ATC151028: Budgetary Review and Recommendation Report of the Portfolio Committee on Energy, dated 21 October 2015

Energy

Budgetary Review and Recommendation Report of the Portfolio Committee on Energy, dated 21 October 2015

                                            

The Portfolio Committee on Energy, having considered the performance and submission to National Treasury for the medium term period of the Department, reports as follows:

 

1. Introduction

 

1. Mandate of the Committee

 

• Conduct oversight on behalf of the National Assembly, over the actions of the Department of Energy (the Department) in order to ensure Executive accountability for the delivery of services to the people of South Africa, as enshrined in the Constitution of the Republic of South Africa, 1996. Sections 195 and 33 of the Constitution, read together, guarantee all South Africans a right to services that must be provided impartially, fairly, equitably and without bias;
• Oversee and review all matters of public interest relating to the public sector and energy to ensure service delivery;
• Ensure compliance by the Department and  its entities to relevant legislation (financial and other); and
• Monitor the expenditure of the Department and its entities and to ensure regular reporting to Parliament, within the scope of accountability and transparency.

 

1. Description of core functions of the Department and its entities.

 

In carrying out its mandate, the Department formulate Energy policies, Regulatory frameworks and legislation, and oversees their implementation to ensure energy security, promotion of environmental friendly energy carriers and access to affordable and reliable energy for all South Africans.

 

The Minister of Energy is responsible for overseeing the following State-Owned Entities (and their subsidiaries), which are either classified as Schedule 2 or 3A institutions in terms of the Public Finance Management Act, 1999 (Act 1 of 1999), as amended (PFMA):

 

• The National Nuclear Regulator (NNR) - The purpose of the NNR, as outlined in section 5 of the National Nuclear Regulator Act 1999 is to essentially provide for the protection of persons, property and the environment against nuclear damage through the establishment of safety standards and regulatory practices.
• The National Energy Regulator of South Africa (NERSA) - The purpose of NERSA, as effectively outlined in section 4 of the National Energy Regulator Act, is to regulate the electricity, piped-gas and petroleum pipeline industries within the Republic of South Africa in terms of the Electricity Regulation Act, 2006 (Act No. 4 of 2006), the Gas Act, 2001 (Act No. 48 of 2001) and the Petroleum Pipelines Act, 2003 (Act No. 60 of 2003).
• National Radioactive Waste Disposal Institute (NRWDI) - This entity has been established with the aim of managing radioactive waste in South Africa. To date the Board of Directors have been appointed and the DoE is in the process of appointing the Secretariat.    
• The South African National Energy Development Institute (SANEDI) - SANEDI’s functions, as outlined in section 7(2) of the National Energy Act, are to: - direct, monitor and conduct applied energy research and development, demonstration and deployment as well as undertake specific measures to promote Energy Efficiency (EE) throughout the economy; and - establish a nationally focused energy research, development and innovation sector and undertake EE measures with a strong relevance for South Africa.
• The South African Nuclear Energy Corporation (NECSA) - NECSA’s functions, as outlined in section 13 of the National Energy Act, are to: - undertake and promote research on nuclear energy, radiation sciences and technology; - process source, special nuclear and restricted material including uranium enrichment; and - collaborate with other entities.
• The Central Energy Fund (CEF) Group of Companies (SOC) Ltd - CEF (SOC) Ltd is involved in the search for appropriate energy solutions to meet the future energy needs of South Africa, the Southern African Development Community and the sub-Saharan African region, including oil, gas, electrical power, solar energy, low smoke fuels, biomass, wind and renewable energy sources. CEF also manages the operation and development of the oil and gas assets of the South African Government.

 

1. Purpose of the BRR Report

 

The Money Bills Procedures and Related Matters Amendment Act (Act 9 of 2009) sets out the process that allows Parliament to make recommendations to the Minister of Finance to amend the budget of a national department.

 

In October of each year, Portfolio Committees must compile Budgetary Review and Recommendation Reports (BRRR) that assess service delivery performance given available resources; evaluate the effective and efficient use and forward allocation of resources; and may make recommendations on forward use of resources. The BRRR are also source documents for the Standing/Select Committees on Appropriations/Finance when they make recommendations to the Houses of Parliament on the Medium-Term Budget Policy Statement (MTBPS). The comprehensive review and analysis of the previous financial year’s performance, as well as performance to date, form part of this process.

 

1. Method

 

The committee, in undertaking the process of compiling this report, considered the following source documents and engagements:

• Annual Report briefings, in terms of Section 65 of the Public Finance Management Act, No. 1 of 1999, which requires that Ministers table the annual reports and financial statements for the Department and public entities to Parliament.
• Briefing by the Auditor-General of SA (AGSA) on the audit outcomes of the Department of Energy and the entities reporting to it.

• Briefing by the Department of Planning, Monitoring and Evaluation on the performance of the Department of Energy for 2014/15.

 

1. Outline of the contents of the Report.

 

1. Introduction
2. Overview of key relevant policy focus areas
3. Overview and assessment of financial performance
4. Auditor-General of South Africa (AGSA) Report
5. Department of Planning, Monitoring and Evaluation Report
6. Service delivery environment
7. Key Policy Development and Legislative Changes
8. International Activities of the Department
9. State Owned Entities (SOEs) oversight
10. Summary of the Annual Reports 2013/4 of the entities
11. Committee’s findings and observations
12. Recommendations
13. Appreciation

 

 

1. Overview of the key relEvant policy AND PROGRAMME focus areas

 

1. White Paper on the Energy Policy, December 1998

 

The Department derives its mandate, among others, from the White Paper on energy Policy of December 1998. The Department is responsible for ensuring energy security within the country and achieves this by undertaking Integrated Energy Planning, regulating energy industries, and promoting electric power investment in accordance with the Integrated Resource Plan (IRP) for electricity. The Department plans to review and update the 1998 White Paper on the Energy Policy of the Republic of South Africa during the 2014/15 MTEF period.

 

1. White Paper on Renewable Energy Policy, November 2003

 

The White Paper on Renewable Energy Policy of November 2003 supplements the White Paper on Energy Policy, which recognises that the medium- and long-term potential of renewable energy is significant. This Paper sets out government’s vision, policy principles, strategic goals and objectives for promoting and implementing renewable energy in South Africa. It also informs the public and the international community of government’s vision, and how government intends to achieve its objectives; and informs government agencies and organs of their roles in achieving the objectives.

 

1. Energy Security Master Plan for Liquid Fuels, 2007

 

The recommendations made in the Energy Security Master Plan for Liquid Fuels, which was approved by Cabinet in 2007, continue to be implemented, with the current focus being primarily on addressing the short- to medium-term infrastructural constraints within the liquid fuels sector.

 

1. Nuclear Energy Policy, June 2008

 

Following the White Paper on the Energy Policy, 1998, the Nuclear Energy Policy was approved by Cabinet in June 2008. The policy provides a framework within which prospecting, mining, milling and the use of nuclear materials as well as the development and utilisation of nuclear energy for peaceful purposes shall take place. The long-term vision of the policy is for South Africa to become globally competitive in the use of innovative technology for the design, manufacture and deployment of state-of-the-art nuclear energy systems and power reactors and nuclear fuel cycle systems.

 

1. Integrated Energy Planning Strategy

 

The Department tabled the Integrated Energy Planning Strategy before Cabinet during the first quarter of 2011. The strategy outlines the requisite processes, systems and structures necessary for the development of a comprehensive Integrated Energy Plan (IEP). The latest IEP is still to be presented to Parliament.

 

 

 

 

 

 

1. National Strategic Fuels Stock Policy

 

The Energy Security Master Plan for Liquid Fuel identified a number of capacity constraints and challenges faced by the petroleum sector in meeting energy demand. In responding to these challenges, the National Strategic Fuels Stock Policy was submitted to Cabinet during the 2011/12 financial year. This policy sets out the framework for the storage of fuels stock by government as well as industry. It also seeks to guide the necessary investment decisions within the liquid fuels sector to ensure the security of energy supply. As part of this process, towards the end of September 2010, the Department drafted and published Regulations in Respect of Strategic Stocks to be kept by Oil Companies, which was also finalised during the 2011/12 financial year.

 

 

1. National LPG Strategy

 

As part of the promotion of clean energy sources, the Department drafted a Liquefied Petroleum Gas (LPG) Strategy which was 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 convert low-income households from the use of coal, paraffin and biomass to LPG.

 

1. Cleaner Fuels Programme

 

To further improve the quality of transport fuels, the Department reviewed the current fuel specifications and standards so as to reduce harmful emissions, and to align standards with global vehicle technology trends and environmental requirements. This should encourage vehicle manufacturers to introduce fuel efficient engine technologies with lower carbon and noxious emissions. Government has taken a decision to postpone the implementation of CFII from July 2017 to a later date that will be announced once further consultations on the amended Regulations regarding Petroleum Products Specifications and Standards has been

concluded.

 

1. Promoting Clean and Renewable Energy Sources

 

Promoting the development and use of clean and renewable energy resources remains a key priority for the Department. Renewable energy feed-in tariffs were set for a diverse portfolio of renewable energy sources including wind, solar, biomass and small-scale hydro.

Producers who invest in renewable energy are incentivised by tariffs which cover the cost of generation plus an attractive return.

 

1. Energy Efficiency Programmes

 

Similarly, energy efficiency programmes are prioritised and the Department has developed a Solar Water Heating Framework, which consolidates all solar water heating programmes currently run by various municipalities, public entities and the private sector. Energy efficiency in the residential, commercial and industrial sectors remains one of the most attractive options in terms of cost and time to deploy. The measurement and verification of energy efficiency outcomes will accordingly become a focal area, with the South African National Energy Research and Development Institute (SANEDI) serving as a repository for all energy efficiency interventions and outcomes.

 

1. Independent Power Producers Programme

 

The Department moved away from the Standard Offer Framework (Renewable Energy Feed-in Tariff), to a criteria-based approach for proposals for the finance, construction, operation and maintenance of renewable energy generation facilities by IPPs. These criteria included potential for the creation of a local industry, job creation, black economic empowerment and technology transfer. Interventions that improve energy efficiency in the domestic, industrial and commercial sectors were developed and finalised in 2011/12. The Department also initiated a procurement process for renewable energy investment under the Renewable Energy Independent Power Producer (REIPPP) Programme. Technologies including solar, wind, biomass, hydro and landfill gas will all contribute to the diversified portfolio of renewable energy. In addition to the renewable energy IPPs, other non-Eskom generation opportunities are being procured, particularly cogeneration and other options identified as part of the IRP implementation process.

