Independent Power Producers (IPP) Office briefing

Energy

06 March 2018
Chairperson: Ms Z Faku (ANC) (Acting)
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Meeting Summary

The Independent Power Producers (IPP) Office’s briefing focussed on five key aspects - policy and planning aspects, its mandate, energy procurement, measures that supported the government’s national agenda and the future plans for the Office. 

South Africa’s IPP procurement programme was informed by global, regional and local policy considerations. Global policies like COP 21, regional integration and a range of bilateral and multi-lateral agreements, as well as other treaties, impacted on the development and implementation of the local IPP policy. Important local government policies like the National Development Plan, the Integrated Resource Plan and the Integrated Energy Plan, together with key legislation like the National Energy Act, played a critical role in shaping the IPP’s plans.

Some of the key aspects related to the IPP procurement programme was that Government intended to procure around 30GW of power from IPPs. About 14.7GW would be renewables (wind, concentrated solar power, biomass etc) and the remaining 15.3GW would come from coal, gas and hydro. The running costs of the IPP Office had to have a limited impact on the government’s balance sheet, and the impact on Eskom’s balance sheet was mitigated by a cost pass-through mechanism.

The main issues raised by Members were around job creation initiatives that flowed from IPP programmes, the financial viability of the Office, and its possible move to the Central Energy Fund. They were also concerned about the lack of access, or limited access, to the national electricity grid by IPPs. There was also criticism that due to the lack of any clear policy, the growth of small IPPs had been severely retarded. Members said the continued inclusion of nuclear in the country’s energy mix was in contradiction to the governments position at the recent Davos meeting. Other concerns were the continued delay in signing off the remaining approved power purchase agreements, and the delay in gazetting the new Integrated Resource Plan, even though it had been approved late in 2017 by the Cabinet . 

The IPP Office said that in the seven years since its inception, it had learnt a lot, and a solid base had been created from where it could now work more effectively to roll out its plans, especially the socio-economic development and enterprise development initiatives that flowed from the IPP programmes. However a key drawback had been the stop-start nature of approved plans and programmes, which had severely curtailed the activities of the Office and the projected outcomes intended to contribute to the upliftment of the economy and the government’s energy plans.

The Department advised that nuclear remained part of its preferred energy mix, hence its inclusion in IRP programmes. The signing of the outstanding projects was receiving urgent attention and the new Minister would soon be briefed on the IPP projects. In principle, there was full agreement to sign as soon as possible. Regarding the delay in gazetting the Integrated Resource Plan, once the Minister was briefed on the concerns raised by Cabinet, and these concerns had been addressed the Department, it could be gazetted.

Meeting report

Briefing by IPP Office

Ms Karen Breytenbach, Head: Independent Power Producer (IPP) Office, said that Mr Maduna Ngobeni, Programme Officer, would brief the Committee. She would support and provide clarity where needed.

Mr Ngobeni advised the IPP presentation would focus on five key aspects:

  • Policy and planning matters in the national context;
  • The IPP Office mandate;
  • IPP energy procurement;
  • Independent Power Producers Procurement Programme (IPPPP) support initiatives;
  • IPP Office future plans.

He said the country’s IPP procurement programme was informed by global, regional and local policies. Global aspects like COP 21, regional integration and a range of bilateral and multi-lateral agreements, as well as other treaties, impacted on the development and implementation of the local IPP policy. Important local government policies, like the National Development Plan (NDP), Integrated Resource Plan (IRP) and the Integrated Energy Plan (IEP) together with key legislation like the National Energy Act, played a critical role in shaping South Africa’s IPP plans. 

These plans had to take into account the impact of some of the local socio-economic and environmental issues facing the country, such as stagnant economic growth, water scarcity, measures to drive down costs but increase efficiency, fiscal considerations and addressing unemployment and poverty. A crucial part of IPP plans had to include measures to provide a meaningful contribution in addressing these challenges. In the national context, there had been some success, where the private sector had been able to participate in the power generation industry, as outlined in the Energy White Paper. Some of the targets that still had to be achieved included permitting non-discriminating access to the transmission system, and the lack of an adequate competitive platform between the public (Eskom) and private energy companies. 

A crucial aspect that had impacted negatively on the overall plans and roll-out of IPPPPs had been the incomplete integration of the country’s energy plans – the resource and energy master plans had not been finalised or integrated.

The IPP Office had been mandated to implement the Independent Power Producers Procurement Programme, and to operate at arms length from government. The Office was created by a Memorandum of Understanding (MOU) between the Department of Energy (DOE), National Treasury (NT) and the Development Bank of SA (DBSA). It was self-funded and funds were derived from IPP project fees.

