Department of Energy on its Annual Performance Plan, with Minister and Deputy Minister in attendance

Energy

02 May 2017
Chairperson: Mr F Majola (ANC)
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Meeting Summary

In her first appearance before the Committee, the newly designated Minister of Energy, Ms Mmamaloko Kubayi covered a wide range of important topics that were of concern to Members, particularly those related to the lack of trust and transparency from which the Department of Energy (DoE) was suffering. The meeting also covered the Department’s presentation of its annual performance plan (APP) for the 2017/2018 financial year.

Addressing the public debate around the selling of South African oil reserves to foreign enterprises illegally and not transparently, Ms Kubayi confirmed that the Central Energy Fund (CEF) had provided a report which exposed  the fact that the DoE, under the former Minister of Energy, had authorized a rotation or sale of the oil reserves to a foreign enterprise at a rock-bottom price. The Minister confirmed that the transaction had been a sale, and not a rotation, contrary to her predecessor’s declarations. The transaction had been carried out outside the CEF Board. Although she assured the Committee that there would be a legal prosecution, because those who had authorised the transaction had left the Cabinet, the responsibility of the DoE at this stage was to find existing legal avenues to correct the misdoing.

The Minister said that despite the current financial constraints in Government, the Department was focused on filling the vacancies in the DoE. On top of promoting transparency over the nuclear issue and more public engagement, the goal now was to capacitate the Department for the achievement of its objectives. In order to assist the DoE effectively, she intended to capacitate the National Energy Regulator of South Africa (Nersa) further, where the main challenge was having one chief executive officer (CEO) who led the administrative body while serving simultaneously as the regulatory body.

The Minister also touched on two topics that were part of current public discussion. Firstly, she gave an assurance that it was not her intention to privatise PetroSA -- the intention was to find a way to resuscitate the entity, which was highly problematic. Secondly, engaging with the different views on the use of nuclear and renewable energy was crucial in a situation where it was known that within two years’ time the country might experience shortfalls in electricity supply. Ms Kubayi also clarified that her reason for not signing Eskom’s Power Purchase Agreements was her intention to gather more information in order to act in an informed manner consequently.

The DOE presented its annual performance plan, covering its administration targets and the budgetary changes which would have an impact on its performance. The Department had received a budget increase below the estimated inflation rate throughout the medium term expenditure framework (MTEF) period. The DoE intended to engage with National Treasury over the budget, given that it would affect the core business of the Department. An amount of R30m had been deducted from the Integrated National Electrification Programme (INEP) and directly transferred to the National Radioactive Waste Disposal Institute (NRWDI), as it would be dealing with the nuclear build programme. 

Meeting report

The Chairperson said that during the next two weeks the Department of Energy (DoE) would prepare to adopt the Annual Performance Plan (APP) guidelines, which was the only item of the agenda for the session. Although the meeting would focus on the APP, he would welcome the intervention of the newly appointed Minister to interact with Members for the first time.

Ms Mmamaloko Kubayi , Minister of Energy, took the opportunity to present herself, to inform Members about previous positions she had held and to mention that the Deputy Minister, Ms Thembi Majola, would remain part of her team. She clarified that some aspects of the APP’s presentation had had be readapted after consulting the Auditor General (AG) for its inputs and after consideration of comments from Members. Consequently the targets for the financial year were now very clear, precise and measurable. She mentioned the DoE had tabled its responses to previous concerns, with a clear focus on providing provided Members with complete feedback on their contributions, particularly those around better transparency from the DoE.

In relation to the entities that the Department oversees, Ms Kubayi talked about the need of filling the vacancies occurring in many of them, always within the established budgetary constraints. The goal was to capacitate the Department for the achievement of its objectives, as well as positioning the DoE in a more effective position. The Department’s corporate structure and its lack of use of technical knowledge had affected this goal negatively. For example, in Kwazulu-Natal the Department had over 106 electrification projects and only two specialists supervising them, while only one person was controlling compliance and implementation for the entire province. The Department also lacked capacity in its policy unit, a fact that had been reported in the last Competition Commission’s report. She committed to meet with the Minister of Economic Development, Mr Ebrahim Patel, in order to plan this capacitation of the DoE. In her opinion, the current service delivery model did not meet the needs of the country.

Regarding the different state-owned enterprises (SOEs) belonging to the Department, the Minister did not want to name those that she admitted were lacking management oversight when reporting to the DoE and the National Energy Regulator (NERSA). She intended to further capacitate the latter to do its job. The main challenge was having one Chief Executive Officer (CEO) who formed part of the administrative body of NERSA while serving simultaneously as the regulatory body, and expecting him to be independent. This was an issue causing problems for the NERSA’s mandate. NERSA, together with the National Nuclear Regulator (NNR), needed strengthening. She commented on the good functionality of the Central Energy Fund (CEF), which had recently hired a new Chief Financial Officer (CFO), though other vacancies remained open -- for example, the position of Group CEO.