 

1. Infrastructure Rehabilitation

 

As the electricity supply-demand situation is improved, it has become critical to address problems facing the electricity distribution network, particularly municipal infrastructure. The Approach to Distribution Asset Management (ADAM) Programme has been introduced to rehabilitate the identified municipal structure which poses a risk to energy security.

 

 

1. Legislation regulating the energy sector

 

The following legislation regulates the energy sector:  

 

• National Energy Act, 2008 (Act No. 34 of 2008)
• Electricity Regulation Act, 2006 (Act No. 4 of 2006), as amended
• Petroleum Products Act, 1977 (Act No. 120 of 1977), as amended
• Central Energy Fund Act, 1977 (Act No. 38 of 1977), as amended
• Nuclear Energy Act, 1999 (Act No. 46 of 1999)
• National Nuclear Regulator Act, 1999 (Act No. 47 of 1999)
• National Radioactive Waste Disposal Institute Act, 2008 (Act No. 53 of 2008)
• Petroleum Pipelines Act, 2003 (Act No. 60 of 2003)
• Petroleum Pipelines Levies Act, 2004 (Act No. 28 of 2004)
• Gas Act, 2001 (Act No. 48 of 2001)
• Gas Regulator Levies Act, 2002 (Act No. 75 of 2002)
• National Energy Regulator Act, 2004 (Act No. 40 of 2004)
• Abolition of the National Energy Council Act, 1991 (Act 95 of 1991)

 

In addition to the aforementioned Acts, the following legislation also impact on the sector:

• The National Environmental Management Act, 1999 (Act No. 107 of 1999)
• The National Environmental Management Act, 1999, has a direct impact on legislative and other measures to reduce carbon emissions, energy efficiency and mitigation of the impact of the generation/refinement and use of energy on the environment.
• The Mineral and Petroleum Resources Development Act, 2002 (Act No. 28 of 2002).

 

 

 

 

 

 

 

 

 

 

 

3.

 

1. . Overview of Vote allocation and spending (2014/15)

 

Table 1: Overview of Vote allocation and spending (2014/15)

Per Programme
DETAILS	Adjusted Budget 2014/15	Actual spend 2014/15	Actual % on budget spend
	R'000	R'000	%
Totals 2014/15	7 437 794	6 220 113	83.6%
Administration	260 601	257 168	98.7%
Energy Policy and Planning	53 053	41 749	78.7%
Petroleum and Petroleum Products Regulation	78 210	64 548	82.5%
Electricity and Energy Programme Management	4 217 327	4 180 973	99.1%
Nuclear Energy	846 529	845 418	99.9%
Clean Energy	1 982 074	830 257	41.9%

Source: Presentation document to PCE on 14 October 2015

 

 

1. Financial Performance – 2014/15

 

As at 31 March 2014, the Department spent R6.22 billion or 83.6% of its allocated budget. This resulted in an unspent balance of R1.22 billion or 16.4% of the adjusted allocation.

 

The composition of the overall unspent balance of R1.22 billion is as follows:

• Compensation of Employees     :R 8.98  million  
• Goods & Services                     :R 34.74 million 
• Transfer Payments                    :R 1.17 billion  
• Capital Assets                           :R 1.43 million

 

The Department spent a total of R264.27 million in respect of compensation of employees during the 2014/15 financial year which resulted in an under spending of R8.98 million (3.29%) at year-end. The budget balance is attributable to the number of vacant positions in the Department. The recruitment process for the majority of positions was not completed by year end but was at an advanced stage. Disbursed payments totalling R209.34 million for the procurement of various goods and services which resulted in an under spending of R34.74 million (14.23%) at year-end. Attributable to operational delays in appointing service providers for various projects and certain projects which were not undertaken as planned during the financial year both resulting in a significant under spending in the consultants cost item.

 

Cost reduction measures implemented resulted in operational savings in travel and subsistence, the delayed relocation of regional offices to the new office accommodation premises delayed the procurement of office furniture resulting in under spending in the minor assets cost item.

 

Disbursed payments amounting to a total of R5.74 billion to public entities, municipalities and implementing agents against a budget of R6.92 billion. This resulted in a budget under-spending of R1.17 billion (16.96%) at year-end.

 

The major contributors to this under-spending are:

• R35.53 million - INEP non-grid electrification programme due to the late start of the projects in the 2014/15 financial year as a result of delays in finalizing implementation agreements. This consequently impacted on time frames attached to implementation and verification of connections and subsequent late receipt of invoices.
• R1.14 billion - Eskom Solar Water Heater Programme which could not be transferred due to challenges in implementing the project by Eskom in the current financial year. The re-engineering of the programme was inevitable during the financial year and culminated in the termination of the DoE-Eskom MoA (by mutual agreement). The Department has initiated the process of obtaining Cabinet’s approval for the programme’s Revised SWH Contracting Model.

 

A request has been submitted to National Treasury to roll funding of R1.14 billion over to the 2015/16 financial year to implement the Solar Water Heater Projects at municipalities across all nine regions which will assist in reducing the electricity demand.

 

Transfer Payments

 

The management of transfer payments in terms of the Division of Revenue Act (DORA) are managed by line function (INEP / Clean Energy) based funding requests received from individual municipalities and subsequent project plans which are included in the DORA implementation agreements.

 

The Finance Branch manages the alignment of DORA payment schedules with the Department’s drawings against the National Revenue Fund and payment requirements.

 

The Finance Branch also assists the line function to re-gazette funds from a financial perspective, i.e. from non-performing municipalities and entities.

 

MUNICIPAL EEDSM PROGRAMME CHALLENGES

 

Since the inception of the Energy Efficiency and Demand Side Management (EEDSM) programme in 2009/10 there has been improvements on the management and administration of the programme. However, the following still remain a challenge:

• Poor EEDSM proposals submitted by municipalities due inadequate technical skills and/or capacity to manage and implement the project
• Signing of the Agreements and submission of the business plans as required by the Division of Revenue Act.
• Monthly, quarterly and annual progress reports not being submitted on time as required by the Division of Revenue Act
• Lack of accountability on reports provided. Most of these reports are not officially signed off by an authorized person within the municipality.
• Poor expenditure by most municipalities. This is evident in the amount being requested as roll-over.
• Municipal conflicts on Measurement and Verification (M&V) of energy savings. However, it should be noted that for 2014/15, the M&V function has now been shifted and centralized within the DoE.

 

Technical support to municipalities relating to the EEDSM:

• In 2011/12 the Department decided to develop an implementation and monitoring guideline for the EEDSM programme. The guidelines serves as practical tool for the development, implementation and monitoring of the EEDSM measures within municipalities, and also list options on various technologies and methodologies that can be adopted.
• In addition to the guidelines, the Department also developed a set of indicators as a criteria for developing EEDSM proposals.
• This set of indicators together with a business plan, and reporting templates were developed through the South African German Energy (SAGEN) Programme with the support of the German International Cooperation (GIZ). 
• In 2013/14, the Municipal Infrastructure Support Agency (MISA) also came on board to provide support specifically on improving municipal capacity and project management on implementation of the programme.
• The Department conducts structured workshops and at municipalities to address any shortfalls on implementation agreements.

 

Integrated National Electrification Programme (INEP) challenges

 

Municipalities and Eskom

• Slow delivery of electrification projects by Municipalities and in certain Eskom regions.
• Lack of skills and high vacancy rates within Municipalities – administration, technical and project management functions.
• Majority of Municipalities are not performing as required - internal municipal procurement take too long, hence the delays in the appointment of the contractors, and the subsequent delays in service delivery.

 

Non-grid Programme

 

• Slow roll-out of non-grid connections due to negative perceptions about non-grid technologies and practical short comings.
• Non-grid service providers struggle to survive due to the small customer base and implementation of non-grid projects in far rural locations.

 

Funding and cost of connections

 

• More connections are done in rural areas – connection costs increases sharply and subsidy level has to be increased accordingly.
• Annual budgetary process force projects to be planned and designed on an annual basis and not on a multi-year (project completion) basis.

 

Proposed solutions to the EEDSM

• Regional steering committees are being established to enhance project assessments before funds are allocated which will assist with the current project monitoring on existing projects.
• During the implementation phase, projects are monitored and evaluated, and this oversight role has been strengthened.
• After the completion of the projects, Technical Audits are conducted in order to inspect the quality, technical standards and safety compliance.
• Not all the projects are regularly monitored and audited due to financial and human capacity constraints.
• Projects allocations of over R5 million are prioritised for technical audits.
• Establishment of the Departments monitoring and reporting unit of INEP is currently underway.

 

 

Unauthorized Expenditure – R14.86m

 

The unauthorized expenditure of R14.86 million is due to an Infrastructure Grant transfer payments paid to the Mthonjaneni Municipality in May 2010. The transfer was appropriated in the 2009/10 financial year, however the payment to the municipality was processed in March 2010, but only transferred in May 2010 due to the system rejection of the banking details. A request for condonation has been submitted to National Treasury for consideration. Condonation was approved without funding. The Department presented the matter to SCOPA on 12 November 2014 and is awaiting the committee’s decision. No unauthorised expenditure was incurred in the 2014/15 financial year.

 

Irregular expenditure

• During 2014/15 irregular expenditure to the amount of R 55 000 was identified .This amount was due to non-compliance to procurement process.
• Condonation was granted in the 2014/15 financial year for this irregular expenditure. The matter is being investigated and disciplinary steps will be taken pending the outcome of the investigation.

 

Investments – R2.205 million

 

• The Department is a 100% shareholder in the South African Nuclear Corporation Limited (NECSA) and own 2,205 shares.

 

Current Liabilities – R1,219 811 billion

 

The breakdown of the above is as follows;

• R1, 218 681 billion - Unspent voted funds / Surplus funds, this was surrendered to National Treasury (NT) immediately after the audit.
• R1,666 million -  Revenue collect on the 31 March 2015. This has been surrendered to NT

• R208 000  -  Taxes on employee earnings. This was paid over to South African revenue Services (SARS0 in April 2015.
• R256 000  - Unallocated amounts was received in respect of petroleum licenses.  

