Independent Power Producers signed agreements; NERSA on Eskom application; DOE Annual Plan

NCOP Economic and Business Development

24 April 2018
Chairperson: Mr M Rayi (ANC, Eastern Cape)
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Meeting Summary

The Department of Energy (DoE) briefed the Committee on its 2018/19 Annual Performance Plan (APP). The Committee was given insight into the targets that were set in terms of its six Programmes, namely, Administration, Energy Policy and Planning, Petroleum and Petroleum Products Regulation, Electrification and Energy Programme and Project Management, Nuclear Energy and Clean Energy. Also included in the presentation was a briefing on the financial outlook of the Department including final allocations and budget reductions. Challenges faced by the Department included inadequate funding, electrification programme, impact of recent crude oil prince increase and exchange rate fluctuations and negative publicity on nuclear.

The DoE was asked when development of the Regional Gas Master Plan would be completed, when the Draft Radioactive Waste Management Fund Bill was to be submitted, barriers to entry for players wishing to enter the wind/solar energy sector and what policy changes the Department planned to get new entrants into these sectors. Members wanted to know whether electrifications were being done according to plan, plans for ownership and skills transfer on electrification projects, where the projects were located and progress made on the National Oil Company and Grand Inga Hydroelectric Dam Project.

Members were concerned about the DoE meeting its targets given its high vacancy rate and when these vacancies would be filled. The Committee also noted that the Nuclear Energy Corporation had serious problems and questioned if the APP would address these problems. The DoE was asked to provide the Committee with its Draft Renewable Energy Technology Roadmap. Concern was raised about the R434.93 million reduction in the Solar Water Heater Programme and the huge decrease in the 2018/19 allocation for clean energy - Members saw this as a problem as SA needed to meet its international obligations on clean energy. Members had concerns about the impact that the imminent rise in oil prices was to have on SA. The DoE was asked to provide the Committee with an update on the issue of SA’s rolling oil stock that was sold illegally. The DoE was informed that in provinces like Limpopo, businesses had electricity connectivity problems with Eskom. People had to pay bribes in order to have electricity connected or wait one to two years - what was the DoE doing about stamping out corruption?

The Independent Power Producer’s (IPP) Office briefed the Committee on the impact of signing agreements BW3.5 &4. Members were given an overview of the BW3.5 and 4 projects under the Renewable Energy Independent Power Producer Procurement (REIPPP) Programme. The 27 projects would collectively add 2 305.42 megawatts to SA’s grid in the next four years, with most of the projects set to begin commercial operations during the 2020/21 and 2021/22 financial years. The projects would be located in six provinces and would draw from a range of technologies.

On the projects outlined by the IPP Office, Members asked what criteria was used in selecting provinces for the projects, whether the IPP was responsible for technology behind the storage of energy via batteries as this would be a worthwhile project to pursue, jobs created, provision made for small businesses and for a report of fully operational projects in the provinces along with potential operational projects. Members questioned the role projects played in community development, what the electricity costs to households presently were compared to costs after projects were started and if National Treasury come to the party on the IPP projects. Members were concerned about the lack of transformation that was taking place in the construction industry. Members were concerned about job losses taking place in new energy factories producing components for wind turbines etc and why this was happening.

The National Energy Regulator of SA (NERSA) briefed the Committee on Eskom’s revenue application for 2018/19. The Committee was provided with insight into the decision taken by NERSA on Eskom’s revenue application/revenue allowance for 2018/19. On the regulation of electricity prices for Eskom, NERSA used a Revenue Requirement Methodology. The average electricity price per unit was determined by dividing revenue by forecasted volume of electricity to be sold. On the application itself, Eskom applied for a total of R219 billion in expected revenues from all customers. The total that NERSA allowed was only R190 billion – R15 billion less than the previous year. Members were informed that Eskom always failed to collect the revenue that NERSA had allowed it. Eskom’s expenditure was also greater than what NERSA allowed. NERSA had provided Eskom with a detailed roadmap of what Eskom needed to do.

