Independent Power Producers Programme: status report by Department of Energy


23 August 2016
Chairperson: Mr F Majola (ANC)
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Meeting Summary

The Department of Energy presented a report on the South African Independent Power Producers (IPP) Procurement Programme, looking not only at renewable energy but all types of energy.

Renewable energy has been on a decreasing price path, by as much as 75% for solar, reflecting competitive prices. The onshore wind price decreased by 50%. By December 2016, 3 GWs will have been added to the national grid, 55 of 102 projects will be providing clean renewable energy to households and businesses across South Africa. Since the inception, the Renewable Energy IPP Procurement Programme (REIPPPP) projects have contributed over 8 000 GW hours to the national grid.

The IPP Procurement Programme has contributed significantly towards employment with about 111 835 jobs created since the inception of the IPPPP. The projection for 2023 is 371 000 jobs. Investment capital has also significantly been large, with R53.4 billion from foreign investment and R139.4 billion stemming from domestic institutions. This totals R194.1 billion for IPP development based on commitments for the 6 376 MWs procured (bid windows 1, 2, 3, 3.5, 4 and smalls). The projection for 2023 (based on 21448 MW) is R654 billion.

Members asked questions about the social impact of the renewable energy programme; training programmes for undergraduates and unskilled persons in the informal sector; statements made by the Eskom CEO and Chairman about renewable energy; job creation for the youth; the Inga Project with the Democratic Republic of Congo (DRC); ‘electricity banking’ and onerous requirements by Eskom on net-metering; the conversion of the open cycle diesel turbines to gas; fewer projects commissioned in the KZN and Mpumalanga; whether the R654 billion figure reflected in the presentation includes the whole IPP Programme or is for certain projects of it.

The Department explained that it does not buy megawatts but energy generated from power stations owned by developers. The capital investment should not be linked to the megawatt but the energy that is being produced in those stations and bought by government. The private sector absorbs all the risks from the development of power stations to their completion. Renewable energy is far more cost effective than Coal Fire Power generated power. More substantial investment capital is being invested in it.

Meeting report

South African Independent Power Producers (IPP) Procurement Programme: briefing
Mr Aphane noted that IPPs are required to submit quarterly reports on job creation, local content, management control, preferential procurement, enterprise development and small enterprise development  (SED). There is continuous improvement in monitoring the IPP programmes due to learnings from the first projects. There is also an ongoing engagement with universities and local government to improve the social impact of the IPP programme.

On renewable energy, solar photovoltaic energy has seen a decreasing price path with a 75% decrease. Therefore, without a doubt, the Renewable Energy IPP Procurement Programme is delivering energy at increasingly cost competitive rates. The onshore wind price trend has decreased by 50%. By December 2016, 3 GWs will have been added to the national grid since the inception of renewable energy (with 55 of 102 projects providing clean renewable energy to households and businesses across South Africa). Since inception, the projects have contributed over 8 000 GW hours to the national grid.

On job creation, the IPP has contributed in employment cumulatively in construction and operations about 111 835 jobs. The projection for 2023, the IPP programme would have created 371 000 jobs. This shows a significant increase in employment as a result of this programme. Investment has also increased significantly with R53.4 billion committed from foreign sources and R139.4 billion from domestic financial institutions.

Mr M Matlala (ANC) asked about the ongoing engagement with the universities and local government to improve the social impact of the Renewable Energy Programme, and when is the training programme going to be concluded. It seems that some of the training programmes are targeted for people with Honours and Masters degrees, there is no undergraduate programme on renewable energy. Will the Department be able to have a programme designated for people with undergraduate qualifications and for people who do not have skills. Secondly, Mr Brian Molefe, the CEO of Eskom, made some comments about renewable energy, saying that ‘‘renewable energy is like a very old cell phone and the technology is not yet developed enough for it to perform efficiently and make a contribution to electricity supply in the country, therefore, relying on renewable energy is very clumsy.’’ He asked Mr Aphane to share some light on this statement. Thirdly, a letter was written by the Chairman of Eskom to the Minister of Energy stating that, ‘the utility was unwilling to sign further power purchase agreements with IPPs beyond the preferred projects under the bid widow 4.5’, He asked for the reasons behind this statement. The renewable energy project launched in 2010, it is stipulated that it has contributed less than 1% of the energy sources in the country. It has been over five years since the launch of the programme, what is the contribution of the project now? On the IPPs, it is stated that, the IPP programme has proved to be a success despite the challenges it encounters. However, the main issue is the lack of infrastructure, education, coordination and awareness raising. He asked when can the Department confidently say that the IPP programme has been achieved, because there has been a lot of ups and downs since its inception. He asked for clarity about the 2 778 youth jobs created by Avon during its construction phase, whether the number is inclusive of young women or refers to males only. Lastly, has the Department considered taking in young people for internship programme?