 

 

1. Auditor General of South Africa (AGSA) REPORT:

 

1. Audit opinions

 

In 2012/13 and 2013/14, the Department of Energy (DoE) received unqualified audit opinion from the Auditor General (AG). However in the year under review (2014/15), the Department received a clean Audit opinion, an achievement that the Department should be commended for. For three years, 2012/13 to 2014/15, the National Energy Regulator of South Africa (NERSA) received a clean audit opinion from AG. On the other hand, the National Nuclear Regulator (NNR), for two years, 2013/14 to 2014/15, received clean audit opinion as well. Other entities that have submitted their financial statements and had their auditing done have all received unqualified audit opinion with findings from the AG.

 

The Nuclear Energy Corporation of South Africa (Necsa) Annual Report has not yet been tabled in Parliament as the auditing is still being finalised.  Information on the National Radioactive Waste Management Disposal Institute (NRWDI) and Electricity Distribution Industry (EDI) holdings is reported as “outstanding”. This means that information that was supposed to be submitted for auditing was not submitted as required. This is because the NRWDI is not fully operation, also the EDI holdings was disbanded, and it does not exist. However, according to the legislation, the AGSA is required to audit these entities and it will continue to do so unless a letter is sent requesting that these entities be exempted from the audit.

 

 

 

 

1. Material errors or omissions in submitted annual financial statement

 

Table 2: Material errors or omissions

Department/Entity	Finding	Root Cause	Recommendations
SANEDI	The financial statements submitted for auditing were not prepared in all material respects in accordance with the requirements of section 55(1)(b) of the Public Finance Management Act (PFMA). Material misstatements identified by the AGSA relating to revenue; assets; disclosure notes were subsequently corrected resulting in the financial statements receiving an unqualified audit opinion.	There was inadequate review by finance management to ensure that the financial statements comply with the financial reporting framework.	Management are encouraged to subject the financial statements to thorough review prior to submission for audit, and ensure that all supporting schedules used to prepare the financial statements agree to the final account balances and disclosures
CEF	The financial statements submitted for auditing were not prepared in all material respects in accordance with all the requirements of section 55(1) (b) of the PFMA. Material misstatements on, non-controlling interest, assets and disclosure notes were corrected, resulting in the financial statements receiving an unqualified audit opinion.	There was inadequate review by finance management to ensure that the financial statements comply with the financial reporting framework.	Management are encouraged to subject the financial statements to thorough review prior to submission for audit, and ensure that all supporting schedules used to prepare the financial statements agree to the final account balances and disclosures
Equalisation Fund	The financial statements submitted for auditing were not prepared in all material respects in accordance with the requirements of section 55(1)(b) of the PFMA. Material misstatements identified by the AGSA relating to, current assets and revenue, were subsequently corrected resulting in the financial statements receiving an unqualified audit opinion.	There was inadequate review by finance management to ensure that the financial statements comply with the financial reporting framework.	Management are encouraged to subject the financial statements to thorough review prior to submission for audit, and ensure that all supporting schedules used to prepare the financial statements agree to the final account balances and disclosures

Source: Auditor General of South Africa, (204/15)

 

1. Findings on predetermined objectives

 

Table 3: Predetermined objectives

Department/Entity	Finding	Root Cause	Recommendations
SANEDI	The strategic deliverables were not well defined, specific and measurable and therefore did not meet the usefulness criteria. Furthermore some target in the strategic deliverables were not time-bound. Indicators/Measures were not verifiable	The Accounting authority did not ensure that the public entity has and maintained an effective; efficient and transparent system of internal control regarding performance management	Compliance with the Public Finance Management Act should be administered and implemented in all Facets of the Entity. Performance objectives should be aligned to the mandate of the entity and should be specific; measurable; achievable; relevant and time bound (SMART) to ensure service delivery.
Equalisation Fund	We were unable to report on the usefulness and reliability of the annual performance report of the Equalisation Fund as it was not prepared as required by section 55(2)(a) of the PFMA.	Management has not exercised oversight responsibility regarding financial and performance reporting; compliance and related internal controls as no performance objectives were set for the financial year. The entity was still waiting for clarity from National Treasury on whether or not they should prepare performance information.	Compliance with the Public Finance Management Act should be administered and implemented in all aspects of the Equalisation Fund. Performance objectives should be set for the Fund so that performance of the fund can be assessed as well as accountability and tracking of progress of the fund can be monitored.

Source: Auditor General of South Africa, (204/15)

 

1. Compliance with legislation

 

Table 4: Compliance

Department/Entity	Finding	Root Cause	Recommendations
SANEDI	Expenditure Management The accounting authority did not take effective steps to prevent irregular as required by section 51(1)(b)(ii) of the PFMA	Management does not take effective and appropriate steps to prevent any irregular expenditure.	Management should take effective and appropriate steps to prevent irregular expenditure
CEF	Audit committees Members of the audit committee have not been appointed as directors of the entity by the  shareholder as required by section 94(4) of the Companies Act   Procurement and contract management Sufficient audit evidence could not be obtained that quotations and contracts were awarded to suppliers whose matters have been declared by South African Revenue to be in order. Goods and services were not procured through a procurement process that is fair equitable and transparent and competitive as required by PFMA section 51(1)(a) (iii)   Expenditure management The accounting authority did not take reasonable steps to prevent irregular expenditure as required by section 51(1) (b) (ii) of the PFMA.   Material misstatements corrected The financial statements submitted for auditing were not prepared in all material respects in accordance with the requirements of section 55(1)(b) of the PFMA.	The CEF’s Shareholder has not complied with section 94 (4) (a) of the companies act   Insufficient review process implemented to ensure compliance with applicable legislation and the annual financial statements	The shareholder should ensure that it complies with all legislation and specifically section 94 (4) (a) of the Companies Act by appointing the said audit committee member as a director. The accounting authority should take the necessary steps to prevent irregular expenditure and non- compliance with legislation
Equalisation Fund	Material misstatements corrected The financial statements submitted for auditing were not prepared in all material respects in accordance with the requirements of section 55(1)(b) of the PFMA. Internal audit non-compliance with legislation Internal audit did not submit the reports against annual performance plan to the audit committee. The effectiveness and efficiency of internal controls were not evaluated by Internal Audit. The reliability of and integrity of financial and operational information was not evaluated. Compliance with laws and regulations was also not evaluated.   Strategic planning and performance management The Accounting Authority did not establish procedures for quarterly reporting to the Executive Authority The Accounting Authority did not ensure that the public entity had and maintained effective , efficient and transparent systems of financial  and risk management and internal controls as required by section 51 (1) (a) (i) of the PFMA.   Monitoring and oversight The National Treasury was not notified, in writing that the public entity is not listed as required by Section 47(2) of the PFMA.	Insufficient review of the annual financial statements (AFS) before submission for audit.   Effective leadership is lacking. Daily disciplines of account reconciliations and monitoring of compliance with legislation were not effective.	The financial statements should be reviewed by a senior person who is independent from the preparation of the AFS   Internal audit should comply with the terms of the SLA between the DoE and CEF and the TR requirements. Compliance with the Public Finance Management Act should be administered and implemented in all aspects of the Equalization Fund

Source: Auditor General of South Africa, (204/15)

 

1. Unauthorised, Irregular and Fruitless  and Wasteful Expenditure

 

Unauthorised expenditure refers to the expenditure that is not in accordance with the budget vote. According to the AGSA, no unauthorised expenditure was incurred by the Department or the entities.

 

Irregular expenditure is incurred when one is in contravention with key legislation. Fruitless and wasteful expenditure is expenditure that should not have been incurred (that is it is incurred in vain; that could have been avoided; and no value for money received)

The Department and its entities, during the year under review, incurred irregular and fruitless and wasteful expenditure as follows.

 

Table 5: Unauthorised, Irregular and Fruitless and Wasteful Expenditure

Department / Entity	Irregular Expenditure (R)	Fruitless and Wasteful Expenditure (R)
DOE	55 000	15 000
CEF Group	20 366 000	4 731 000
NERSA	1 704 000	402
SANEDI	426 000	34 000
EQF	0	0

Source: Auditor General of South Africa, (204/15)

 

 

• Department of Energy: The Department incurred irregular expenditure of R55 000 and this is attributed to the procurement process that was not followed. Fruitless and wasteful expenditure was attributed to interest paid on international membership fees.
• Central Energy Fund Group: The Group incurred irregular expenditure of R20 366 000 and this is a result of Contravention of company policy and PPPFA Procurement without competitive bidding or quotation process. Fruitless and wasteful expenditure was attributed to non-performance penalties, settlement claim due to unfair recruitment process, interest incurred for late payment of tax, misplaced items (stolen) and overpayment of retrenchment packages.
• National Energy Regulator of South Africa: The Regulator incurred irregular expenditure of R1 704 000. The irregular expenditure was attributed to extension of contract scope without prior approval. The Fruitless and wasteful expenditure relates to the interest paid to the service providers late due to late payment of invoices.
• South African National Energy Development Institute: The Institute incurred irregular expenditure of R436 000. The irregular expenditure was attributed to; no tax clearance certificates were available; BEEE scores not considered and deviation not approved by appropriate authority. The reasons for the fruitless and wasteful expenditure relates to the interest caused by delays with interbank transfers as well as interest due to late payment to supplier.

 

In light of all the above challenges, the AGSA recommends the following:

• Consequences management should be prioritized to ensure that the same transgressions are not repeated.
• The entities should implement controls timeously as and when deficiencies are identified.
• Entities should ensure that compliance to legislation is continuously monitored and reviewed.

 

1. DEPARTMENT OF PLANNING, MONITORING AND EVALUATION REPORT ON DOE PROGRESS ON THE IMPLEMENTATION OF THE MEDIUM-TERM STRATEGIC FRAMEWORK (MTSF) 2014-2019

 

1. Introduction

 

The MTSF is government’s first five year implementation plan of the NDP, covering the financial years 2014/15 to 2018/2019. This report reviews overall progress against the targets in the MTSF for the 14 outcomes over the financial period 2014/15.

 

The MTSF outcomes seek to address the triple challenges of unemployment, inequality and poverty espoused in the National Development Plan. The report does not cover every target in the MTSF – for each outcome the report covers a selection of targets, strategic issues requiring change and provides pointers to critical future focal areas. By focusing on a limited set of key indicators, the methodology enables evidence-based assessment of progress against the NDP. The methodology helps the DPME to focus on outcomes and impacts rather than just activities

 

Refinement of some indicators in MTSF chapters for alignment with SONA, the Nine Point Plan, and other recent developments. Proposed refinement timely as mid-2015 represents the end of the first year of the fifth Administration. Using the NDP as the blueprint, DPME and STATSSA are working with departments to ensure that indicators are refined so they are always measurable, accurate, reliable and time-bound. Areas of under-targeting and over-targeting are being looked into and addressed, and consensus is sought across all contributing governments and spheres. The quality of the data used in the Nine Point Plan will also form part of this ongoing process to ensure credibility. 

