ATC110524: Report on Budget Vote 29 & Strategic Plan for 2011/12–2015/16 period of Department of Energy
Report of the Portfolio Committee on Energy on Budget Vote 29 and the Strategic Plan for the 2011/12–2015/16 period of the Department of Energy, dated 24 May 2011
The Portfolio Committee on Energy, having considered and deliberated on the budget and strategic plan of the Department of Energy and its entities on 22 March 2011, reports as follows:
This report presents the strategic objectives that were presented by the Department of Energy (the Department) to the Portfolio Committee on Energy (the Committee) on 22 March 2011. The objectives have been formulated to respond to the overall government priorities and outcomes.Guided by the Rules of Parliament, promulgated in terms of the Constitution, the Portfolio Committee on Energy plays an oversight role over the Ministry of Energy, the Department of Energy and nine (9) state-owned entities. The Committee has to scrutinise the strategic plan of the Department and its entities in order to determine whether the funds requested are aligned to the objectives as stated in the respective strategic plan documents.
2. Background and history of the Department of Energy (DoE)
President Jacob Zuma’s new cabinet announced, in May 2009, the need to establish, reorganise, and rename some of the national departments to support Ministers in the execution of their mandates. In his statement, the President emphasized the importance of the type of structure that would best serve government's goals. As a result, the Department of Energy was created following a separation from the erstwhile minerals and energy department. The newly established Department of Energy has a specific mandate to ensure secure and sustainable provision of energy for socio-economic development. In the process it will seek to regulate and transform the sector for the provision of secure, sustainable and affordable energy. As the country’s economy continues to grow, energy is increasingly becoming a key focus, hence the department would play a crucial role in ensuring that exploration, development, processing, utilisation and management of South Africa’s mineral and energy resources compliments the country’s growing economy.
3. Mandate, Mission and Vision of Committee
The Committee’s mandate as prescribed by the Constitution of South Africa and the Rules of Parliament is to build an oversight process that ensures a quality process of scrutinising and overseeing government’s action that is driven by the ideal of realising a better quality of life for all people of South Africa.
3.1. Mandate and Mission:
As a Committee of the National Assembly whose powers are enumerated in Chapter 4 of the Constitution, and in accordance with the rules and orders of the National Assembly, the Committee is required, in respect of the mandate of the Department of Energy to:
· consider, amend, approve or reject legislation;
· consider and approve budgets and monitor expenditure of the department and its entities;
· consider progress reports from the line function department, and entities on their respective mandates;
· ensure that all appropriate executive organs of state are held accountable for their actions; and
· conduct oversight of the national executive authority and of any organ of state
To become a vibrant and effective Portfolio Committee that legislates and conducts oversight over the implementation of departmental programmes and related entities to improve service delivery, achieve universal access to electricity and a transformed energy sector.
4. Analysis of the State of the Nation Address 2011
The State of Nation Address outlined key policy thrusts that have direct impact on the energy sector. Among others, the key policy priorities mentioned by the President included green jobs initiatives, job creation in the sector, energy security, role of Independent Power Producers, skills development and the issue of filling of all funded vacancies.
5. Strategic Plan: Overview including State Owned Entities
5.1. Department of Energy
The Strategic plan of the department and its entities is informed by the department’s mandate, recent cabinet decisions involving policy matters affecting energy, including among other things; the restructuring of the electricity distribution industry, energy planning and the performance outcomes of deliverables signed by the Minister of Energy. Outcome 6 and outcome 10 of the performance agreements signed by the minister will have a significant bearing in the approach of the department in achieving its targets.
5.2. State Owned Entities
The Minister of Energy has oversight responsibilities over 5 State Owned Entities (SOE) and their subsidiaries which are either classified as schedule 2 or 3 in the PFMA. They are the National Energy Regulator (NERSA), National Nuclear Regulation (NNR), Nuclear Energy Corporation of South Africa (NECSA), Central Energy Fund Group (CEF) and the Electricity Distribution Industry Holdings (EDI). The enabling legislation requires the Minister to appoint members of the boards of all state owned entities reporting to the Minister of Energy. All board members, with the exclusion of CEOs, are non-executive. The Department is represented on all of these boards, with the exception of NERSA. Boards are ultimately accountable and responsible for the performance of the entities. They give strategic directions to the entity in line with the mandate and this is in turn implemented by management.
In order for the department to achieve its objectives, it would be essential for the state owned institutions within the energy sector to be streamlined according to the departmental mandate. It will therefore be critical for the department to strengthen the hands of those entities that it oversees in order for them to be able to deliver on their legislative mandates.
