 million has been made available in 2016/17 for the New Nuclear Build Programme procurement advisors and consulting services

Discussion
Mr M Khawula (IFP, KwaZulu Natal) asked if load shifting was equivalent to load shedding. He asked how certain was the DoE about the time frames for the Eskom build programme. He asked why the Department bases its reduction on a wish list rather than on allocations given by National Treasury.

Mr B Nthebe (ANC, North West) asked why the DoE hires consultants on communication. He asked if the Grand Inga project was progressing to ensure energy security of South Africa and its neighboring countries as it was part of Agenda 2016 - the Africa we want. The 14% reduction on solar water heating project was very unfortunate. He asked for assurance that fiscal prudence will be adhered to.

Mr W Faber (DA, Northern Cape) asked where money will come from for the Grand Inga project, how much will it be and what amount was South Africa contributing. He asked if the DoE has ventured into gas exploration in Mozambique and how much was budgeted for the exploration. He asked how much power was expected from the solar plants for the grid. He asked how increases in crude oil were affecting the DoE budget. NECSA received two licence applications for nuclear to date and he asked where money for the nuclear build programme will come from given that only R200 million was allocated.

The Chairperson asked how much were IPPs contributing to the power grid.

Mr Thabane Zulu, Director General: DoE, replied that the nuclear budget allocation was for consultant work for the nuclear acquisition programme. No funding model had been arrived at for the nuclear programme. It has brought in specialists on nuclear who were doing the technical work on the nuclear programme together with legal and financial experts on nuclear. Fiscal prudence will be adhered to. The Grand Inga project needed a meeting on its own to explain the role South Africa will be playing, the role of neighboring countries, what has been done to date and the benefits to other countries.

Ms Yvone Chetty, Chief Financial Officer, replied that the indicative budget was a guideline of the expected funds from Treasury and the final was what Treasury will finally offer for that specific financial year. It uses consultants for communication for advertising and printing of bulk booklets. The DoE exercise financial prudence especially in the appointment of staff given current reductions in the staff budget. It was also implementing cost cutting measures in travel and hotel bookings, and the use of consultants.

Mr Ompi Aphane, Deputy Director General: Policy, Planning and Clean Energy, DoE, replied when there was an imbalance between electricity supply and demand, it results in load shedding. Load shifting was deliberately switching off for example a geyser without an adverse impact on the consumer.

Mr Tseliso Maqubela, Deputy Director General: Petroleum and Petroleum Products Regulation, DoE, replied that it was currently importing a lot of gas from Mozambique mainly used by Sasol for chemicals. A R3 billion investment had been made by Sasol to expand the pipe importing gas from Mozambique. It was waiting to hear from people who were awarded the blocks in Mozambique before making any final investment decisions. There was an import parity on crude oil determined by the exchange rate and the international system. In 2012, R8 was equal to a dollar and now it is almost double. Today’s price increase at midnight will return the prices to where they were in October 2015. For now it needs to strengthen relationships with countries that supply crude oil for preferential treatment. It was looking at starting to drill oil and gas at the shores.

Mr Zulu replied that DoE had had a number of engagements with Eskom on adherence to time frames on the build programme. It has put in strict monitoring mechanisms and where there was a deviation, it must be accompanied by a sound and scientific explanation.

Mr Wolsey Barnard, Deputy Director General: Energy Programmes and Projects, DoE, replied that the 86% access of electricity was both on and off the grid. It has to use solar and fuel cells to meet the electrification targets set by 2025.

Ms M Dikgale (ANC, Limpopo) asked if electrification programmes target the rural population.

Mr Nthebe said in the Northern Cape, there was a boom of green energy. He asked about the relationship between independent power producers and the green energy boom on transformation.

The Chairperson asked if there were sufficient skills for solar water heaters in terms of maintenance, repairs, localization and beneficiation. He asked what was happening on biofuels as there had been arguments that food security was being compromised for energy security, by using grain for biofuel. The South African Nuclear Energy Corporation (NECSA) performed terribly badly in the last financial year. The DoE must assure the Committee that such nonsense will not be experienced again given the massive investments on nuclear. Corrective measure need to be taken to address the accounting of NECSA.

Mr Zulu replied that the NECSA issue was a worry and it was his first task when he was appointed. Restructuring arrangements had been put in place and a new board has been appointed. It was working with the Auditor-General on what measures need to be taken. The Minister was dealing with leadership stability at NECSA. It was busy tightening its contractual process with the IPP Office on the transformational agenda and the renewable energy programme.

Mr Aphane replied that biofuels work only in a highly subsidized manner when oil prices were low. Under the current circumstances, the state does not have the money and the programme has been put on hold given the ensuing drought.

Mr Muzi Shange, Chief Operating Officer, DoE, replied the solar water heater programme was broken into two parts: one was the social aspect and the other load reduction. Load reduction targeted mainly public buildings and middle income groups. The social aspect was now advanced on its procurement process looking at manufacturing. The companies themselves will go out and do feasibility studies. The maintenance and spare parts was not an issue because the components were manufactured locally. The right appointments had been made at NECSA and things will start improving.

Mr Barnard replied that 75% of the budget allocation for electrification was earmarked for rural areas.

The Chairperson said Petro SA has excellent training centres on water reticulation and electrification. The mayors were also supporting the programmes by sending 20 young people to be trained on electrification. However, conditions at one of the plants need to be improved. The DoE was contributing to the skills development space and this needed to be commended. He thanked DoE for presenting to the Committee.

Meeting adjourned.

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