 

 

 

1. Performance of the DoE

 

Table 6: Classification of performance for this report

Green	Target has been achieved, or Target has been exceeded, or Target has almost been achieved, or Target will be achieved
Amber	Some progress or substantial progress towards meeting the target
Red	No progress towards meeting the target
Blue	System for measuring the indicator not yet in place, or Data not available or not released during the reporting period under consideration

 

 

Sub outcome 1: Regulation, funding and investment improved

Indicator	2014 level (baseline)	MTSF  target	Latest  available measurement	Note	Rating
Amended National Energy Regulator Act and Electricity Regulation Act.	Current legislative framework	By April 2016	The consultations on the two Bills have been concluded and will be tabled at Cabinet on 20 May 2015. A comprehensive report on the two bills will be provided in the next reporting cycle
Appropriate mechanism to prefund capital and create a smooth price path over a longer-term for Eskom.	No mechanism to prefund capital	By July 2014.	Support package for Eskom, approved by cabinet in 2014 to address funding gap Inclusion into the Finance Task Team for actioning includes: Key inclusion in package is emphasis on sustainable electricity Ensuring financial sustainability of Eskom Short term funding challenges addressed to bring in additional capacity
Private Sector Participation framework (PSP) in the energy sector in base-load and renewable electricity generation, liquid fuels and gas	Windows for Re IPP concluded	2014. As per framework targets over MTSF.	RE IPP Programme with private sector participation now at W4 stage REIPP Programme now at Window 5 stage Co-generation contracts renewed that retained over 800 MW supplied by the private sector. 1800MW Coal IPP RFP issued and will be closing in June 2015

Source: DPME presentation to the PCE on 13 October 2015

 

Sub outcome 2: Reliable generation, transmission and distribution of energy ensured

Indicator	2014 level (baseline)	MTSF  target		Latest  available measurement	Note	Rating
Refine, update and implement the Integrated Resource Plan (IRP).	2010	Mid and end of 5 year term.		Public consultations concluded. The IRP is being refined internally for submission to the Cluster and subsequently to Cabinet for approval.
Establish an independent system operator.	ISMO Bill 2013 was submitted to Energy Portfolio Committee after due process.	All processes complete by mid-term.		The electricity Industry Structures Bill is being developed to replace the ISMO Bill. This Bill will ensure that the structure is appropriate to deliver the electricity required by the economy.
Reform of the electricity supply industry to introduce IPPs in support of electricity security of supply.	Only 1000MW of Open Cycle Gas Turbine   IPPs under construction		At least 2 major power stations and 7000MW renewable energy deals.	The procurement process for Base load Coal fired power generation has been started and RFP issued   Extension of existing Short-term power producer contracts is done   As at 31 December 2014, a total of 1 795 MW of energy from IPPS was connected to the national grid – 1 182,62 (from BW1) and 339 MWs (from BW2). This from a total of 4 122 MW procured in BWs 1, 2 and 3.
Maximize debt-raising on capital markets for Eskom, backed where necessary by sovereign guarantees	Eskom funding model not concluded, after the NERSA tariff decision till 2018		100% of funding secured every year.	A support package was approved by Cabinet for Eskom. The package included the need to raise additional debt, an equity injection and support for Eskom applying for price increases.   Eskom funding package has been concluded over the Multi-Year Price Determination up to 2018.   Any additional levers required to assist with the electricity challenges which were not accommodated will need to be funded   The financial position of Eskom remains vulnerable. The engagement between National Treasury, DPE and DOE on the price path is essential.   The War room process has shown that the current regulation do not provide enough leverage for addressing emergency situation   The Finance IMC is meeting on 22 May 2015 to address Eskom funding challenges
Develop Southern Africa’s hydro-electric resources and enhance inter-regional electricity trade.	There is currently no hydropower in our energy mix		A major hydro scheme approved over MTSF	The pre-feasibility study for the Mphanda Nkuwa Project, wherein Eskom is to have an interest and be the major off taker is expected to commence by the end of 2014 Inga Project treaty signed September 2014 and ratified by Parliament in November 2014. Consultations with DRC counterparts are on-going
Ring-fence the electricity-distribution businesses of the 12 largest municipalities and resolve their maintenance and refurbishment backlogs.	No coordinated strategy to address municipal distribution infrastructure problems.		12 municipalities’ distribution issues resolved by 2019.	The Approach to Distribution Asset Management (ADAM) framework has been revised and implementation and funding model being developed
Review bulk electrical infrastructure required for universal access to electricity, prepare an implementation plan, and implement.	ADAM approved by Cabinet.		Implementation of items as per approved plan.	By the end of the 4th Quarter the final draft of the new electrification master plan will be completed. Mini ADAM has managed to complete 4 distribution projects out of the 9. The remaining 5 are progressing well.
Improve governmental support for combating illegal use of electricity.			10% reduction in electricity cable theft each year of MTSF	Funding being made available to pilot smart grids ongoing Agreement already signed with municipalities for implementation The War room has been exploring energy saving options that could be implemented in the short term. 495 MW saving have been achieved by Eskom DOE and DPW need to finalise the partnership on the government energy saving programme and provide report to the Cluster in the next quarter An Inter-Ministerial Committee has been established to develop interventions to address the illegal use of electricity including copper theft PICC working on paper under leadership of COGTA on the combating of illegal use of electricity and cable theft
Improve demand-side management, including through smarter management of electricity grids.			800 MW over MTSF	Funding being made available to pilot smart grids ongoing Agreement already signed with municipalities for      implementation The War room has been exploring energy saving options that could be implemented in the short term. 495 MW saving have been achieved by Eskom. DOE and DPW need to finalise the partnership on the government energy saving programme and provide report to the Cluster in the next quarter. PICC working on paper under leadership of COGTA on the combating of illegal use of electricity and cable theft
Commission Medupi,  Ingula and Kusile.	All projects in the current build programme in the Constructions phase		Medupi:  3970  MW by 2017 Ingula: 4 units at 333 MW each by 2016 Kusile: 6 units at 800 MW each	All projects in the current build programme in the Construction phase. Medupi Unit 6 was successfully synchronised to the grid on 3 March 2015. The ramping up of the power has now reached the 700 MW. Full load (794MW) is expected to be commissioned by June 2015. Kusile and Ingula are still in construction phases The demobilisation process in Medupi is causing instability in the area Cooperation with other departments such as EDD, DoL and the dti to develop more sustainable opportunities for the community is essential Engagements planned between the organised labour, contractors and Eskom
Commission at least 7000 MW of renewable energy by 2020	About 4000MW of RE projects under construction or being negotiated.		500 MW by 2019	Window 4 of the REIPP programme successful bidders have been announced by the Minister of Energy The construction of the 100 MW Sere Wind Farm is on track for full commissioning by end of March 2015. All 46 turbines have been installed. As at 20 January 2015 a total of 1 521,62 MW of energy from IPPS was connected to the national grid – 1 182,62 (from BW1) and 339 MWs (from BW2). This from a total of 4 122 MW procured in BWs 1, 2 and 3. BW 5 planned get RFP Feb 2015, Bid Submission by August 2015, and to reach Financial Close by August 2016
Take a decision on expanding oil refining capacity.	Nil		Cabinet approval of proposals by June 2016.	Work has commenced and current progress is according to projected dates
A funding mechanism for upgrading of existing refineries to ensure they meet new fuel-quality standards.	Nil		Approved by June 2015.	Work has commenced and current progress is according to projected dates.

Source: DPME presentation to the PCE on 13 October 2015

 

 

1. Key achievements

 

The Renewable Energy Independent Power Producer Programme (REIPPP) is  the first large scale private sector procurement in the electricity generation industry in South Africa & one of the largest renewable energy programmes in the world. South Africa is now considered amongst top 10 renewable energy investing country leaders in renewable energy Independent Power Producer (IPP) investments

 

Four bidding windows have successfully been launched, resulting in the procuring of 92 renewable energy projects (including wind, solar photovoltaic and concentrating solar power technologies). Window 4, with additional request for bids have been announced and preparation towards the finalisation of Window 5 is in progress

 

These REIPP projects translate into approximately R193bn in private sector investment. To date, projects totalling approximately 6 300 MW have already been commissioned under the 4 bid windows and are selling power to the grid, helping to reduce the current supply shortfall 

 

Over the course of the four bidding rounds, the price of electricity from each technology dropped substantially, solar PV decreased by 75% and wind by 50% - while increasing both local content and job creation, partially driven by strong competition in the sector.

 

1. Key challenges

 

• Electricity supply constraints is a significant impediment to economic growth
• High risk of frequent and major load-shedding over coming months could last up to 3 years. Load shedding is a high cost to the economy  - costing on average between R9 – R15 kWh compared to running diesel generators (R4-R5 kWh)
• Delays in build of Medupi and Kusile (poor planning, skills shortage due to boom in the building of power stations, poor contractor performance, weaknesses in contract management, strikes)
• The use of diesel is costly and unsustainable in the medium term (R10-R12bn annually since last year) but remains a short term necessity
• Resolving the electricity supply constraint requires a mix of energy options including coal, gas, renewables, shale, nuclear as well as oil and gas

 

1. Interventions required

 

• Not all the elements of the energy mix have been fully explored. Where elements have been explored the speed of implementation needs to be accelerated, for example in gas, biofuels, co-generation, etc.
• Priority must be given to those projects that can bring energy into the grid within the shortest period possible, while considering medium to long term issues
• Create a supportive regulatory environment  that can promote other private sector initiatives to support own generation for economic development
• Move towards cost-reflective tariffs but ensure that we mitigate against the adverse effect this will have on poor households (increasing free basic electricity) and labour-intensive sectors that support job creation
• Mobilise society to use electricity sparingly - government to continue setting an example for demand side management
  • Initiatives by municipalities to support demand side management that includes PV rooftops for business and other programmes such as the platinum fuel cell by the Chamber of Mines in Johannesburg to be supported
• Ensure the implementation of the Renewable Energy Independent Power Producers (REIPP) bid window 5 round REIPP programme
• Conclude off-take agreement for the purchase of 2 500MW of electricity generated from the Inga phase 3 Low Head project
• Finalise water usage applications for hydro-power generation, such as: Nu Planet Boston Hydro, Donora Farm Hydro, Karino Hydro Power, uThukela Hydro

 

1. SERVICE DELIVERY ENVIRONMENT

 

In carrying out its mandate, the Department formulate Energy policies, Regulatory frameworks and Legislation, and fulfil a Regulatory function in petroleum industry, as well as oversees the implementation of projects to ensure energy security, promotion of environmental friendly energy carriers, access to affordable and reliable energy for all South Africans.  The Department is responsible for the following key areas under service delivery:

• Energy mix implementation;
• Energy Efficiency implementation;
• Integrated National Electrification Programme;
• Establishment of Energy centers;
• Opportunities in Energy space;
• Regulation of the petroleum sector;
• Regulation for the safe use of the nuclear products; and
• Oversight over State Owned Entities (SOE’s)

 

6.1. Electricity Supply

 

The year 2014/15 has been beset with energy (especially electricity) challenges which have unfortunately impacted negatively on the country’s economic development.