The Minister said that the CEF had provided a report that she considered of importance for future public engagement regarding the public debate around whether the DoE had authorized a rotation or selling of South African oil reserves to a foreign enterprise at rock-bottom prices. This issue had been a source of public controversy during the former Minister of Energy’s term. She confirmed that the transaction had been a sale, and not a rotation, against her predecessor declarations. As per the report and her conversations with the CEF Board, the transaction had been carried out outside the Board. Given that those who had authorised the transaction had left the Cabinet, the responsibility of the DoE at this stage was to find the existing legal avenues to correct the misdoing.

She emphasised that PetroSA was the institution that concerned the DoE deeply, so the Department planned to meet with its management, even though it could not interfere in the institution directly. She said that particularly the case of Project Ikhwezi should be the subject of further accountability. Such an institution could not underperform and yet remunerate its Board with annual bonuses that were not based on performance. Likewise, the Competition Commission inquiry into the Liquefied Petroleum Gas (LPG) sector was of concern.

The Minister mentioned that within the DoE, the areas of policy and programmes were going to consume most of its work. The development of infrastructure and the cost of long-term programmes worried her because investment and expenditure, though necessary, were currently very restricted. The country had committed to reduce its carbon emissions by 34% by 2020, so nuclear energy and renewables were highly important. To achieve this goal and others, engaging with those holding different viewpoints was crucial in a situation where it was known that within two years, the country might have shortfalls in electricity supply. With regard to the nuclear build programme, there were no underlying issues around public participation. However, it could be necessary to establish a public hearing in the House about the further adoption of nuclear energy.

She was confused as to how external parties outside the DoE had arrived at the figures quoted that supposedly corresponded to the nuclear build programme. When she arrived at the Department, one of the first issues she had intended to handle was the nuclear deal, yet the personnel at the DoE had informed her that currently no deal existed and that the Department was just following different international energy agreements with the United States (1995, revised in 2009), Russia (2004 and 2014) South Korea (2010), China (2006 and 2014) and France (2009 and 2010), Many of these agreements were part of the United Nations’ global objectives. Her key concern was the court judgment that had stopped the nuclear build programme, because it affected the work the Department did broadly. The Department was now considering the possibility of appealing the process. The resolution of the judgment, together with the Integrated Resource Plan (IRP) and Integrated Energy Plan (IEP), which were the determining factors for creating a climate of investment security for the international community.

Lastly, the Minister added that her presence in the Portfolio Committee had been her first public engagement, which was why she had touched on a list of important points. Overall, the Department’s current needs were for capacity, transparency and responsiveness, as well as job creation and contributing more to the economic growth of the country. She would share more with the public on 19 May during the medium-term budget session.

The Chairperson showed appreciation for the Minister’s contribution, and reminded the attending public that the House rules did not allow for external participation. He clarified for Members that the session should focus on the APP and not the Ministers’ contribution, though questions would be allowed. About the ongoing legal process around the nuclear build programme, he said that in the opinion of the Department, further engagement and public discussion were always more desirable than the initiation of legal processes.

Annual Performance Plan: DOE presentation

Mr Thabane Zulu, Director General: Department of Energy, said that the Chief Operating Officer and Chief Financial Officer of the DoE would present the APP, though Members could refer their questions to the different Directors and Deputy Directors who were present.

Programme 1 - Administration

Mr Muzi Shange, Chief Operating Officer, said the first point to be considered was the established target of achieving an average Management Performance Assessment Tool (MPAT) score of at least 2.8, based on the assessment of the previous financial year. The process of this assessment had two steps -- the first in September, with the final analysis to be carried out in December. The second annual target would be to achieve an unqualified audit report from the Auditor General for 2016/17. Other targets focused on the number of quarterly progress reports detailing the implementation of the 2014–2019 medium term strategic framework (MTSF) outcomes to be carried out during the 2017/18 financial year, as well as a series of bilateral intergovernmental engagements to be hosted in the energy sector. These engagements would take place in Belgium and excluded African states, but ten other planned public engagements would focus on the continent. Another objective for the Department was to produce progress reports on the implementation of international energy sector agreements. The Department intends to pay 100% of approved invoices within 30 days of receipt, in line with its performance in 2017.