Mr P Van Dalen (DA) said that some things have been left out in the presentation such as small scale embedded generation – when factories generate electricity for their own use and an abundance of power is then put into the system. A net-metering system would have a meter that would move forwards and backwards accordingly, normally referred to as ‘electricity banking’, it is cost effective and works very well. So why are the people who are using this system judged by Eskom, and it is made difficult for them to connect to the grid, and only the big factories are allowed to do this? Why is it made so onerous for them? Why cannot Eskom embrace this system so that when people have excess electricity, they can give it to Eskom? Why do they have to apply for a generator’s licence to use this system, because it is impossible for these factories when one looks at economies of scale to cover these costs? Secondly, when will the regulations be finalised by the Department for low and middle voltage users. He noted that the CEO of Eskom and the Chairman should be called to order for the statements they made, because those kind of statements may chase away investors. He asked for an update on the Ingula Project – a renewable energy project which delivers about 950 megawatts to the grid and for clarity on the misleading statements that have been made to the public about this project. In KwaZulu Natal and Mpumalanga there are only a few projects, and he asked why is that the case. Perhaps the Department should consider placing the Russian nuclear reactor project there, because it is not like those provinces lack wind or the sun and people there are in need of electricity as well. He asked about the Solar Water Heating Project, and when will it be up and running. Lastly, he noted that the conversion of the open cycle diesel turbines to gas is more expensive as opposed to building new open cycle gas turbines on the gas pipelines where they are needed. The diesel generators were intended for emergencies not to run as a fleet, and they are not supposed to run all the time.

Mr R Mavunda (ANC) commented on the good work done by the Department based on the presentation. He asked whether the education programme in the Department considers the informal sector. And on the integrated skills development, is there data about the number of graduates and whether they have received adequate training with other institutions?

Mr J Esterhuizen (IFP) emphasized that he is not impressed with the presentation, because it is the same things over and over that are being presented, there is nothing new that addresses questions and concerns raised, such as, why the IPP is so expensive. He says this programme has drawn investment of over R190 billion and nothing much has been done. Wind Power came at 69 cents per kW/h which is substantially less than R1.19c per kW/h for new Coal Fire Power generation, which it seems will never be completed and so it will continue costing taxpayers a lot of money simply because of lack of management efficiency. Eskom’s electricity generation costs depends more on management than it does on efficiency yet it gave its directors about R18.3 billion in bonuses. This is very insensible to say the least. Renewable energy attracts foreign direct investment which also contributes towards the credit ratings, however, the R190 billion that was received from foreign investment has only produced 2200 megawatts/h which is only 30% of the energy that can be produced with that amount. The new Coal Fire Power stations will produce 9.6 gigawatt/h of power from that very same amount. The cost inefficiencies are too vast and this is something that needs to be looked at very carefully. Lastly, he asked about the R10 billion that has been paid for Inga.

The Chairperson asked for clarity on page 12 about the IRP 2010 target of 17.8 gigawatt of renewable energy by 2030, and page 18 for the projections on 2023 based on 21 448 megawatt. He asked if the R654 billion figure includes the whole IPP project or it just for certain aspects of it. The challenges are far deeper and serious than what is presented today, so will the Department meet the 17 000 MWs by 2030? He shared his deepest concerns about what is currently happening in Eskom in light of what the CEO and the Chairman publicly uttered.

Mr Aphane said the Ministers have engaged to deal with the issues that Eskom has raised in order to address them. In terms of the policy and regulatory framework Eskom is provided the necessary comfort about the costs related to independent power regulators being passed through without leaving a hole in Eskom. The issue around the costs is being repeated a number of times, what the end user pays for is the energy. The renewable energy IPP programme is structured on the basis of the kilowatt/h that is generated, but people confuse megawatt and kilowatt all the time. The Department does not buy megawatts but energy, it is only at the point where the generator produces a kilowatt/h that the costs reflected on the slides are paid. This means that the developer takes the risk in relation to how much they think their project will produce in energy terms not in megawatt terms. Therefore, the capital investment should not be linked to the megawatt but the energy that is being produced at those stations and bought by government. Where a power station is called to produce electricity at a set time, only then the Department pays for the capacity. Effectively, this means that in the renewable energy space you only pay for what you produce unlike for Coal Fire Power stations where the Department has to pay for it to be on standby to get the temperature at the correct level to produce the electricity that is needed at any given time. Basically, the Coal Fire Power stations are more costly than renewable energy.

Mr Jacob Mbele, Chief Director: DOE, said the reason generator users need to have a licence is because it is in the law. One of the first reasons for the onerous requirements is safety, this is also required by the local municipalities. There is also an issue around capacity within this matter, one of the biggest challenges is that most of the roof top vaults do not have storage which means that when it is not available, people expect the grid to support them, so if there are no rules that are clear in terms of how that is going to work then it will be difficult for the utility to play its part. There is also the issue of tariffs and maintenance, if the costs can be split between the utility and the consumer (factories) then perhaps that could be the start of building the relationship between the utility and the consumer. The Department has taken steps to engage with the key stakeholders to address these issues and if a consensus is reached within two to three months, a gazette will be issued.