6. Key Strategic objectives and Priorities
6.1 Integrated Resource Plan
The IRP was concluded in the previous financial year. It will be implemented in phases with effect from 2011/12 financial year. The IRP underlines the degree of the department’s involvement in a number of inter-departmental and cluster initiatives such as agriculture, economic development, trade, environmental management and climate change.
The Department was tabled the Integrated Energy Planning strategy before cabinet during the first quarter of 2011 however the cabinet still has to have give it another consideration before submission to Parliament. The strategy is expected to be finalized by the end of September 2011 while the first phase of Integrated Energy Modeling System which is required to provide statistical analysis will be completed by May 2011.
6.3. Implementing the national strategic fuels stock policy
The energy security master plan for liquid fuels identified number of capacity constraints and challenges faced by petroleum in meeting its challenges. The National Strategic Policy will also be submitted to cabinet during the 2011/12 financial year. The policy will set out the framework for storage of fuels stock by government as well as industry.
6.4. Drafting of National Liquefied Petroleum Gas (LPG) Strategy
The Department is drafting the LPG strategy which will be submitted to Cabinet in 2011/12. The main objectives of the strategy are to provide access to safe, cleaner, efficient, portable, environmentally friendly and affordable thermal fuel for all households, and to switch to low income households away from the use of coal, paraffin and biomass to LPG.
6.5. Cleaner Fuels Programme
The Department will review the current transport fuel specifications and standards to reduce harmful emissions, and to align standards with global vehicle trends and environmental requirements. Vehicle manufactures are expected to play a pivotal role through introducing more fuel efficient engine technologies with lower carbon and noxious emissions. The department has drafted a position paper for consultation and intends to promulgate new fuels specifications in early part of 2011/12 financial year.
6.6. Promoting Clean and Renewable Energy Sources
The Renewable Feed-In Tariffs have been set for diverse portfolio of renewable energy sources including wind, solar, biomass and small hydro. Similarly, energy efficiency programmes are prioritised and the Department has developed solar water heating framework. A standard offer policy which provides incentives for interventions that improve energy efficiency in the domestic, industrial and commercial sectors was developed and will be finalised in 2011/12 in order to achieve 10 000 GWh of electricity from renewable sources by 2013. 2011 is a particularly special year for the energy sector in South Africa as the country will be hosting the 17th United Nations Conference of Parties (COP17) in Durban. The department is ready to take firm decisions especially regarding the role of coal fired power stations and the refining capacity of the country’s petroleum products (both which increase greenhouse emissions in the atmosphere.
6.7. Implementing Nuclear Energy Policy
The Department continues with the implementation of 2008 Nuclear Energy Policy, including implementation of intergovernmental decisions such as deployment of new nuclear power stations, the associated funding and procurement framework, the industrialisation and localisation strategy, information sharing and skills development. The National Radioactive Waste Disposal will be set up in the 2011/12 financial year.
6.8. Independent Power Producers
The Department will initiate a procurement process of renewable energy investment under the Renewable Feed in Tariffs (REFIT) programme. Other non Eskom generation like cogeneration and other options identified in the Integrated Resource Plan (IRP) will be procured.
6.9. Promotion of energy efficiency
Energy efficiency in the residential, commercial and industrial sector remains one of the most attractive (in terms of costs and time to deploy) option that the department will focus on. The department remains committed to implementing the energy efficiency programme for the industrial and domestic sector in line with the Integrated Resource Plan for the achievement of the 2015 national target of 12%. Measures of achieving this would include, among others, public awareness campaigns.
6.10. Distribution networks and rehabilitation
It has become critical to address the problems facing the electricity distribution network as the Department improves supply-demand. The approach to Distribution Asset Management (ADAM) programme will be introduced to rehabilitate the identified municipal infrastructure which poses risk to energy security.
6.11 Legislative Issues
The Department plans to develop and review the following legislations during 2011/12: amendment of National Energy Regulator Act (No. 4 of 2006) to improve the governance structure of National Energy Regulator of South Africa (NERSA); amendment of Electricity Regulator Act (No. 4 2006) to provide for expropriation, improved licensing and addresses penalties; the Development of Independent System and Market Operator Bill to allow entrance of IPPs in the electricity generation; amendment of Petroleum Products Act (No. 120 of 1997) to address regulatory gaps and amendment of the Gas Act (No. 48 of 2001) to include methane and gases from other sources.