Regarding corporate resource management, the DoE planned to keep its vacancy rate below 10%. Progress reports on the implementation of the human resources (HR) plan would be delivered each quarter, as well as quarterly progress reports regarding the 2% of people with disabilities employed and the 50% women targeted in senior management positions, as per Cabinet’s instruction.

Programme 2 – Energy Policy and Planning

The Department planned to present its annual energy balance (2015) by March 2018. The Integrated Energy Plan (IEP) would be promulgated, taking into account public comments as well as a socio-economic impact assessment. The DoE would submit a Cabinet memorandum on the Gas Amendment Bill to unlock infrastructure development regarding gas pipelines, storage and regasification. The Department must revise the regulatory model for LPG rollout and increase the use of LPG as a thermal solution for the residential sector. A key concern was also to analyse the need for new oil refinery capacity.  Finalising the recommendation on Clean Fuels 2 was also a priority. The Department intended to resubmit the Cabinet memorandum on biofuels, taking into consideration comments about the extent of fiscal incentives.

On the Integrated Resource Plan (IRP), the Department had to finalise the updated IRP, taking into consideration public comments. The updated version must include the carbon capture and storage pilot project. Finalisation of the gas development plan and initiating negotiations with Mozambique regarding gas infrastructure development was also planned. The DoE had to resubmit the Cabinet memorandum regarding the National Energy Regulator Amendment Bill, considering comments by Cabinet. Likewise, the submission of proposals regarding the ‘end-state’ electricity sector was pending.

Other aspects to be achieved during the APP regarding energy and policy were to promulgate regulations for licensing and embedded generation, and to undertake a phased municipal asset management programme, focusing on revenue management, energy efficiency, or asset rehabilitation as applicable. Increasing the generation capacity through coal, gas, biomas and renewable energy was key, in line with the updated IRP. Increasing co-generation and cross border projects needed to follow the new IRP as well.

Lastly, the DoE had to finalise the transmission infrastructure solution required to evacuate the power from the Democratic Republic of Congo (DRC) over Zambia, Zimbabwe or Botswana, and into RSA. The launching of new generation capacity bidding rounds, in accordance with the pace and scale approved under the IRP, was also required.

Programme 3 – Petroleum and Petroleum Products Regulation

The Department forecast that 1 500 retail site compliance inspections were to be conducted, and a target of 1 080 fuel samples were to be tested. Another target was that 50% of licence applications approved should include 50% black economic empowerment (BEE) ownership. The Department intended to release several publications of the Petroleum Products Market Analysis reports, and to publish 12 audit reports on fuel price adjustments from external auditors.

Programme 4 – Electrification and Energy Programme and Project Management

The DoE would publish four quarterly reports on the additional households to be electrified through grid electrification, to achieve the 2017/18 target of 235 000 in the National Electrification Plan. Four quarterly reports would also be released on the building and upgrading of electrification infrastructure projects included in the 2017/18 targets, as contracted with Eskom and municipalities. There would be quarterly reports on additional households electrified with non-grid electrification towards the 2017/18 target of 15 000 in the National Electrification Plan, and quarterly reports and an annual report regarding the development of rural Integrated Energy Centres (IECs).

The Department planned to present the approved implementation plan on IEC strategy; bi-annual reports on interventions or support provided to municipalities struggling with electricity infrastructure rollout; and an additional bi-annual report on infrastructure development and rollout in the country.

Programme 5 – Nuclear Energy

Regarding the development of nuclear energy in South Africa, the amended National Nuclear Disaster Management Plan must be approved, along with the Nuclear Build Programme governance framework. An inter-governmental implementation protocol was expected to be approved, and so was the the Nuclear Build Programme. The DoE intended to submit the amendment Bill to the Forum of South African Directors-General (FOSAD) cluster for approval, and had the expectation of developing a nuclear communications and stakeholder engagement strategy for further engagement

Programme 6 – Clean Energy

In clean energy, 0.5 Terawatt-hours (TWh) of energy savings realised and verified from Energy Efficiency and Demand Side Management (EEDSM) projects were on the agenda. The development of energy consumption baselines for 15 additional municipalities was expected. A post-2015 national energy efficiency strategy was expected to be approved and included in the IRP.  The Department also expects to update the renewable energy implementation report. The finalisation of the biomass/biogas to energy strategy and plan were programmed for the financial year, as well as a functional Renewable Energy Data Information System (REDIS). A Solar Energy Technology Roadmap (SETRM) would be included in the IEP. An increase in the number of procured baseline systems, in line with the budget allocation and targeting youth trained under accredited programmes to install the systems at target municipalities, was planned. The DoE expected to initiate the load reduction programme through solar water heater installations, and it would monitor and reduce energy consumption in target buildings as part of the energy and climate change strategy. The annual compliance report on the 3rd Environmental Management Plan Edition would be developed. Coordination services for the different projects with the Danish, German, UK and other related clean energy programmes had been factored into the final APP. Lastly, the development of the carbon offset administrative system to support a carbon tax policy would be carried out in the 2018/2019financial year.