The DOE was the mandated owner of the IPPPP and the IPP Office. It guided and monitored delivery and performance of the Office, with monthly and quarterly reports. National Treasury managed the Office bank account in terms of the Public Finances Management Act (PFMA). The DBSA managed the operations and procurement of goods and services. Audit services were provided by the Auditor General of SA (AGSA) for IPPPP procurement services and the IPP bank account with NT, while the DBSA auditors audited the procurement of goods and services needed by the IPP Office.

The IPP Office mandate was derived from new generation capacity, as determined by the Minister of Energy. In addition, DOE provided mandate instructions and assistance on specified strategic interventions such as:

  • Cross-border and regional products, like the Inga hydroelectric project;
  • Contract management, evaluation and monitoring of IPP projects;
  • Solar heater repair and maintenance programme;
  • Sector planning support (IRP, IEP, Gas Utilisation Master Plan).

Mr Ngobeni highlighted some key IPPPP aspects which were managed by the Office. Government intended to procure around 30GW of power from IPP’s. About 14.7GW of this would be from renewables -- wind, concentrated solar power, biomass etc.-- and 15.3GW from coal, gas and hydro. These numbers had to be adjusted in line with the recently approved IRP by Cabinet in December 2017. The procurement of these requirements would commence only once this was finalised.

Other aspects he touched on included the 2 500MW thermal and discarded coal-fired power plant plans in Mpumalanga and Limpopo, a 2 000 MW gas programme earmarked for the Richards Bay industrial development zone (IDZ), and another one in the Coega IDZ (1 000 MW), as well as a 1 800 MW co-generation project using waste-to-energy and industrial biomass. 

Some of the initiatives by the IPP Office in support of government’s national objectives included:

  • The Renewable Energy IPPPP (REIPPPP) had successfully delivered clean energy timeously and cost effectively, such as 3 773 MW power delivered as at Dec 2017.
  • Renewable Energy (RE) power costs in SA were among some of the lowest in the world. The price hasd dropped from 2.52c/kWh to 0.82c/kWh
  • Renewable IPPPP had supported broad economic objectives. As at December 2017, investments were about R48.7bn, there were 39 537 full time employees, and there was about a 31% broad-based black economic empowerment (BBBEE) shareholding in projects.
  • Some of the socio-economic benefits that had accrued to communities attributable to IPPPP were that between 1% and 1.5% of project revenues had to be spent on socio-economic development (SED) and 0.6% on enterprise development (ED). In some instances there had been problems with local community ownership due to various factors like the long periods to repay debt, or governance of community trusts. To address these problems, a new SED and ED strategy/model had needed to be developed by the DOE/IPP Office and all affected parties, including local and provincial governments.
  • Ensuring a local content spend of around 45% of project values (R67bn).
  • The REIPPP had a footprint in all nine provinces, but due more favourable solar and wind resources in the Northern Cape and Western Cape, the latter two provinces had attracted the lion’s share of the projects.
  • Limited impact on the Government’s balance sheet – the impact on Eskom’s balance sheet had to be mitigated by the cost pass-through.

The IPP Office was not a legal entity and was not able to transact it its own name, so all involved parties (DOE, NT and DBSA) had committed to collaborate and establish the IPP Office as a separate legal entity. The current MOU governing the IPP Office operations expired in March 2019, and an extension was currently being reviewed.

Discussion

Mr M Matlala (ANC) said some aspects of the presentation were very confusing, in that the presenter often referred to aspects that he indicated he would address later in his presentation, but had failed to inform Members when this had occurred. in his presentation. He wanted to know what the total budget was for the entire project of the IPP Office, and the nature of the IPP Office relationship between Eskom and the SA Local Government Association (SALGA ). He asked why some project outcomes were not achieved. He was from a rural constituency where the local community in the area was not able to get water from the Die Hoop Dam, as money was owed to Eskom for unpaid electricity bills, and he asked if the IPP Office could intervene to ensure the villages got access to the water in the dam. How would South Africa benefit from cross-border deals -- would local citizens with the necessary skills be able to participate? He wanted to know in which provinces and municipalities the jobs created by the IPP programmes were, and whether these were real direct and full time jobs. He was concerned that the recent Electricity Regulation Amendment Act of 10 November 2017, which reduced the scope of electricity generation activities that were exempt from licensing, could impact negatively on IPPs, and wanted to know what the IPP Office’s view on this was. He asked the Director General to update the Committee on the financial state of the IPP Office, and to advise if the entity would be moved into the Central Energy Fund (CEF).