6.12 Build Programmes
Government recognises energy security as critical and essential ingredient for economic development and job creation. To ensure the security of electricity supply for the country, Eskom has invested more than R75 billion, mainly on the new stations Medupi, Kusile and Ingula, as well as the return to service and transmission of other projects.
Power stations and major power lines are being built on a massive scale to meet rising electricity demand in South Africa. Eskom's capacity expansion budget is R385 billion up to 2013 and is expected to grow to more than a trillion rand by 2026. Ultimately Eskom will double its capacity to 80 000 MW by 2026. Since the programme started in 2005, an additional 4 453.5 MW has already been commissioned. The plan is to deliver an additional 16 304 MW in power station capacity by 2017.
7. Budget Summary and Analysis
The Department of Energy’s structure is composed of five programmes namely, Administration; Energy Policy and Planning; Energy Regulation; National Electrification Programme and Nuclear Energy and Regulation. The Departmental budget has increased by R440.9 million (7.80 percent) in nominal terms and R162.0 million (2.87 per cent) in real terms. It increased from R5.64 billion in 2010/2011 to R6.90 billion in 2011/12.
The substantial share of this budget amounting to R3.21 billion (54 per cent of the Departmental budget) is appropriated to National Electrification Programme. This is followed by Energy Planning and Policy Planning with R1.54 billion rand (25 percent) rand. Nuclear Energy and Regulation has been allocated R613.2 million while Energy Regulation and Administration were allocated R554.7 million and R167.5 million respectively.
It is worth noting that the Department has undergone major restructuring and introduced new programmes, e.g. National Electrification; Energy Regulation and Nuclear Energy and Regulation programmes. Nuclear Energy and Regulation was under Programme: Electricity, Nuclear and Clean Energy while National Electrification programme was a project under same programme.
The Associated Services programme which was used for transferring, managing and monitoring funds in support of the Department’s mandate to funded and non funded statutory bodies and organisations has been cancelled. State Owned Enterprises have their stand alone budget which is constituted of their own revenues, transfers and subsidies from the Department.
7.1. Programme 1: Administration
The Administration programme provides strategic support and management services to the Ministry and Department. It has the lowest share of the total Departmental budget compared to other programmes. It has been allocated R167.5 million which is 2.8 per cent of the Departmental budget. This is attributable to the fact that the programme does not engage in the core functions of the Department, it coordinates and provides strategic support to the entire Department. The budget has increased by R41.7 million (31.1 per cent) in nominal terms or R34 million (27.05 per cent) in real terms. The programme is comprised of six sub-programmes increasing from four sub-programmes in 2010/11, namely: Minister; Management; Audit Services; Corporate Services; Financial Management and Office Accommodation. Among these sub-programmes, Financial Management and Corporate Services received bigger allocations of R62.7 million and R44.7 million respectively in 2011/12.
7.2. Programme 2: Energy Policy and Planning
The Energy Policy and Planning programme (Programme 2) provides an integrated energy planning service to promote the sustainable use of energy resources through energy research and the development of appropriate policies and regulations that promote the efficient use of petroleum products, coal, gas, renewable energy and electricity sources. The programme received the second highest share (25 per cent) of the total budget. Its budget decreased from R 1 548.6 billion in 2010/11 to R 1 546.9 billion in 2011/12. There has been a downward shift in the programme budget. The programme budget has decreased by R1.7 million (0.1 percent) in nominal terms and -4.68 percent in real terms. It is important to note that this programme’s budget increased by 2718.44 per cent in nominal terms or R1.4 billion (2 541.47 per cent) in real terms from 2009/10 to 2010/11. The significant increase in 2010/11 could be attributed to Departmental priority of promoting local petroleum refinery capacity and investment in the sector. PetroSA planned to build a 400 000 barrel per day refinery at Coega in the Eastern Cape. An additional R4.5 billion was allocated to Transnet pipelines with a spread of R1.5 billion per year over the MTEF period. These funds were earmarked for the construction of the national multipurpose petroleum pipelines to ensure the secure supply of petroleum product
7.3. Programme 3: Energy Regulation
This programme regulates and provides enforcement in the energy sector. It also develops specifications, standards and conditions for petroleum products; ensures the security of liquid fuels; and facilitate the implementation of renewable technologies and clean development mechanisms. A total R488.4 million was allocated for programme 3 in the 2010/11 financial year, representing 7.73 per cent of the budget vote. The budget increased by R68.8 million (20.24 per cent) in nominal terms or R43.1 million (12.69 per cent) in real terms. Although this is a new programme, the programme constitutes of sub-programmes existed during the previous year and comparison is drawn from those sub-programmes. The programme consists of four sub-programmes, namely, Petroleum Licensing and Monitoring, Hydrocarbons Operations, Clean Energy and Public Entity Oversight.