Financial Information

Ms Yvonne Chetty, Chief Financial Officer (CFO) compared the past two financial years to the prospects for 2018/19.

Employee compensation for 2016/17 (R318.3m) had increased by 7.5%, compared to 2015/2016 (R296.2m), but would remain pegged at R318.2m (0% increase) for 2017/18. The annual budget allocation variations from 2016/17 to 2017/18 were presented, including goods and services (-35.4%) transfers and subsidies (10.3%), and payments for capital assets (-71.7%). The total appropriation for 2017/18 amounted to R8 113.5m, an increase of 7.5% compared to the current financial year. She explained how much each allocation took from the budget, considering that the Department had received a budget increase below the estimated inflation rate throughout the MTEF period. She said these marginal increases would have a negative impact on the Department’s ability to expand its establishment or to fund contracts or positions that were carried additional to the establishment. The core business of the establishment was affected by the by the reduction in the employee compensation budget, as critical posts had to be filled for it to meet its targets. This issue would be discussed further with National Treasury. The estimated budget shortfall, in relation to the current head count, was R20.6 million in the 2017/18 financial year. With the nuclear build in mind, the goods and services allocation had been reduced, so a lower increase of 3.0% had been allocated to this section.

Overall, more than 90% of the budget went to transfers and payments. The nature of these transfers and payments was explained, in relation to the different entities and commitments of the DoE. The amounts transferred to each entity belonging to the DoE would remain unchanged, except for transfers to the Integrated National Electrification Programme (INEP) Eskom, which would have R30 million directly transferred to the National Radioactive Waste Disposal Institute (NRWDI), and a reduction of R7.2m in the Nuclear Energy Corporation of South Africa’s (NECSA’s) allocation.

Discussion

Mr G Mackay (DA), welcomed the new Minister and her interventions, and showed his discontent for hearing that the DoE admitted it had sold South Africa’s oil reserves, contradicting the former Minister’s statement that the resources had been subjected to a rotation, intentionally misleading the Portfolio Committee and violating the Parliamentary system. He asked the Minister where the money from this transaction was, and how much it was. The Democratic Alliance had reports that estimated the figure to be up to R3 bn, and asked how much was available after this transaction, and from which entity the money would come for the recovery of these stocks. He asked about the Minister’s decision not to sign Eskom’s Power Purchase Agreements (PPAs) with key renewable energy independent power producers (IPPs), given the importance of this matter for investors.

There was a need for clearer information the nuclear build programme, and answers should be provided to the Committee, as the previous Minister had avoided answering and had ignored the given legal counselling on the matter. More specifically, when and how would the procurement process take place? According to the presentation, the nuclear deal was clearly going ahead despite the current legal judgment that had stopped the process, so an explanation of how the DoE would go ahead was required.

He asked what the Department’s plan to reengineer NERSA was – whether it was a simple administrative readjustment, or if it would introduce an appealing process which the previous ministry had in mind. He was pleased with the Minister’s declaration that she would like to resuscitate PetroSA’s performance, though she had admitted that the DoE could not interfere according to the existing policy. He asked how the Minister planned on working on this direction -- whether entirely through a private equity injection, or a partial privatisation of the institution. He also asked about the presumptive approval of nuclear bids in the Free State when the nuclear process was legally retained.

Mr J Esterhuizen  (IFP) supported the Minister’s suggestion about hosting hearings in relation to the introduction of nuclear energy in the South African energy mix. He also referred to the over-spending in most entities belonging to the DoE as one of the major problems of the Department, as well as being able to hold management accountable, including PetroSA, whose managements bonuses he classified as unacceptable.

Mr M Matlala (ANC) asked if the reallocation of transfers from INEP Eskom to the NRWDI would affect the performance of the former.

Ms G Nobanda (ANC) inquired about the time frames that would be used for the filling of vacancies, and if they were going to be only positions of a technical nature.

The Minister responded to Mr JA Esterhuizen demand of accountability, arguing that as a former Chairperson and Committee Member she understood the need of more accountability, and said that it ultimately assisted her mandate and the DoE’s. Likewise, having an open debate about the introduction of nuclear energy in SA was positive, but all parties must allow experts in the field to explain all the factors involved, as well as the presence of different role players in the process and the energy system.