Mr J Esterhuizen (IFP) said that it seemed as if there was a deadlock within the DOE on future of the IPP Office, and wanted to know what the way forward was to get finality and clarity on the position of the Office. He asked if there were any large IPP projects being built in SA, as it seemed to him that all the large projects were “foreign built.” Why had over 70% of the renewable energy budget not been spent? Did Eskom provide easy access to the grid for IPPs, and was there a national grid plan in place that enabled this? He said there was a lack of policy that was retarding the growth of small scale power producers.

Mr G Davis (DA) said he was concerned about the delay in signing Power Purchasing Agreements (PPAs). He wanted to know when these would be concluded and what problem was delaying the signing. Around $15bn was ready to be invested in the RE sector, and he wanted to know how much investment had been lost due to stalling of projects. Would the IPP Office move to the CEF, and if so, what was the reason and what would the benefit be? Why had the new IRP not been gazetted, even though it had been approved by Cabinet? What was holding up the gazetting process? Why was nuclear was still in the IRP energy mix, and why it was being retained at the expense of renewables?

He asked for comparative job creation statistics on nuclear (power stations) versus the creation of around 6 000 jobs on renewables.

He queried the delay in signing off projects and the impact on the IPP Office and its independence, as the delay in signing off projects would impact its funding. Was there a more sustainable funding model? He was concerned about the delay on the Smalls Programme, as it impacted directly on small emerging power producers, and wanted to know what the hold-up was. Lastly, he asked why there was still a coal programme in the IPPPP, as the country needed more clean energy, not more coal.

Ms T Gqada (DA) said she was concerned about a move of the IPP Office to the CEF, and how this would address the challenges faced by the IPP Office. She wanted more clarity on the solar heating programme in the rural areas, as she felt it was failing. How many permanent jobs were being created via IPP programmes, especially in the rural areas, and in which provinces were they? She wanted to know what was meant by the term “ full time equivalent job.”

IPP Office response

Ms Breyetenbach said that SED (social economic development) was a very important aspect of the IPPPP. Other key outcomes were to drive down the price of electricity and the development of “our people”. She conceded that the IPP Office could perhaps have done more on the latter. In future there had to be better plans to ensure that “our people” were better equipped to enable them to participate more effectively in the power generation industry.  

In the seven years since the inception of the IPP programme, the Office had learnt a lot. A solid base had been created from where the IPP Office could now work more effectively. A key lesson had been that the stop-start process of the past had to be avoided, as this did not encourage efficiency and effectiveness of programmes. She cited some programmes that had had to be stopped for around nine months, which had now started again. This did not impart stability to the programme or to job seekers, especially to young professionals who had recently joined the Office. The Office had to learn from the past and apply the learning so that there was a better deal for “our people” on socio economic development.

Delays in finalising the IPP Office future had not been good for the organisation. It would prefer to retain its independence and not depend on government funds to do its work.

She concluded by saying that the stop-start nature of the IPP programme was not helping the economy. She requested the Committee to support the work of the Office, which would report back on its progress whenever required. If the IPP Office was not delivering on its mandate, it was happy to face the consequences of non-performance. 

Mr Ngobeni said the IPP Office did not have a budget as it was funded entirely from project funds. These funds were deposited into a NT account, and only that could be spent on running the Office.

The IPP Office was not aware of the issue regarding the Die Hoop Dam in Limpopo, as this was not part of its mandate, but it could investigate and report back to the Committee.

As yet, there had been no cross-border IPP programmes. Before these could commence ,South Africa had to be very clear about what its priorities and outcomes for these were. 

There were no details yet regarding the possible incorporation of the IPP Office into the CEF.

Regarding the deadlock within the DOE regarding the CEF, he said that the issue had been laid to rest and that the IPP Office had now been given approval to go ahead with its plans.

The reason why coal was still in the IPP programme was because it formed part the IRP. IPP programmes were guided by the IRP.

Access to the national electricity grid for IPPs needed more alignment between Eskom and the IPPs.

The IPP Office did have the job creation statistics at the provincial and municipal level, and these would be provided to the Committee.

The amendment to the Electricity Act was to facilitate investment in the sector, and pertained to regulation on greater than 1MW power generation. 

He said that all approvals were in place to sign the outstanding agreements. All involved parties were getting protocols and administrative systems aligned to enable this.

The IRP could indicate how much investment and MW generation capacity had been lost due to the delay in signing agreements. 

The DG would brief the Committee on the IRP approval and gazetting process.