 

• The Department has, during the year under review participated in forums, both inter-governmental, local and international levels, created to seek short, medium and long term energy solutions – not only for South Africa, but also for Continent and Globally.
• The Department’s response to electricity challenges is multiple. This includes:
  • The Integrated Energy Plan (IEP) which will prioritise policy intervention for future programmes within the Energy sector.
  • Integrated Resource Plan (IRP) to ensure sufficient capacity is added to the network on time, but also considering the broader NDP aspects of additional capacity through an option of energy mix.
  • Contributing to the 5 point plan to normalize the electricity supply/demand in country - implementation of Five Point Plan:
    • Improve Eskom Maintenance and Operational Practices
    • Co-generation
    • Coal
    • Gas
    • DSM

 

The Department’s Renewable Energy Independent Power Producers (REIPP) programme has added to the energy supply capacity and electricity diversity in South Africa. Through the competitive procurement approach, the tariff for onshore wind has declined by 55% per unit while that of solar photovoltaic has declined by 62% per unit.

 

The REIPPPP is the most advanced programme, and is already making a significant contribution to electricity supply in the country

• 5 bid rounds (bid windows 1, 2, 3, 3.5 and 4) completed
• 305 bids received and evaluated for 17.8 GW total capacity
• 92 selected as preferred bidders identified with
• 6 327 MW electricity capacity procured
• 1 860 MW already operational from 38 IPPs
• R 193.3 billion investment attracted in bid Windows 1 - 4

 

1. Nuclear Energy

 

South Africa has signed various Inter-Governmental Agreements (IGA’s) which lay the foundation for cooperation trade and exchange for nuclear technology. The Department concluded various vendor parades with all nuclear vendor countries that have shown interest in the South African nuclear build programme.

 

The work on the financial model of new build programme in progress as at the end of the 2014/15 financial year. In preparation for the rollout of the nuclear build programme, the Department has commenced with the Nuclear Skills Development and Training Programme. In this regard, 50 students were selected to attend nuclear training programme; and Countries such as South Korea, China and Russian Federation have agreements with South Africa in relation to training in various nuclear fields.

 

1. Energy Efficiency

 

The National Energy Efficiency Strategy and Action Plan is process of completion and the Draft Regulations have been published for compulsory energy management plans to be put in place by targeted end users.

 

Municipal Energy Efficiency and Demand Side Management Programme will continue with savings to the extent of 500 Gigawatt already achieved by various municipalities, mainly by retrofitting lighting in buildings, LED street lighting, installation of smart meters, water and sewage pumps.

 

1. Solar Water Heater Programme

 

The solar water heater programme has changed effectively during the year under review, with implementation projects led by the Department of Energy. The planned new contracting model has been submitted for Cabinet approval.

 

In keeping with the inter-governmental relations framework, national and local government will collaborate in ensuring that the programme delivers on local enterprise and skills development. Maintenance and life cycle management of installed products and the creation of employment opportunities targeting the youth, women and military veterans will be prioritized.

 

In partnership with the Department of Labour and the Energy and Water SETA, a comprehensive training programme will be implemented.

 

 

1. Petroleum

 

The Department has refined the proposed Biofuels Subsidy Model and the risks posed to the fiscus and National Revenue Fund by utilizing Industrial Development Corporation (IDC) to run an independent modelling analysis. The Department is revisiting the cleaner fuels (CFII) programme as well as investment in new refining capacity. The Task Team working on Cleaner Fuels has been established. Furthermore, developing proposals on how to deal with identified regulatory shortcomings that are hampering increased liquefied Petroleum Gas (LPG) usage is to be developed.

 

1. Electrification

 

The INEP programme was allocated R4,15 billion during the 2014/15 financial year, to expand the connections and non-grid solutions in those areas where infrastructure is inadequate.

 

Table 7: INEP budget allocation

Entity	MTEF Allocations	Planned connection	Connections Achieved
Eskom	R2.95 billion	180 031	160 938
Municipalities	R1.10 billion	70 979	72 517
Non-grid	R96.62 million	15 000	14 030
Total	R4.15 billion	266 010	247 485

Source: Presentation to the PCE on 14 October 2015

 

As the programme continues to connect deep rural areas, the delivery of connections has been significantly impacted by inadequate and in some instanced the absence of bulk infrastructure and inadequate human resources within implementing agencies and local municipalities.

 

1. KEY POLICY DEVELOPMENT AND LEGISLATIVE CHANGES

 

The National Development Plan (NDP), requires South Africa to devise policies and plans for the following in order to improve the country's energy situation:

• Gas should be explored as an alternative to coal for energy production;
• There needs to be greater mix of energy sources and greater diversity of IPPs in the energy industry;
• Electricity pricing and access need to accommodate the needs of the poor; 
• Universal access to modern energy through grid and non-grid means by 2030
• Timing and desirability of nuclear power and
• New petrol refinery need to be considered.

 

In addressing the NDP requirements, the Department has developed or is in the process of developing the following:

• The Electricity Regulation Second Amendment Bill;
• National Energy Regulator Amendment Bill;
• The National Energy Regulator Amendment Bill;
• Nuclear Financial modeling process
• Radioactive Waste Fund Bill were initiated with National Treasury to develop the institution’s funding model;
• Gas Utilization Master Plan (GUMP);
• Integrated Energy Plan;
• Integrated Resource Plan (IRP) to implement energy mix options
• Bio-fuels implementation strategy and
• Petroleum Road Map

 

1. INTERNATIONAL ACTIVITIES OF THE DEPARTMENT

 

The Department has maintained co-operation with the Southern African Development Community (SADC) Region, the African continent and the rest of the world. These strategic partnerships have been in line with the energy interests of the country, particularity the need for energy security of supply, diversification of the energy mix and access to finance, technology, technical skill and information.

 

In line with this imperative, the Department has forged bilateral and multilateral relations that meet our strategic objectives

 

The Department’s medium and long term energy strategies have taken cognizance of the abundant clean energy resources available in the region. These guide the strategy of the Department to multi-source with the twin objective of security of supply and reduce our carbon foot print. In regard to this, the Department led the process of signing a Treaty on Hydropower project with government of the Democratic Republic of Congo. The Treaty was signed in 2013 and it enjoins South Africa and DRC to develop the Project. The project has an estimated generation capacity of 40 000 MW and will be constructed in phases, with Inga III Low being the first phase. The Inga Hydropower project has the potential to provide up to 15 000 MW of clean energy specifically to South Africa. The first phase targets aims to generate 4 800 MW.

 

On 20 March 2014, the Inga Treaty entered into force, meaning that all the conditions for ratifying the long term agreement between the two countries were satisfied, effectively paving the way for commercial negotiations to be concluded regarding the power to be procured from Phase 1 of the Inga Hydropower project.

 

Other international activities include:

• South Africa is also exploring other regional projects within the SADC Region in countries such as Mozambique and Lesotho.
• DOE has participated in all Energy related and general BRICS activities.
• South Africa has signed various nuclear technology based Inter-Governmental Agreements (IGA’s) with different countries;
• Various bi-national meetings have been held during the last financial year – a separate session will be required to reflect on all the 63 bi-lateral agreements South Africa have with various countries, entities and/or agencies.

 

1. STATE OWNED ENTITIES (SOEs) OVERSIGHT

 

The Department has continued to provide oversight of State Owned SOE/Cs reporting to the Minister of Energy through the SOE Oversight Unit, by ensuring engagements on and timely approval of their Corporate Plans, Strategic Plans, Annual Performance Plans (APPs), Budgets recommendations regarding board positions.

• The CEF Group, NERSA, NNR and SANEDI obtained unqualified audit opinions from the Auditor General South Africa (AGSA).
• The Necsa Audit has still not been completed and will be presented to the Committee as soon as it is signed off by the AGSA.
• NECSA celebrated the 50th anniversary of its SAFARI-1 Nuclear Research Reactor, commissioned in 1965, and it still remains the country’s only research reactor.  This is a significant milestone in the nuclear sector.
• The Nuclear Regulator continues to capacitate itself in various key positions that will give it the necessary human resource capacity to successfully oversee the Country’s imminent Nuclear new build Programme

 

Although, the CEF Group suffered a huge loss due to the impairment of the GTL Refinery as a result of the poor gas recoveries from the Ikhwezi project, the Group still managed to increase cash generated from its operations by approximately 36 % while cutting operational costs by 12 %.

 

 

1. ADDITIONAL INFORMATION

 

10.1. Update on addressing the distribution challenges

 

• Municipal electricity distribution infrastructure has an estimated backlog of R70 billion
• Needs a funding model that entails revamped institutional, regulatory and structural adjustments to the status quo. In this regard the Approach to Distribution Asset Management (ADAM) programme was initiated, targeting the metropolitan and suburban areas of the country for piloting.
• The development of norms and standards relating to amongst others maintenance, tariff design, is been developed that is necessary for adoption as a regulatory mechanism for municipalities to normalize their electricity distribution businesses. These norms and standards are to be informed by the pilot ADAM programme that was initiated in 2013/14 and is under review currently.

 

1. Update on the implementation of the Energy Efficiency measures

 

• The National Energy Efficiency Strategy and Action Plan is nearing completion and the Draft Regulations have already been published for compulsory energy management plans to be put in place by targeted end users.
• The South African National Energy Development Institute (SANEDI) continues to play a leading role with respect to a variety of energy efficiency initiatives.
• The Cool Surfaces pilot programme, with a particular focus on schools and low-income households, will mobilize our youth to form part of energy efficiency initiatives.
• Furthermore, the municipal Energy Efficiency and Demand Side Management Programme (EEDSM) will continue, with savings already achieved by various municipalities, primarily by retrofitting lighting in buildings, LED street-lighting, the installation of smart meters, water and sewage pumps.