Members asked NERSA whether the crux of the matter around Eskom was its inability to collect revenue, Eskom providing consumers directly with electricity, the extent to which Eskom’s governance issues affected the bottom line and whether NERSA should look at the provinces when it came to tariff increases. There was also discussion on whether NERSA would look at the performance of IPPs, why monitoring mechanisms were not put in place to prevent Eskom from spending more than it should, the need for legislation in this regard, whether Eskom acceded to guidelines set by NERSA and how Eskom would be able to service its debt. Members pointed out problems when municipalities started using revenue collected from electricity to fund their own operations and emphasised the need for greater accountability by Eskom. Members were concerned about Eskom having recurring revenue shortfalls and overspending.

The Committee adopted its Report on Budget Vote 26: Energy, Annual Performance Plan 2018/19.

Meeting report

Department of Energy (DoE) Annual Performance Plan (APP) 2018/19

Mr Thabane Zulu, DoE Director General, spoke briefly to the layout of the presentation

Mr Lloyd Ganta, DoE Acting DDG: Governance and Compliance, presented the DoE’s APP as it pertained to its six programmes:

  • Programme One: Administration: the planned targets for the Chief Directorate of International Relations was to facilitate the coordination/hosting and participation into Brazil, Russia, India, China and SA (BRICS) Energy initiatives, to be held on 30 August 2018, and also to facilitate coordination/ hosting and participation into the Southern African Development Community (SADC) initiatives, to be held on 30 June 2018.
  • Programme Two: Energy Policy and Planning: planned targets were completion of the gas demand/supply analysis including gas-to-power and completion of the Gas Infrastructure Master Plan and Regional Gas Master Plan. The intention was further to draft regulations to support implementation of the Gas Amendment Act.
  • Programme Three: Petroleum and Petroleum Products Regulation: planned targets included conducting 1 500 retail site compliance inspections and have 1 080 fuel samples tested. Another target was to have DoE’s Audit Report of Broad-Based Black Economic Empowerment (B-BBEE) in the Petroleum Retail Sector published. The intention was furthermore to see that its Petroleum and Liquid Fuel Sector Code be published.
  • Programme Four: Electrification and Energy Programme and Project Management: targets were to have four quarterly reports on additional households to be electrified with grid electrification towards the 2018/19 target of 200 000 in the National Electrification Plan. Another target was to also have four quarterly reports on building/upgrading of electrification infrastructure projects towards the 2018/19 targets as contracted with Eskom and municipalities.
  • Programme Five: Nuclear Energy: the intention was to have 70% of authorisation applications processed within the eight-week time period, finalise the Decommissioning and Decontamination Policy and submit the National Nuclear Regulatory Amendment Bill to Cabinet for approval on public consultation. In addition, the plan was to send the Draft Radioactive Waste Management Fund Bill to the State Law Advisers Office.
  • Programme Six: Clean Energy: the plan was to ensure there was 0.5 terawatt hours of energy savings realised and verified from Energy Efficient Demand Side Management (EEDSM) projects. The intention was also to have the Draft Renewable Energy Technology Roadmap (RETRM) drafted and completed and further ensure the Solar Water Heater Programme implementation was monitored and that four quarterly progress reports were submitted.

Ms Camagwini Ntshinga spoke to the financials of the DoE. The total final allocation for 2018/19 was just over R7 billion with 91.24% allocated to transfer payments and the remaining balance of 8.76% used for operational purposes. The 2018/19 budget allocation was reduced by R1.1 billion compared to the 2017/18 budget allocation.

Mr Ganta provided the Committee with insight into some of the challenges faced by the DoE:

  • inadequate funding for its operational budget hampered the DoE in filling vacant posts. The DoE was lobbying for extra funding
  • progress on the electrification programme was not what it should be but there was continuous engagement at Executive level between the DoE and Eskom to improve oversight of electrification projects
  • further rollout of the Solar Water Heater Programme was hampered by lack of funding. However the pilot phase was being implemented which was to be followed by sufficient capacity and resource allocations
  • impact of the recent crude oil price increase and exchange rate fluctuations made it necessary to accelerate exploration efforts on South African shores
  • negative publicity on nuclear did not help things so the DoE developed a Communication and Stakeholder Strategy. There was public awareness to demystify beliefs

Discussion

Mr L Magwebu (DA, Eastern Cape) asked when development of the Regional Gas Master Plan was to be complete - would it be in the current financial year or the following one? He was concerned about the DoE meeting its targets on Programme Three: Petroleum and Petroleum Products Regulation given the high vacancy rate – would the Department have the required capacity? If the process of recruitment was taking place, when all posts would be filled? On the target of electrification of 200 000 households, DoE needed to provide the Committee with detail on its projects so that Members could conduct oversight over them. Where were the projects located? He asked when the Draft Radioactive Waste Management Fund Bill was to be submitted to the State Law Advisers Office. All Bills for 2018 had to be submitted no later than May 2018 to Parliament.