Allocations to the Petroleum Licensing and Hydrocarbons Operations sub programmes allocations increased marginally by 0.8 million in nominal terms while Petroleum Licensing decreased by 0.7 (2.22 percent) in real terms. However, Clean Energy sub-programme allocations increased from R488.5 to R554.7 which is an increase of R66.2 million in nominal terms and 40.8 million in real terms. The increase in the budget could be attributed to the need of the Department to intensify its efforts in clean energy mechanisms, energy efficiency initiatives, use of renewable resources, and it is in line with the Departmental priorities of moving away from fossil fuels to cleaner energy technologies.
7.4. Programme 4: National Electrification Programme
This programme has a substantial share in the departmental budget amounting to R3.21 billion (54 percent). The National Electrification Programme is also a new programme. This was one of the flagship projects of the Department in 2010/11 wherein transfers and subsidies were made to Eskom and Municipalities as implementing agents. During 2011/12, the Department has taken ownership and management of the programme and the programme is composed of two sub-programmes namely, Business Planning and Grant Management and Monitoring. In 2010/11, R2 884 billion was transferred to INEP and this has increased to R3 207 billion during 2011/12. The allocations has increased by R323 million which is 11.2 percent in nominal terms and 6.11 percent in real terms.
7.5. Programme 5: Nuclear Energy and Regulation
Following the White paper on Energy Policy in 1998, Nuclear Energy Policy was approved by Cabinet in June 2008. The Policy provides a framework within which prospecting, mining, milling and use of Nuclear materials including development and utilisation of Nuclear energy for peaceful purposes shall take place. The programme has been allocated R613.2 million which is an increase in nominal terms of R11.8 million (2 percent) and a decrease in real terms of R16.3 million (-2.71 percent).
8. Observations and Key issues for the Committee
· The Committee noted with concern the asymmetry between the strategic plan of the department, as presented before the Committee and that capture in the Estimates of National Expenditure especially with regard to the programme categories.
· A doubt was raised as to whether the department had the capacity to meet the target of rolling out 1 million solar water heaters by 2014.
· The Committee noted that the proposed 92% connectivity by 2014 would result in 8% of settlements not being connected. It was therefore important to have measures in place that would see the connectivity of the remaining 8%.
· The Committee was also concerned about the immediate plans to finance EDI as the department has taken control of EDI. The Department of Energy indicated that at a short term R1.2 billion has been spent on distribution and a possible strategy in conjunction with DBSA and Treasury in the form of soft loans in the long term is being sought.
· The Committee noted with concern the pace at which the filling of funded vacancies was progressing within the department.
· Regarding Nuclear safety, the Committee noted that the government remained committed to nuclear energy programmes and that events such as the Fukushima disaster would only emphasise the need to have stringent safety measures rather than putting such programmes to a halt as other countries had done.
· There was a concern that the strategic plan of the department had not managed to shed more light on how it linked to the New Growth Plan.
The Commitment to roll out 1 million solar water heaters seemed to be huge task. An update of how far this was progressing would be required from time to time.
· The Committee noted further that there was little reference with regard to the restructuring of the activities of the State Owned Entities so that their mandate clearly corroborated that of the department.
Having considered the strategic plan of the Department of Energy and budget vote 29, the Portfolio Committee on Energy recommends the following:
· That energy efficiency projects should gain much needed momentum and should be clearly visible in the programmes of the Department.
· That the Department should aggressively promote energy saving initiatives, including the review of the current institutional arrangements to accommodate that need. Currently this is an effort which only falls under ESKOM.
· That the amendments to the Petroleum Products Act (PPA) need to be fast tracked because during the Liquid Fuels Charter’s public hearings the PPA was found to have been impeding the transformation of Historically Disadvantaged Individuals (HDIs).
· That the Department considers the release the reviewed white paper on renewable energy for comments.
· That the Department should urgently address challenges in the electricity distribution, rehabilitation and maintenance of the electricity infrastructure.
· That rationalisation of electricity supply and distribution, including the role of Eskom and municipalities should be given serious consideration by the Department.
· That South Africa’s target of achieving at least 10 000 GWh power produced from renewable by 2013 should be prioritised by the Department.
Having considered the budget vote and strategic plan of the Department of Energy, the Portfolio Committee recommends that the House endorses the 2011/12 Budget Vote 29 of the Department of Energy.
Report to be considered.
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