 

1. Update on gas importation and distribution infrastructure

 

The uptake of Liquid Petroleum Gas (LPG) in our country remains disappointing, mainly due to infrastructure impediments. On the positive side, NERSA has licensed three import installations that will be able to bring in LPG. Proposals on how to deal with other identified regulatory shortcomings that are hampering increased LPG usage will be developed by the Department, including the Draft LPG Fuel Switching Strategy, which provides a framework for the expansion of the use of LPG South Africa with special emphasis on the household sector.

 

1. Update on the petroleum industry refining capacity

 

Major strides were made towards the licensing of fuel import capacity. NERSA licensed import facilities in Richards Bay, Saldanha, Cape Town and Coega, which will enhance competition in the liquid fuels sector, whilst ensuring a more robust energy security regime.

 

Government will align the regulatory dispensation by the different organs of state to aid efficiencies in this area.

 

1. Update on Oil and Gas in relation to Operation Phakisa

 

The DoE and the Department of Mineral Resources are co-operating in accelerating efforts that will result in exploration for oil and gas within our territorial waters.

 

1. Update on Integrated Energy Plan (IEP) and the Integrated Resource Plan (IRP)

 

Both IEP and IRP are in the process of been finalized and updated respectively, and will be submitted to Cabinet to obtained approval to be released for public comment and inputs by end of this financial cycle.

 

1. SUMMARY OF ANNUAL REPORT 2014/15 OF CENTRAL ENERGY FUND AND ITS ENTITIES

 

11.1.    CEF

 

1. Background

 

CEF (SOC) Ltd (“CEF”) is the holding company for a number of subsidiaries, which, when taken together, constitute the CEF Group. These subsidiaries also operate in the energy sector with commercial, strategic, regulatory and developmental roles. The business focus and activities of each subsidiary is as follows:

 

 

CEF SOC Holding Company
Provides Group strategic direction, executes monitoring and evaluation activities to improve overall Group business performance, strategic alignment and key interfaces for delivery of the CEF Mandate
Subsidiary		Business Focus
1	Clean Energy Division (CED)	Clean and Renewable Energy
2	Petro SA	Oil and Gas, NOC
3	SFF	Strategic stock and pollution control
4	PASA	Promotion, Licensing and Regulation
5	AEMFC	Mining, Coal
6	iGas	Gas and Gas infrastructure

 

1. Group Performance highlights for the year under review

 

• Safety record maintained with no fatalities during the year.
• Only 7 environmental incidents reported, this is an improvement from the previous financial years. In 2011/12 there were 15 incidents reported.
• First Gas Loop Line from Mozambique to South Africa completed with gas flows from December 2014.
• CEF Gas Strategy approved by the Board which will positively impact the country’s energy mix in the future.
• Strong cash generation, cash generated from operations increased to R4.4 billion (R2.8 billion in 2013/14). Cash balances at R10 billion.
• Significant reduction in operating costs i.e. operating costs (excluding impairment) reduced to R1.8 billion (R2.1 billion in 2013/14).
• Substantial improvement in SFF’s revenues of crude oil storage due to the contago market.
• Successful transition from SA GAAP to International Financial Reporting Standards (IFRS)
• Unqualified audit opinion by the  Auditor General
• CEF Integrated Report made it to the top 10 at Nkonki SOC Integrated Reporting Awards
• Total B-BBEE procurement of just over R9 billion.

 

1. Finances of CEF SOC Holding Company

 

Table 8: Finances of the CEF

 

	2015  R’000	% Change	2014  R’000	% Change	2013 R’000
Revenue	18,515,161	-14.1%	21,553,172	10.5%	19,505,287
Gross Profit	1,353,865	-53,2%	2,892,996	19,0%	2,430,551
Gross Profit Margin %	7.3%	-45.5%	13.4%	7.7%	12.5%
Operating Expenses	(1,895,676)	12,2%	(2,159,995)	0.1%	(2,193,901)
Impairments (Assets & Investments)	(14,449,739)	325.7%	(3,394,563)	0%	0
Operating Profit/(Loss)including impairment	(14,751,188)	-919.1%	(1,447,546)	-307.7%	696,888
Operating Profit/(Loss) excluding impairment	(301,449)	-115.5%	1,947,027	179.4%	696,888
Net Profit /(Loss) After Tax	(14,274,433)	-882.5%	(1,452,867)	-246.9%	989,111
Net Interest Received /(Paid)	(580,061)	546.4%	(89,743)	-134.7%	258,508
Return on Equity %	(94.5%)	-1,795.3%	(5.0%)	-253.2%	3.3%
Liquidity Ratio	3.56	6.7%	3.34	-6.2%	3.56
Cash Generated from Operations	4,440,350	36.4%	2,892,089	-41.7%	5,674,064
Capital Expenditure	5,973,286	-12.8%	5,296,985	40.6%	8,915,733
Free Cash Flow	(1,848,157)	19.2%	(2,287,518)	-72.4%	(8,287,608)
Cash Balances	10,077,251	-8.0%	10,953,250	-16.2%	13,071,430

Source: CEF presentation to the PCE on 15 October 2015

 

Turnover

The main reasons for the significant decrease in turnover are as follows:

• Drop in the oil price which affected sales during the second half of the financial year. A portion of this was offset by weaker ZAR/US$ exchange rate.
• Lower coal sales to Eskom

Crude Oil storage revenues increased due to the contago market.

 

Gross profit

The causes for the drop in gross profit are:

• Unfavourable mix between manufactured product (GTL sales) and trading due to the declining gas reserves. Margins of manufactured products are on average 20% whilst purchased products only yield a 2 % margin.
• Drop in the crude oil price which reduced the margins on manufactured products.

 

Operating costs

Operating costs were well managed across the group and some of the major contributors were as follows:

• The highly successful Billion Plus Program at PetroSA delivered savings of over R1 billion, a portion of which relates to the operating costs. Further savings will be realized in the 2015/16 financial year.
• An efficient and conservative approach on general expenditure across the Group has benefitted the Group.

 

Impairment

Reasons for Impairment

• Lower reserves volumes from gas fields e.g. Ikhwezi (242bcf target, revised to 25bcf, only 10% realized)
• Lower crude oil prices ( >$110/bbl. in July 2014; decrease to <$60/bbl. in March 2015)
• Increase in Cost of Capital

80 percent of the GTL impairment charge was due to volumes not realised and may not be reversible

 

Cash flow

Despite tough economic conditions the group generated positive cash from operations. The increase in the cash generated from operations is attributable to better working capital management. Capital expenditure was funded mainly from cash from operations hence the cash balances did not increase. Cash balances are still healthy though at just over R10 billion.

 

Balance Sheet

 

The impairments totalling R17,8 billion in the last 2 financial years have caused significant decline in the value of the group. It is however important to note the group has almost no debt (net basis) which means there is potential to raise debt. Debt will however be raised for projects which are viable and will increase the value of the group over time whilst also assisting CEF in fulfilling the mandate given by DOE.

 

The group remains liquid with a liquidity ratio of 3,56 (better than a norm of 2) which means it is able to cover all short to medium terms commitments as they become due.

 

Financial priorities

• Alternative funding of the abandonment liability
• Completion of Project Apollo which will confirm the long term options for PetroSA
• Project funding for projects which will sustain the group in the long term.
• Further cost optimisation across the group.
• ONE CEF which should deliver an efficient group of companies

 

Irregular expenditure

There was a significant decline in irregular expenditure in the company and Group. In the previous two financial years most of the irregular expenditure related to PetroSA upstream and midstream activities. The Finance Minister did grant the PPPFA exemption to PetroSA in June 2014 hence the significant improvement. In CEF irregular expenditure relates to procurement of various services e.g. advisers, recruitment consultants etc. The recent strengthening of the Procurement Function at CEF, SFF and AEFMC will reduce irregular expenditure in the group even further.

 

Table 9: Key audit findings

Findings	Corrective Measures
Material impairments of R14.5 billion as a result of impairment of property, plant and equipment.	The Project Apollo has been implemented to address the problem.
The unauthorised, irregular, fruitless and wasteful expenditure of R3.3 million was as a result of non-performance penalties, SARS penalties and interest, contract cancellation fees and overpayment of retrenchment penalties, which was an administration problem –PetroSA Equatorial Guinea.	Disciplinary measures were implemented to curtail this problem in future.
Funding of abandonment provision, PetroSA has an obligation to rehabilitate and abandon its offshore and onshore operations valued at R9.3 billion which is currently not fully funded. NEMA requires this rehabilitation liability to be fully funded within 12 months from year end.	The Project Apollo has been implemented to address the problem.
Significant Uncertainties
PetroSA commissioned additional research into the requirements to fully close or decommission redundant exploration wells. A reliable estimate of the cost cannot be made, therefore, no amounts have been provided for these items.
PetroSA notified employees in terms of s189 of the Labour Relations Act in February 2015 of a possible headcount reduction based on operational requirements. The ultimate outcome of the matter cannot presently be determined and no provision for any liability as a result of this was made.
PetroSA Ghana’s place of effective management changed to South Africa in 2012 and the company became a tax resident in RSA. The tax legislation does not expressly deal with the tax treatment of the opening balances. Clarity has been sought from Receiver of Revenue.

Source: CEF presentation document to the PCE on 15 October 2015

 

1. The Group Stabilise Priority Journey as part of Vision 2025

 

In 2014 we embarked on a Group Strategy called Vision 2025 to chart a way forward for Group long term sustainability and Commercial viability. Vision 2025 was the Group strategic response to a number strategic challenges that were emerging and impacting on Group sustainability. This Group strategy was premised on the following strategic themes/pillars which form a central theme of Corporate Plan in terms of tracking Group Performance and setting targets.

 

To facilitate the execution of Vision 2025 a Strategic Road Map was devised to sequence and prioritise key projects for sustaining the organisation and build a solid balance sheet for future growth under (1) Stabilise (2) Grow and (3) Lead as depicted on the next slide.