Responding to Mr Mackay, Ms Kubayi apologized. In the interests of being able to work together with the Committee, she agreed to take responsibility for the misleading of the Committee by the previous Minister regarding the information provided on the selling of national oil resources. However, she had not been informed of amounts missing, as argued by Mr Mackay, and clarified the received transfers for the sale had been deposited in the Central Energy Fund’s (CEF’s) account. In fact, the discovery of this allocation had been at the root of questioning where the money had come from. The CEF was now expected to verify the information, and if the entity found discrepancies in what had been deposited and what should have been, then further steps could be taken.

With regard to PetroSA, the Minister said that clearly it was not her intention to privatise the entity, and the plan was to work with the CEF to reach a better financial, administrative and strategic position for it. Though at this stage she could not be specific, she expected to be able to provide detailed information about PetroSA’s way forward by May 19. In the same direction, it was planned that NERSA would be strengthened, contrary to Mr Mackay’s concern.

The Minister clarified that she did not stop Eskom from signing any agreement, but it was her professional decision not to sign during Eskom’s PPA signing ceremony on May 11 without having been briefed and without having gathered enough information or clarity around the challenges. Her intention was to create a common opinion among the different departments in Government and stand with one voice that promoted security and certainty for stakeholders.

With regard to the nuclear judgment, Ms Kubayi pointed out that it did not state that nuclear energy could not be introduced in the SA, but that the processes that had been carried out to do so had failed to comply with policy, and that was what needed to be worked on. Thus, in her opinion, the process of studying the possibility of achieving a nuclear deal should continue.

Deputy Minister Majola, commenting on Mr Mackay’s concerns about NERSA, pointed out that the problems the institution experienced were of governance, particularly around the role of its CEO who, on top of having to run the institution, had to fill the role of the sector’s regulator, both at the executive level. She added that regarding the IPPs, more than 80% of what was invested was South African money and not Foreign Direct Investment (FDI), mainly from official institutions, and this was something to celebrate. She supported the Minister’s opinion on the judgment against the current Nuclear Energy procurement proposition, adding that when the DoE looked at clean energy it also included the nuclear option, hence the continuous reference to the South African energy mix.   

Mr Zulu confirmed that no procurement processes had been carried out in the country, supporting the Minister’s statement, and said that once the judgment had been unpacked and analysed by the DoE, there would be further engagement with the Committee.

The Chairperson commented that what the Committee was suffering was a profound lack of trust in the DoE, and not of lack of information or understanding regarding technical matters.

The DOE’s Acting Deputy Director General explained that there were 96 vacancies, of which 50 were technical and 46 administrative.

The CFO said the reason for the R30m transfer from INEP Eskom to the NRWDI was that the NRWDI was the new entity in charge of the nuclear programmes. The Institute needed funding to be operational, given that in 2016 it had been the Department which had to fund the entity. The R30m transferred to the NRWDI therefore was a reprioritisation of existing funds.

Deputy Minister Majola, addressing the opinions of those who found danger in enhancing nuclear energy within the energy mix, defended the nuclear technology had been used for a long period in South Africa for other purposes, mainly in the medical sector.

Mr Esterhuizen supported the Minister’s position, and argued that what was problematic was the untrustworthy status of the DoE which, in his opinion, was negatively affecting the pace of industrialization of the country. He demanded a further explanation regarding where the money given to Eskom went.

Mr Mackay said he found it contradictory that the DDG had argued that no procurement process had been carried out around nuclear energy while it had been confirmed last week that Eskom was trying to go ahead with nuclear procurement. Although he welcomed the Minister’s pledge that she would study, revise and inform the issues around the nuclear energy-related procurement processes, the rest of DoE could not use the same line, given that they had been involved in the Department since 2014, when President Jacob Zuma had introduced the topic during the State of the Nation Address. He accused the Deputy Minister of not assuming her responsibility as part of the previous ministry, and of avoiding concrete answers using processes and timeframes to cover the problem of transparency. Lastly, he wished to contradict the Deputy Minister, saying that it was the former Minister of Finance, Mr Pravin Gordhan, who had stated that most of the investment during the last nuclear bid had come from FDI, and not from local sources.

The Chairperson told Mr Mackay that his frustration was shared among the rest of the Members, but that he should at least trust the new Minister’s intentions for action, at least initially.

Minister Kubayi ended her response by stating that Eskom was requesting information on energy options, including nuclear, without starting any process regarding procurement for nuclear energy projects, and stressed that the legal team was studying the different ways forward. Her commitment was to be available to the Portfolio Committee whenever required.

The meeting was adjourned. 

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