Mr Maduna Ngobeni, Principal Energy Officer, IPP Office, said that training is looked at across different levels within the Department as far as social and educational development is concerned, not necessarily graduates only, but people who can do different things and equipped with skills that are useful for the IPP programme such as plumbers. The Department is of the view that such people could do work in the solar water heating programme and so forth. Some of the training is paid for by the IPP, and under the IPP there is a programme called Enterprise Development which is designated specifically to train new entrepreneurs but also people who have intentions to grow to that level at a later stage. There is also a programme which provides for socio-economic development at a community level that assists in training at both primary and secondary school level for learners, and some of the programmes within this space have already hired teachers to assist in training of the kids.

Mr Aphane added that there is a new university in the Northern Cape, and one of the ideas is to make it a centre of excellence for solar technologies and to place a chair faculty there sponsored by the Solar Water Heating Programme. The Department has also signed a collaboration agreement with CPUT for a renewable energy platform that will support the IPP programme in the formal space as far as students are concerned for training. SACRE (Southern African Centre for Renewable Energy) which is wider than SA, is a SADC initiative that was endorsed out of the SADC Energy Ministers meeting in June this year. The IPP Office in Centurion also offers a lot of informal training courses for the various courses within SADC on renewable energy. However, it is important to note that there is a lack of green energy training in the country, but through these various programmes the Department aims at closing that gap.

Mr Ngubane said about 2200 megawatt is already supplying power to the grid, but in building the power plant there has been a time lag. The construction started in 2010; in late 2013 various projects started connecting to the grid. It is worth noting that it takes about two years to build the PV plant depending on the size of course. The projects outlined on the slides have different commercial operation dates, they are likely dependent on the connection, and only Eskom issues the connection dates, so only until Eskom has given out a connection date will the projects commence to be utilised. The challenges causing the up and downs stem from the areas in which the projects are located. In addition ,the Department did not know at that point where the projects would be located because different provinces have different weather climates as well as the fact that the projects were clustered. The Department will commence working on revisiting some of the projects and try to open up the 50 km radius so that more people within the vicinity of those projects are able to have access to power supply out of the project. Also government and Eskom is involved, and both of these entities have different processes in terms of closing the deals. So the Department then needs to pull everything together in order to sign off on a project, and if there is a loophole the project will not go through. There are banks involved in this process as well, and the banks also have their own say about the projects, and all the parties in the value chain must be happy. If one is not happy, then the project will not go through. Basically, it is more complicated than it looks in terms of closing the deals.

With regards to the Avon youth employment, the figure for jobs created does include women, it is not only male youth but young females as well. There is a lot of discussion in the IPP Office on the internships. The Department has hired quite a number of interns. The plan is to take them further to different projects around the country for a wider reach and exposure. Currently the Department is working towards putting together an appropriate package that will cover all the necessary costs for the interns especially those who will be located in remote areas where accommodation may be an issue. If more costs are added to the project, then the project developer will have to absorb the costs. The reason there are no renewable energy projects in KZN and Mpumalanga is because the private sector approves the places in which it is best to develop the project, such as the climate: wind and sun, the price in the market also plays a significant role to that effect. So it would be expensive to have projects in those two provinces due to climate reasons, however, there are other projects that can be done such as coal generation in both provinces as well as gas, given that Mpumalanga is close to Mozambique, and KZN is also appropriate for gas generation because of its port. But the renewable energy programme would not be a financial feasibility in those provinces.

With regards to the Solar Water Heater programme, the Department looks at it from a repair and replace perspective with the view of getting the IPPs to support it. A high level inspection and verification study was conducted; it is a work in progress. In Sol Plaatjie, 20 people have been trained during the pilot phase to install the solar water geysers in the local community and to be in a position to repair them. Once the study has been concluded, the Department will be in a position to roll it out to other cities and use the same approach that was used in Sol Plaatjie. The OCGT conversion is an issue of planning and modelling, so an analysis of the cost infrastructure needs to be done in order to come up with the best possible solution. As for the R194 billion for the 2200 MW, it is a committed amount which came from the private sector not government. The Department only gives the private sector a contract once they have built the power plant, and it is only then that the Department pays but only for energy that is generated from those power plants. The figures reflected on the slides are just flagged.

Mr Aphane then highlighted that the R10 billion paid for Inga is not a correct amount, Inga (SA) signed a treaty with the DRC (Democratic Republic of Congo) and the treaty consists of subsequent phases and there was no payment made for the treaty. However, SA only paid $10 million which is a commitment fee for the first phase and this amount is refundable if SA does not opt out of the treaty, to cover the risk for the DRC to initiate project development which could be costly and if SA opts out at some point. The $10 million has not been paid yet and it does not apply to subsequent phases but only to the first phase of project development.

The meeting was adjourned.

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