Mr Zulu responded that the DoE was prioritising the process on filling of vacancies. The process should be concluded within three months. Detail on electrification projects would be sent to the Committee. The DoE had entered into agreements with Eskom and municipalities in this regard. The DoE had signed off on projects.

The Chairperson stated that Bills not completed would be carried over.

Mr E Makue (ANC, Gauteng) noted that the South African Nuclear Energy Corporation (NECSA) had some serious problems – would the 2018/19 APP address these problems? He stated that when he had visited the NECSA, it was busy with skills development which he was impressed with - was skills development covered in the APP? He asked that the Committee be provided with the Draft Renewable Energy Technology Roadmap. He was concerned about the R434.93 million reduction on the Solar Water Heater Project, resulting in nil earmarked funds. Even if the pilot phase was to be implemented the briefing spoke about the DoE planning an intervention of having resources allocated. He observed that there was to be no resources allocated. He was also concerned about the huge decrease in the 2018/19 allocation for Clean Energy. This was a problem as SA needed to meet its international obligations on clean energy.

Mr Zulu stated that the Minister of Energy prioritised to deal with issues present at the NECSA. Each entity of the DoE had an APP. The DoE’s nuclear branch was not present in the meeting as it was dealing with challenges. The Committee would be kept up to date. He pointed out that the Solar Water Heater Programme was in the APP for 2018/19. The major challenge was a decline in funding. For the current financial year there was no budget. The DoE was on the second phase of the Programme and would be doing installations. There were still geysers held in storage. The DoE intended to engage with the National Treasury around the impact the decrease in funding had. He conceded that the DoE, on its capacity to implement, was very slow. The DoE’s capacity strategy and financial planning was clear. The DoE would be continuing work on the Solar Water Heater Programme. Before departments were allocated funding by National Treasury, they had to show what their plans with the funds were. DoE was very much aware of SA minimising its carbon footprint The DoE was focused on having a good energy mix. Special focus was placed on Clean Energy. There were Clean Energy efforts in the Northern Cape province however most players in the Clean Energy sector were international. There were very few local companies who could enter into the Clean Energy arena. Investors were also international. Locals partnered with them. The DoE, together with the Independent Power Producer (IPP), developed a funding strategy for locals. This could be also be done on gas, coal etc. Ownership too was mostly held by international players. In order to invest, players wished to have a stake in ownership as well. There was a need for locals to also have a stake in ownership. A funding mechanism for locals to participate was needed. Every project provided for a percentage ownership by locals. It was however very limited as most of the funding was international.

Ms Ntshinga stated that budget reductions had mainly been on transfers. Transfers mainly to Eskom, the Solar Water Heater Programme and the Integrated National Electrification Programme (INEP) were reduced.

Mr Mojalefa Moagi, Central Energy Fund Chief Executive Officer (CEO) said that a group strategy review was being done to map the way forward on the National Oil Company. The process should be concluded by the end of May 2018.

Mr W Faber (DA, Northern Cape) was concerned about the imminent rise in oil prices. Then there was still the issue of SA’s rolling stock that was sold illegally – what was happening with this matter? The good thing was that the rolling stock had not left SA and was still being stored locally. He asked whether the stock was being returned to SA at the same price that it was sold. He pointed out that in the Northern Cape, many new entrants entered the sun powered energy market - were there any obstacles for new players? What policy changes did the DoE have planned to get new entrants into the new energy sector? The DoE was also asked what the situation over shelf gas was.

The Chairperson responded that shelf gas fell under the Department of Mineral Resources.

Mr Zulu said that the Minister of Energy conducted an enquiry into the sale of the oil rolling stock. The matter was currently before the courts. The Sustainable Energy Fund was dealing with the matter. He agreed that shelf gas was a Department of Mineral Resources project.