 

1. Current challenges to a sustainable CEF Group?

 

• A collapse in the oil price; coupled with declining feedstock at PetroSA; results in declining cash and reduced operating life of the GTL. This has major consequences for the Mossel Bay economy & associated industries
• As a single income source entity and the largest contributor in the Group the PetroSA sustainability is a huge risk.
• A similar concern can be directed to AE with Eskom as their single and biggest customer against a backdrop of low commodity prices and a struggling mining sector.
• Funding of strategic Group projects is becoming a major challenge due to weak balance sheet
• Group strategic challenges are also exacerbated by:
  • Inverse relationship between costs and revenue
  • Large impairment (write-down) for 2015 FY & partially funded abandonment costs
  • Less than optimal project selection  and execution
  • Group leadership uncertainty, ineffective governance structures and poor Group core skills
  • Archaic business operating models in a highly competitive business environment
• Uncertainty of hiving-off finalization impacting future funding for AE and PASA
• MPRDA uncertainty and reduced drilling interest and activity.

 

1. Revised Stabilise Phase Strategic Priorities

• Stabilise the business (Initiatives across the Group at Operational & Strategic level)
• Conserve cash in the short-term through a deep cost-cutting exercise
• Capacitation of effective Board Members with Industry Knowledge for effective governance & effective decision making
• Group alignment and the reduction of inefficiencies and duplications
• Addressing core PetroSA sustainability challenges & Develop and begin implementing a long-term solution for Mossel Bay. Probably the most single biggest priority for the Group-Project Apollo
• Improving AE profitability through increased volumes to Eskom and plan for future acquisitions
• Implement a robust long-term funding plan for projects across the Group and defer others
• Ongoing activation of Project Genesis to build capabilities and an efficient structure to be able to support the Shareholder and Strengthen monitoring and evaluation and drive business performance
• Change in investment strategy (Partnerships and Brownfields investments)
• De-risk the Group through multiple sources of income and limit exposure

 

 

1. IGAS

 

11.2.1. Profile

 

Mandated to act as the official state entity for hydrocarbon gas development in Southern Africa. Together with its partners Sasol and the Mozambican Government  Company (CMG) established Rompco in 2004. Rompco is the Joint Venture which owns and operates the gas transmission pipeline from the Mozambican Pande/Temane gas fields to Secunda in South Africa. Developed with Shell and Eskom, from 2003-2008, a land based LNG to Power Plant option at the Port of Ngqura. iGas owns the intellectual property for this option, which was not pursued.

 

In 2013 developed, for the Gauteng Province, the pipeline options for gas to the Provincial Hospitals. This work was further pursued by the Gauteng Province. Increased gas through-put in the Rompco pipeline by adding a compressor at Komatipoort (2010) and completing a 128 km loop line in Mozambique, which was commissioned in November 2014. Developing a gas pipeline from Saldanha Bay to the Eskom Ankerlig Power station.

 

1. Highlights and challenges

 

Highlights	Challenges
Construction completion and commencement of operation, with Rompco, of a 128 km loop line in Mozambique as part of the gas transmission pipeline from the Pande/Temane gas fields to Secunda in South Africa.	Refinancing of Rompco slipped by nine months, from December 2014 to September 2015. Financial close expect at the beginning of October 2015. iGas Shareholder loan now to be repaid in the third quarter of the 2015/2016 financial year.
Prepared the CEF Group Master Plan and interacted with CEF Group Companies to finalise the CEF Board approved plan.	Infrastructural development awaiting sufficient developed gas resources
Repayment of the bankers loans for the iGas Rompco investment.
iGas is repaying the CEF Shareholder loan
iGas reviewing new options for gas transmission pipelines

Source: CEF presentation document to the PCE on 15 October 2015

 

1. iGas key focus areas for 2015/16

 

1. Increase Gas Infrastructure development in Southern Africa

 

In order for natural gas to be supplied to the Southern African market the following needs to be developed;

• Indigenous Gas resource (such Coal Bed Methane and Shale Gas). iGas reviewing the related gas pipeline needs.
• Neighbouring Gas resources (such as further gas options in Mozambique). iGas involved in pipeline expansion plans and other options.
• Imported energy feedstock: iGas is pursuing LNG infrastructure options and connected transmission pipelines.

 

1. Increase permanent staffing of iGas

• This area is actively being pursued.

 

1. STRATEGIC FUEL FUND (SFF)

 

11.3.1. Company profile

 

SFF Association (‘SFF’) is the crude oil reserve agency of the Republic of South Africa. SFF owns and operates two Western Cape based crude oil storage facilities with a combined capacity of 52.6 million barrels. SFF is mandated to store approximately 10.3 million of State-owned crude oil and to finance all its operational expenses by commercialising unutilised storage capacity in Saldanha Bay.

 

SFF’s reason for existing is to ensure security of crude oil supply in cases of declared emergencies.

 

1. Highlights and challenges

 

Highlights	Challenges
Zero work related fatalities and zero reportable oil spill incidents.	Positioning the oil pollution control business.
Revenue up 116% y/y.	Earning a return on the line fill investment.
Earnings up 308% y/y.	Securing a Government to Government oil sharing agreement for security of supply purposes
Ready to respond to crude oil supply emergencies.	Increasing stock reserves.

Source: CEF presentation document to the PCE on 15 October 2015

 

1. AFRICAN ENERGY FINANCE AND MINING CORPORATION (AEMFC)

 

11.4.1. Background

 

AEMFC is the State Owned Mining Company with coal mining operations based in Ogies, Mpumalanga Province, contracted to supply the Eskom Kendal power station with thermal coal.

 

1. Highlights and challenges

 

Highlights	Challenges
Profitability	Low orders (half the mine capacity volumes) from Eskom
An excellent safety record	Funding to commission priority projects
An unqualified audit opinion	Funding for acquisitions
A new contract with Eskom – bigger volumes	Finalisation of Hiving Off as per Cabinet decision in 2010
Local community and schools support

Source: CEF presentation document to the PCE on 15 October 2015

1. Revenue and expenditure

 

Revenue for the year increased by a modest 2% to R235 million in 2015 from R230 million in 2014 due to:

• Driven by low off-take by Eskom.
• Income from royalties earned only for 5 months in 2015
• Cost of sales were high due to a higher strip ratio, increased labour costs, mining and processing costs
• Gross profit margin lower at 33% (2014: 38%) as a result of a sales mix to other customers

Exploration expenditure of R9 million was incurred (2014: R2 million). The expenditure is on projects which are in the initial phases and are charged to income statement. (Business development costs)

 

The operating activities generated 77% less cash flows in 2015 because of the decrease in revenue coupled with increase in labour, mining and processing costs. Cash and cash equivalents decreased by 22% to R71 million at 2015 from R92 million at March 2014. Negative free cash flow of R20 million is as a result of the decrease in net cash from operating activities.

 

On business development asset expenditure:

•  Investment in T Project was R34 million in 2015 (2014: R16 million).
•  Investment in Klippoortjie was R12 million in 2015 (2014: R4 million).

 

1. Financial position

 

• Return of equity decreased from 66% in 2014 to 21% in 2015 because of the decrease in profitability.
• Liquidity ratios are stable, with positive cash flows.
• Asset base has increased by 2% from 2014 because of investments in for future growth of the company.

 

 

 

 

 

 

 

1. PETROLEUM AGENCY OF SA

 

11.5.1. Background

The strategic role of the Petroleum Agency South Africa (PASA) is to contribute to the energy resources of the country by promoting and regulating the exploration and production of the country’s natural oil and gas resources.

1. Highlights an challenges

Highlights	Challenges
Clean audit opinion	Funding of the Agency
Tabling of the Extended Continental Shelf Claim Project at the UN Sub-commission	Funding of the Extended Continental Shelf Claim Project
Contribution to draft Technical Regulations
First ever deep-water well was attempted in South Africa Upskilling students: Upstream Training Trust

Source: CEF presentation document to the PCE on 15 October 2015

1. Revenue and Expenditure Trends

 

Revenue has been declining steadily due to a different financial regime i.e. royalties are paid directly to the fiscus.

 

PASA continues to utilise its cash reserves to fund operations.

 

PASA Balance Sheet

• PASA’s financial position has worsened owing to -
  • it using its cash reserves to fund operations and
  • the write-off of bad debts

 

PASA Key Audit findings

• PASA received a clean unqualified audit report

 

1. Focus areas for 2015/16

 

PASA continues to focus on -

• Regulate the Upstream Petroleum Industry to ensure equitable and sustainable development of upstream resources
• Contribute to South Africa’s security of energy supply through the evaluation of petroleum resources and the preparation of an inventory to attract upstream investment
• Ensure accessible and well managed geotechnical petroleum information for South Africa
• Evaluate shale gas
• Contribute to the formulation of the petroleum regulatory framework
• Participate in Operation Phakisa projects
• Manage the transitional period
• Efficient management of finances
• Sustainability of PASA

 

1. CLEAN ENERGY DIVISION

 

11.6.1. Background

CED derives its mandate from the 2003 High-Level Business Strategy which directed CEF to “Catalyse the renewable energy sector and thereafter develop the RE sector further.”

1. Highlights and Challenges

Highlights	Challenges
Project portfolio now fully rationalized. 18MW landfill gas to power project now under construction.	Limited Funding
Increased investments in utility scale RE projects e.g. 100MW ACWA CSP Project.	Skills availability in the market
Supporting the DoE in catalysing new RE sectors especially biofuels

Source: CEF presentation document to the PCE on 15 October 2015

 

1. Petroleum, Oil and Gas Corporation of South Africa (PETROSA)

 

11.6.1. Background

 

The entity operates in a complex and highly capital intensive environment that is characterized by long lead times and employs about 1900 staff members.  The business spans across the oil and gas value chain.  PetroSA has an upstream presence in South Africa and Ghana, and a trading office in Rotterdam.

 

PetroSA has a mandate to operate as a commercial entity and create value for the shareholder advance national objectives in the petroleum industry, spearhead industry transformation and provide security of supply.

 

1. PetroSA Performance Highlights &  Strategic Challenges

 

Highlights	Challenges
PetroSA remains a going concern, despite a disappointing performance in 2014/15.	Impairment loss of R 14.5 billion, mainly due to: underperformance of Project Ikhwezi; the low oil price environment. PetroSA reported an additional impairment of R125 million.
Identified R1 billion worth of savings due to cost optimization/ revenue enhancement initiatives.	Overall losses for the year were R14.6 billion
These are being implemented and further savings are being explored	Poor performance of Project Ikhwezi and other Upstream initiatives;
The USD150 million bridge loan facility raised, for the acquisition of PetroSA Ghana, was fully repaid in February 2015.	Downstream entry initiative did not materialize; and
Achieved a Cash Profit of R 2.5 billion	Delays in the Importation of Liquefied Natural Gas (LNG).