Mr Ngobeni said he did not have the information on the number of jobs to create a nuclear power station versus renewable energy options.

If the programme developed in the manner envisaged by the IPP Office, there would be no need to use state funds to fund it. Funding constraints would arise only if no projects were approved.

He agreed that the delay in signing small project agreements was severe, but often a delay in signing off large projects had a domino effect, in that the stalling of large projects also impacted negatively on smaller projects.

The IPP Office solar heating programme pertained only to maintenance and repairs, not to new installations.

Regarding the contentious issue of job creation via the IPP Office programmes, he advised that it was not always possible to get accurate numbers from producers. For example, employing 500 people for a day or one week was not really a realistic example of job creation. In addition, it was sometimes difficult to get a true indication of full time jobs - was it full time after one year, two years or three years of working? The measure the IPP Office used was the number of hours worked per person on projects. Working for eight hours a day for a prolonged period by workers was a much better indication of job creation initiatives.

Mr Thabane Zulu, Director General: DOE, responded to the questions addressed to the Department.

He said the signing of the outstanding projects was receiving urgent attention. The new Minister would be briefed shortly on the IPP Projects. In principle, there was full agreement to sign as soon as possible, and it was just a matter of modalities, like resolving the financial modelling, which was delaying the process. His personal view was that the issue would be addressed speedily by the Department. The DOE would communicate progress on the matter to the Committee as soon as possible.

On the IRP programme approved by Cabinet but not yet gazetted, the Department was looking into issues raised by the Cabinet and had to engage with the new Minister on this. His personal view was that the IRP had not been gazetted perhaps because of the concerns raised by Cabinet on some issues. Once those issues were resolved, the IRP would be gazetted. 

Nuclear was part of the DOE’s preferred energy mix in the IRP, so it was included in Departmental energy programmes. The matter raised in the courts on nuclear was a serious issue, and needed to be addressed by the DOE. Nuclear energy remained in the fold, and that all that the Department needed to do was to address was how it could be accommodated in the IRP.

He had not been able to fully assess the issue of the IPP Office moving to the CEF, and was therefore unable to comment. Once he had applied his mind, he would revert back to the Committee on the issue.

Follow-up questions

Mr Esterhuizen said it seemed there was no grid planning in place to manage access to the grid for other players. He wanted to know what was happening to the Inga project, as R150m had already been spent on the project but it seemed as if nothing was happening and that the project was dead. A further query was what the National Energy Regulator of South Africa’s involvement was in the setting of fixed tariffs for IPPs. How was it possible that the price Eskom was paying IPP’s could never be above inflation, yet Eskom’s own price to its customers was not constrained by inflation and was dependent on its financial requirements?

Mr Davis wanted to know if the delay in signing the new power purchase agreements was due to diary constraints of key players. If this was the case, surely the issue could be fast-tracked? It seemed that there was no urgency within government to get the ball rolling. Was there another reason for the delay? Was the DOE DG aware of what concerns had been raised by the Cabinet in respect of the IRP? Now that there was a new Cabinet in place, could this earlier decision be rescinded? He wanted further clarity from the DG on nuclear, as it seemed as if there were mixed messages from the government on nuclear. At Davos, the message had been that it was not possible, yet the DG was now indicating that it was still on the table.

Mr Matlala probed further on the Eskom/SALGA issue, and asked why Eskom was not back in the DOE. Its continuing absence from the Department meant that it could effectively derail DOE initiatives on supply and related IEP and IRP matters. He asked the DG to convey his concern to his principals, that he wanted Eskom to be located within the DOE.

DOE’s response

Mr Zulu said that the issue regarding the concern Cabinet had with the IRP, was his own view. Once the new Minister had sight of the concern and applied his mind to it, the Department would be in a better position to comment on the issue. The delay in the signing of PPAs was only due to protocol, and once all these issues had been addressed, the signing would take place. He was due to meet with the Minister later in the day, and he was sure there would be some developments on the issue.

On nuclear, the Department was dealing with the issue based on the court ruling -- the budgetary constraint and how to address the challenge. He was not able to comment on the political debate on nuclear within government. 

Mr Davis said he understood the constraints under which the DG was working on these issues, so he wanted to raise his objection to the non-attendance of the Minister. It the Minister had been present at the meeting, these concerns could have been addressed.

The Acting Chairperson responded that the Committee had to respect the Minister’s time, as he had provided the Committee with an apology, due to Cabinet commitments, well ahead of the meeting. The DG had advised that he was meeting with the Minister later in the day where these concerns would be discussed and the Committee would then be briefed on the outcomes. 

The meeting was adjourned.

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