Mr Moagi added that the strategic stock sold was still stored in its original tanks and had not left SA. The matter was before the courts. An application was made to the court to have the sale declared invalid. He could not say as to whether the stock would be returned at the same price as what it was sold.

Ms B Mathevula (EFF, Limpopo) said that improved oversight was needed on electrification. In Limpopo province, which was mainly rural, people had electricity issues and businesses had challenges with Eskom. Applications to have electricity connected took between one and two years and only way to get it done was to pay a bribe. What was the DoE doing to address corruption? Were there any arrests? She asked DoE if it checked on whether electrification was done as it should be. Did the DoE check, for instance, on how much electrification was done?

Ms M Dikgale (ANC, Limpopo) noted that the briefing spoke about plans for connecting households but did not make mention of electrification for projects. Prepaid electricity was not allowed for projects and inevitably the electricity bills ended up being huge. What was the plan for projects?

Mr Zulu said Eskom was the supplier of energy on most of the bigger projects. However Eskom reported to the Department of Public Enterprises and not the DoE – the Department thus found it difficult to respond on the matter. People could however raise issues with Eskom to DoE. The Department had a hotline in this regard.

Mr Makue noted that the Committee had visited solar and wind energy projects – what were the plans of the DoE on ownership and skills transfer for locals regarding these projects? At Coega, the Committee discovered that the steel used for wind turbines were sourced from South Korea - was technology transfer taking place? He noted that there were timeframes attached to finance provided by Developmental Finance Institutions (DFIs). Skills transfer needed to take place so that things could keep functioning.

The Chairperson said that when he had compared the preambles of the 2017/18 APP with that of the 2018/19 APP, the Minister, in the latter, had not said anything about the Solar Water Heater Programme – the drop in allocation to the programme was concerning. There was a huge drop in the budget for Clean Energy - what did this mean for the achievement of targets in the National Development Plan (NDP)? He also noted that from the previous APP to the current APP, there had not been progress on establishment of the National Oil Company and the Grand Inga Hydroelectric Dam Project.

Mr Zulu replied that the Grand Inga Hydroelectric Dam Project had been on the DoE’s agenda for a long time and the Minister of Energy had prioritised it. Efforts were being made to capacitate SA’s responsibility on the South African side of the Project. Work was being done for the Project to take off but there were challenges. A team was formed for the management of processes. Six South Africans sat on the team. He suggested that the DoE do a standalone presentation to the Committee on the Grand Inga Hydroelectric Dam Project or alternatively could submit a full report.

Ms Dikgale noted that Members always asked questions about electricity and projects but never received a straight answer from the DoE - who had the power to instruct Eskom?

Mr Zulu responded that the DoE would ideally wish to deal with each and every case. He asked members to provide him with a list of projects that had stopped. He would respond in writing to each of the cases. It was a grey area as some of the projects were managed by Eskom.

The Chairperson said that the Committee dealt with six departments and 31 entities. The Committee had not even met all entities of the DoE. There was simply no time to meet with everyone. He suggested that the DoE provide the Committee with quarterly reports. The DoE could provide the Committee with information on projects. This could include information on the Grand Inga Hydroelectric Dam Project. Whatever was being sent to the National Assembly should be sent to the Select Committee as well.

The Committee adopted its Report on Budget Vote 26: Energy.

Independent Power Producer (IPP) Office on the Impact of Signing Agreements BW3.5 &4

Mr Maduna Ngobeni, Programme Manager, IPP Office, proceeded with an overview of the BW3.5 and 4 projects under the Renewable Energy Independent Power Producer Procurement (REIPPP) Programme.

The 27 projects would collectively add 2 305.42 megawatts to SA’s grid in the next four years with most projects set to begin commercial operations during the 2020/21 and 2021/22 financial years. The projects would be located in six provinces (Eastern Cape, Free State, Mpumalanga, North West, Northern Cape and Western Cape) and would draw from a range of technologies. The projects were also making a significant contribution to government’s commitment to meaningful black ownership participation and economic transformation. A total of 61 022 Full Time Equivalent (FTE) jobs were expected to be created of which 58 419 FTE jobs were for South Africans. The bulk of the jobs would be created during the construction period. A further 1 500 additional jobs were to be created within the manufacturing sector. On localisation, R22.24 billion was expected to be spent on local goods and services during construction. There was commitment from IPPs to procure 40% of local goods and services from black-owned enterprises during the construction period.