Source: CEF presentation document to the PCE on 15 October 2015

 

 

1. Update on key projects

 

Table 10: Update on Projects

Project Name	Achievements	Looking ahead
Ikhwezi	In July 2015, the F-O11 well was commissioned and flowed gas to the F-A Platform. Currently all three F-O wells are available to supply gas. As this is a tight gas field, early reserves estimates indicates a reserve of 28 bcf.	Ikhwezi did not deliver the expected volumes, hence the project was suspended. The field production and well results are being evaluated to determine the way forward
Mthombo	Focus was on securing a funding partner and initiating feasibility studies. We have continued to make input into Draft Policy/Legislation, supportive of the project (e.g. Draft Integrated Energy Plan)	PetroSA continues to work closely with the CEF and the DoE on Project Mthombo.
LNG	Feasibility Study for a land-based terminal in Saldanha Bay was completed.	Ready to proceed to FEED, with discussions on-going amongst the CEF Group and DoE.
PetroSA Ghana	This contributed an average of 83 693 barrels per month to PetroSA. The Jubilee oilfield production averaged 102 189 bopd.	The Tweneboa-Enyenra-Ntomme (TEN) fields are on track to be commissioned in mid-2016 and is currently in the development phase.
Downstream Entry	Significant progress was made in negotiating legal agreements. However, PetroSA was unable to raise the requisite funding for the transaction.	The transaction was closed in Feb 2015.

Source: CEF presentation document to the PCE on 15 October 2015

 

 

 

11.6.4. Project Apollo

• CEF has initiated Project Apollo, aimed at developing a turnaround strategy for PetroSA
• The project has been approved by the PetroSA Board.
• Intended to be a six-month long process, which started on 01 September 2015 and is divided into 5 Stages
• The intervention entails developing a strategic turnaround plan for PetroSA and creating a foundation for long-term sustainability and commerciality.
• PetroSA indicated that the work being done by PetroSA within the Sustainability Integration Room will form a critical input to the work done in Project Apollo.
• Exco and the PetroSA Board support the initiative, aimed at providing holistic strategic support for PetroSA and to this end, a Joint Turnaround Steering Committee has been set up to facilitate all project governance matters and help speed up decision making. 
• Work-Streams made up of PetroSA management have also been set up.
• A team of industry experts with extensive Oil & Gas experience form the core of the Joint Turnaround Project Team.

 

Project Apollo is about the following:

 

• Strengthening Efficiency - Fast tracking various PetroSA efficiency initiatives which would give the organisation an opportunity claw back on operational costs and prolong chances for survival. This is however not sustainable according to PetroSA.
•  Sustainability - The long term desired outcome that will ensure a stabilised PetroSA that is able to grow and be commercially viable to take advantage of key strategic opportunities.
• Strategic Relevance - The strategic relevance of PetroSA as a commercial viability NOC in fulfilling the delivery of the CEF Mandate in a sustainable and efficient manner after the implementation of a revised Operating Model.
• Excellence - Bring excellence and best practice to processes, controls and overall operational excellence in line with the broader objectives of the CEF Group. PetroSA must be able to compete with the best in class in a sustainable manner.

 

1. South African  NUCLEAR ENERGY CORPORATION

 

The South African Nuclear Energy Corporation did not submit their annual report 2014/15 to Parliament on 30 September 2015 as required by legislation. A letter was submitted by the Minister of Energy to the Speaker of Parliament (ATC’ed on the 29th September 2015) requesting that NECSA be granted an extension.

 

 

1. COMMITTEE’S FINDINGS and observations

 

The Portfolio Committee on Energy noted the following observations and findings:

• A number of policy documents are outstanding, these include the Integrated Energy Plan, the Integrated Resource Plan, the 20 Year Liquid Fuels Master Plan and the Gas Utilization Master Plan. This is hindering key infrastructure development required for energy security in South Africa.
• Members raised concerns that documentation from the DoE lacks clarity in terms of cost and timeframes. This results in the PCE being unable to conduct oversight on some aspects of the DoE’s work as there are no measures to work from.
• Members pointed out that there appears to be inadequate oversight by the DoE on the SoE’s.
• Members noted that the R14.5 billion impairment at PetroSA could have been far lower had the Department put in checks and balances in place to ensure stricter financial control.
• In terms of PetroSA, it was noted that the shareholder compacts were not in place.
• According to the Auditor General, they are still in the process of auditing the financial statements of Necsa. This has resulted in the 2014/15 Annual Report not being submitted to Parliament on the 30th September 2015.
• Members noted that the Solar Water Heater programme has effectively stalled since it was taken over by the Department. Although there needed to be some policy review and the creation of the local procurement value chain, the Department should have been working on this well in advance to ensure a smooth transfer of the programme from Eskom to the DoE. 
• The R1.14 billion rollover request by the DoE for the Solar Water Heater programme was not approved by the National Treasury.

Electricity

• Members noted that South Africa is investing substantially in new generation capacity, technologies include renewables, especially solar, wind and hydro. New coal generation, co-generation and possibly nuclear. If these developments are not carefully managed, with an end state in mind, SA could land up with an energy (electricity generation) mix that is not desirable and suitable for our needs.
• The Members noted that in terms of nuclear, the country is going through a large procurement process and that there is a need for transparency and to have a rational discussion to ensure that Government can carry this out successfully and prudently.
• Key documentation related to the nuclear procurement process, that needs to be presented to the PCE has not as yet been presented. These include the Integrated Nuclear Infrastructure Review (including details of the action plans), Finance Options, Models and Solutions for the nuclear build programme (which was done in conjunction with National Treasury and the Department of Public Enterprises) and Economic Impact of Localization of the Nuclear Programme.

Oil and Gas

• Members noted that, as the Gas utilization Master Plan has not as yet been finalized, progress in terms of gas proliferation in the economy has effectively stalled.
• PetroSA has an obligation to rehabilitate and abandon its offshore and onshore liabilities valued at R9.3 billion, which are currently not fully funded. CEF indicated that it would assist PetroSA.
• There are challenges around transformation in the liquid petroleum industry that needs to be addressed.
• Members raised concerns around the liquid fuels value chain.
• The CEF group reported a loss due to the R14.5 billion impairment at PetroSA. This was ascribed to lower reserve volumes from gas fields e.g. project Ikhwezi and the lower crude oil prices. This puts the financial sustainable of PetroSA in a negative light going forward. As a turnaround strategy, Project Apollo was introduced by the CEF group to confirm the long term options for PetroSA.
• Members also noted that PetroSA is a national asset and impairments are not justifiable. Members are of the opinion that there has to be a forensic investigation into the reasons for the impairment at PetroSA.
• The Members identified numerous governance issues at the CEF group and this is resulting in challenges in managing the group. This include the numerous acting positions.
• PASA indicated that its revenue has been declining steadily as royalties are paid directly to the fiscus and it is utilizing its cash reserves to fund its operations. Although PASA received an unqualified audit report for the 2014/15 financial year, it expressed concerns about it being classified as a going concern in the next financial year as the cash reserves being utilized to sustain the organisation will be depleted by July 2017.

 

1. RECOMMENDATIONS

 

It is recommended that the Minister of Energy;

1. Ensure that key policy documentation, e.g. the IEP, IRP, 20YLFMP and GUMP are finalized and presented to the PCE within six months.
2. Ensure that documentation from the DoE to the PCE have clear measurable targets that are time and cost bound.
3. Review the structure of the DoE so that it is optimally structured to deliver key policies and legislation timeously; and correctly staffed to conduct robust oversight over SoE’s and to deliver on all its key mandates.
4. Present a comprehensive report on the Grand Inga Project to the PCE before Parliament rises in 2015.
5. That the Department of Energy present a progress report on the 2013/14 BRRR recommendations of the PCE before the end of the financial year.
6. Ensure that the Board of Directors and Executive Management of the entities are staffed by individuals that have the correct technical skills to execute their responsibilities.
7. Report to the PCE, how the financial challenges, especially the shortfall, around the rehabilitation of the PetroSA onshore and offshore liabilities are to be addressed, by end of the financial year.
8. Present with CEF, the details of the turnaround strategy, known as Project Apollo, not later than three months.
9. Present an update to the PCE on the cleaner fuels II specifications implementation to the PCE within the next three months.
10. Initiate a forensic investigation into the reasons for the financial challenges at PetroSA including the R14.5 billion impairment. The full findings must presented to the PCE when completed.
11. Attend to the structure of CEF, including ensuring the acting positions are filled as soon as possible, and that the relationships between the CEF Board and the Boards of the entities be addressed, before the end of this financial year.
12. Submit a report on the hiving-off of the entities of the CEF and the implications thereof, to the PCE, by the end of this financial year.
13. Ensure that the shareholder compacts for all SoE’s are in place in the next six months and present them to the PCE thereafter.
14. Take immediate steps to ensure the Auditor General’s audit of NECSA is completed and present the annual report of NECSA to the PCE within a month of completion of the audit. Further, provide to the PCE the reasons for the delay.
15. Ensure a transparent nuclear procurement process.
16. Without prejudicing the interests of the country in the process, present the key nuclear procurement documentation i.e. the Integrated Nuclear Infrastructure Review (including details of the action plans), Finance Options, Models and Solutions for the nuclear build programme and Economic Impact of Localization of the Nuclear Programme, to the PCE within three months.
17. Conduct a comprehensive evaluation on the liquid fuels value chain and present the outcome to the PCE in six months.
18. Conduct a comprehensive evaluation on the gas value chain in terms of the current legislation, policies, status, challenges and the way forward and present the results to the PCE in six months.
19. Ensure the Solar Water Heater programme transfer from Eskom is finalized and rollout immediately.
20. The budget of the clean energy programme be increased.
21. Minister should take note of the recommendations of the AGSA and implement them.

 

 

1. Appreciation

 

The Committee would like to express its gratitude to the Minister, Hon T Joemat-Petterson, the Deputy Minister, Hon TC Majola, the Director-General, Mr T Zulu and the executive management team (Team Energy) of the Department of Energy, the Chief Executive Officers (CEOs) of the respective state-owned companies reporting to the Department of Energy, the Office of the Auditor General of SA (AGSA) and the Department of Planning. Monitoring and Evaluation (DPME).  

 

Report to be considered.