Discussion

Ms Dikgale asked which criteria were used in selecting provinces. She did not see Limpopo as one of the provinces chosen.

Mr Ngobeni answered that in the previous round there was a project in Limpopo. Areas were chosen by the project developer. Areas where enough energy could be produced were chosen. The idea was to have a spread across the provinces. There was a coal IPP in Limpopo. KwaZulu-Natal had bio-mass.

Mr Makue was concerned about the lack of transformation taking place in the construction industry. The Committee would monitor meeting of targets. He asked whether IPP was responsible for the storage of energy via batteries. Great strides were being made in this sector. The Committee visited a Special Economic Zone (SEZ) in Atlantis along the West Coast and saw that a factory manufactured blades for wind turbines laid off 360 members of staff – this was concerning. On battery storage of energy, the motor car manufacturer, Tesla, wished to bring electronic powered vehicles to SA. If one was creative the technology could be used elsewhere. People in informal settlements needed energy that was safe and clean.

Mr Ngobeni responded that stop-starts on projects could not be had. Factories should not be closing down. Sustainability could be ensured if products were exported. The Tesla issue of battery stored power held many possibilities. It was a good thing to look at and consider since power could be stored for later use. Batteries at this point were expensive but prices were coming down.

Mr Faber was pleased to see there were six wind energy projects in the Northern Cape. The briefing spoke about an estimation of 35 363 Full Time Equivalent (FTE) jobs - would these jobs be part of those created during construction or those jobs created after construction? What was the process on jobs if they were only jobs during construction? Was there an exit plan in place?

Mr Ngobeni stated that the Committee could be provided with a report on the breakdown of jobs. Jobs were defined in order for them to be monitored. The hours performed were counted. Hours per day or per year were counted.

Mr Magwebu asked what provision was made for small businesses if there was to be a R22 billion spend on procurement of goods and services during construction for 2020 – 2022. Engagement with the Department of Small Business was needed. The problem was that technocrats did not speak to each other.

Mr Ngobeni explained that small businesses were engaged at local government level. Perhaps it should be done at national level.

Mr B Nthebe (ANC, North West) stated that in the Northern Cape, communities said there was no benefit to them as Small Medium and Micro Enterprises (SMMEs) when 1 400 solar panels were erected. Spaniards had erected the wind farms and solar energy projects. If there was a commitment to localise, what was being done differently than what was done in the Northern Cape? He noted that job creation was a contentious issue. Were immediate jobs created or were jobs created in the future? In the main, DFIs contributed to development in SA. Development needed to tie in with job creation and job security. He asked whether it was correct that 64% of the 57% South African ownership was black-owned.

Mr Ngobeni responded that a better funding mechanism was needed for black shareholding. International investors were willing to invest but wanted an ownership stake. Funding terms and other issues needed to be discussed. Black companies needed to become equal partners. The policy of black people needing to participate should cover ownership as well. He pointed out that communities were engaged. He conceded that outside people were used as sometimes there were issues grappled with. A decision needed to be made on what could be spent at local level and what could be spent at national level. The requirement was that socio-economic development had to take place within a 50km radius. On job security, projects were designed to progress in different windows. In this way it would sustain employment. There were thus small projects year to year creating jobs each time. There were South African companies that did developmental work in the African region and not only in SA.

The Chairperson said that the Committee needed to be provided with a report of fully operational projects in the provinces. Ownership in terms of black and local in the projects should also be broken down for Members. Potential operational projects should be included in the report. What role did each project play towards community development? What was the electricity cost to households currently versus the cost after projects were started? He also asked about job creation versus job losses on projects. Could National Treasury come to the party on these projects?

Mr Zulu replied that there was engagement on policy issues. Engagement with National Treasury was taking place. Efforts were made to get formal engagements.

National Energy Regulator of SA (NERSA) on Eskom’s revenue application for 2018/19

Mr Chris Forlee, NERSA Chief Executive Officer (CEO), provided the Committee with insight into the decision of NERSA on Eskom’s revenue application/revenue allowance for 2018/19. On the regulation of electricity prices for Eskom, NERSA used a Revenue Requirement Methodology, based on section 15(1) (a) of the Electricity Regulation Act, which in turn led to a rate of return methodology (the Multi-Year Price Determination) – the control period was currently five years i.e. 2013/14 – 2017/18. The average electricity price per unit was determined by dividing revenue by forecasted volume of electricity to be sold. On the application itself, Eskom applied for a total of R219 billion in expected revenues from all customers. The total that NERSA allowed was only R190 billion. It was R15 billion less than the previous year. The productivity of Eskom staff per gig watt of energy produced, compared to 2007, had come down by almost 30%. From 2013/14 to 2016/17, Eskom had under recovered on its revenue by 10%. Eskom’s costs also increased by an annual average of 16%. Eskom’s biggest cost overruns was on capital expenditures. In conclusion, Members were informed that Eskom always failed to collect the revenue that NERSA allowed it. Eskom’s expenditure was also greater than what NERSA allowed. Eskom needed to cut its costs. Corruption was decreasing. NERSA had provided Eskom with a detailed roadmap of what Eskom needed to do.

Discussion

The Chairperson asked whether the crux of the matter was not about Eskom’s inability to collect revenue. What was the need for municipalities to provide consumers with electricity? NERSA was asked whether it would not be better for Eskom to charge consumers directly for electricity. The problem was that municipalities in some instances used revenue collected for electricity to fund its operations. To what extent did governance issues at Eskom affect its bottom line? NERSA had its own methodology and was asked how holding public hearings would assist. He asked NERSA whether it should not look at provinces when it came to tariff increases.

Mr Forlee responded that many a times a suggestion was made for Eskom to charge consumers directly for electricity instead of going through municipalities. However logistically it would be impossible for Eskom to undertake. When NERSA approved municipal tariff increases then municipalities were required to ring-fence funds. It was an ongoing battle to get municipalities to pay their bills to Eskom. One of the ways in which NERSA could wield its power was over licence conditions. NERSA nevertheless tried to work with municipalities to sort things out. NERSA’s methodology was there for its cost bucket. NERSA listened to what people had to say at public hearings. NERSA could not set tariffs for provinces. When municipalities requested tariff increases they had to justify why it was needed. NERSA audited municipalities. On the current Eskom application there were 23 000 comments of which eight were substantive.

Mr Faber pointed out that the Organisation Undoing Tax Abuse (OUTA) stated that Eskom’s operating costs could be lowered by R85 billion. He felt there should be accountability by Eskom. Replacing its Board each time did not seem to help. What did NERSA feel could be done?

Mr Forlee replied that in 2013, Eskom was held accountable by way of NERSA benchmarking coal costs. Eskom was held accountable from an economic perspective. On the statement by OUTA, perhaps there was a need to audit transmissions.

Mr Makue asked whether NERSA would look at the performance of IPPs or would they be assessed through the eyes of Eskom.

Mr Forlee stated that Eskom would come back to NERSA in its next application.

Mr Magwebu observed that Eskom continuously had revenue shortfalls. Eskom also always spent more than what it was allowed. Why were there no monitoring mechanisms to prevent Eskom from spending more than it was allowed? Was there perhaps legislation limiting NERSA? Perhaps a legislative change was needed. This was where the Committee would come in. In the end the consumer had to bear the brunt.

Mr Forlee responded that Eskom was asked what it did when it had not met its forecast relating to collecting revenue. Eskom was also asked what it did to increase sales. NERSA had allowed Eskom to revise its forecast. Even if Eskom overspent, from a regulatory point of view, Eskom was not allowed to recoup funds from consumers or by increasing tariffs. NERSA could fine Eskom or could have a regulatory order against it. NERSA did audit Eskom.

Mr Nthebe asked whether Eskom acceded to guidelines set by NERSA. Eskom tariff increases had a detrimental effect on consumers. If the current funding model was followed how would Eskom be able to service its debt? What was NERSA intending to do in the immediate term?

Mr Forlee responded that it would seem as if Eskom had accepted what NERSA had provided for in the guidelines. Eskom had not yet taken NERSA on review given that the court ruled in NERSA’s favour.

The meeting was adjourned.

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