ATC160503: Report of the Portfolio Committee on Energy on the Budget Vote No. 26 of the Department of Energy, dated 03 May 2016

Energy

REPORT OF THE PORTFOLIO COMMITTEE ON ENERGY ON THE BUDGET VOTE NO. 26 OF THE DEPARTMENT OF ENERGY, DATED 03 MAY 2016

 

1.         Introduction

 

1.1.            Subject of the report

 

The subject of this report is to report back to the National Assembly (NA) on the Portfolio Committee on Energy's findings after evaluating and assessing the Budget Vote No 26 of the Department of Energy.

 

1.2.            Background

 

Strategic Plans identify strategically important outcome orientated goals and objectives against which public institutions' medium-term results can be measured and evaluated by Parliament, provincial legislatures and the public. Annual performance plans identify the performance indicators and targets that the institution will seek to achieve in the upcoming budget year. The annual budget sets out what funds an institution is allocated to deliver services. The Annual performance plan shows funded service-delivery targets or projections. The annual budget indicates the resource envelope for the year ahead, and sets indicative future budgets over the medium term expenditure framework (MTEF). The budget covers the current financial year and the following two years.

 

At the beginning of every year, the Minister of Finance tables before Parliament, amidst great expectation and anticipation by South Africans, a detailed outline of the State's Budget: how much money will be or ought to be spent, on what, in that financial year.

 

Thereafter, various government Departments present their budget votes before Parliament -specifying how they intend reconciling their resources with service delivery imperatives as outlined by the President of the Republic of South Africa in the State of the Nation Address. One of the main statutory functions of Parliament is to discuss, pass and oversee the State's Budget. The Department of Energy's Budget (Vote No. 26) was referred to, for consideration and reporting.

 

In compliance with the referral by the National Assembly, the Committee held a Strategic Plan, Annual Performance Plan and Budget Vote briefing on 06 April 2016 with the Department of Energy (the Department) to consider its Budget Vote and Strategic Plan.

 

1.3.            Objectives of the report

 

The objectives of the report are as follows:

·         To describe and analyse the budget of the Department of Energy (DoE) over the 2016/17 financial year;

·         To conclude on implications and make recommendations thereto.

 

 

2. Department of Energy Overview

 

2.1. Background

 

The core business of the Department is premised amongst others on the Energy White Paper of 1998 as well as the National Energy Act, 2008 (Act No. 34 of 2008) which, amongst others mandates the Department to ensure that diverse energy resources are available, in sustainable quantities and at affordable prices, to the  South African economy in support of economic growth and poverty alleviation, while taking into account environmental management requirements  and interactions amongst economic sectors.

 

In carrying out this mandate, the Department develops legislation; undertakes programmes and projects; and in some instances, transfer resources to various implementing agencies and state owned entities (SOEs).  The SOEs reporting to the DoE are as follows:

 

Table1: Entities Reporting to the Department

Name of Public Entity	Mandate
National Nuclear Regulator (NNR)	The NNR is established in terms of the National Nuclear Regulator Act, 1999 (Act No. 47 of 1999).The act establishes the regulator as a competent authority for nuclear regulation in South Africa. The purpose of the NNR, as outlined in Section 5 of the National Nuclear Regulator Act, 1999 (Act No. 47 of 1999) is to essentially provide for the protection of persons, property & the environment against nuclear damage through the establishment of safety standards & regulatory practices.
Central Energy Fund (CEF)	To finance and promote the acquisition of research into and exploitation of oil, gas and renewable/clean energy-related products and technology.
South African Nuclear Energy Corporation (NECSA)	NECSA is established in terms of Section 3(1) of the Nuclear Energy Act, 1999 (Act No. 46 of 1999).The act provides for the commercialisation of nuclear and related products and services, and delegates specific responsibilities to the corporation, including the implementation and execution of national safeguards and other international obligations. The Nuclear Energy Policy of 2008 reinforced NECSA's mandate relating to Research and Development (R&D) and Nuclear Fuel Cycle (NFC) responsibilities.
National Radioactive Waste Disposal Institute (NRWDI)	NRWDI is a Nuclear Waste Disposal Institute established in terms of Section 3 of the National Radioactive Waste Disposal Institute Act, 2008 (Act No. 53 of 2008).The act provides for the establishment of an NRWDI in order to manage radioactive waste disposal on a national basis and to provide for its functions and for how it is to be managed. The Institute is not operational as yet.
National Energy Regulator of South Africa (NERSA)	NERSA is a regulatory authority established as a juristic person in terms of Section 3 of the National Energy Regulator Act, 2004 (Act No. 40 of 2004). NERSA's mandate is to regulate the electricity, piped-gas and petroleum pipeline industries in terms of the Electricity Regulation Act, 2006 (Act No. 4 of 2006), Municipal Finance Management Act, 2003 (Act No. 56 of 2003), the Gas Act, 2001 (Act No. 48 of 2001) & the Petroleum Pipelines Act, 2003 (Act No. 60 of 2003).
South African National Energy Development Institute (SANEDI)	SANEDI is an applied energy research institute established in terms of Section 7(1) of the National Energy Act, 2008 (Act No. 34 of 2008).

 

 

2.2. Organisational structure

 

The approved organisational structure of the DoE consists of the following seven branches:

 

·         Energy Policy, Planning and Clean Energy: The aim of this branch is to ensure evidence- based planning, policy setting and investment decisions in the energy sector to improve energy security, through supply and demand side options, and increase competition through regulation.

·         Petroleum and Petroleum Products Regulation: This branch regulates petroleum and petroleum products industry to ensure optimum and orderly functioning of the petroleum industry to achieve government's developmental goals.  

·         Electrification and Energy Programme and Project Management: The aim of this branch is to manage, coordinate and monitor programmes and projects focused on access to energy.

·         Nuclear Energy: This branch manages the South African nuclear energy industry and control nuclear material and related material in terms of international obligations, nuclear legislation and policies to ensure the safe and peaceful use of nuclear energy.

·         Corporate Services: The aim of this branch is to provide corporate support in the Department.

·         Governance and Compliance: This branch ensures good corporate governance and compliance by the DoE and its SOEs.

·         Financial Management Services: The aim of this branch is to provide financial management, accounting and supply chain management services.

 

2.3. Approved, funded and unfunded posts of the DoE:

 

Table 2: Approved, funded and unfunded posts - DoE

Total No of Posts on DoE's approved establishment	844
Total No of Funded Posts	619
Total No of Unfunded Posts	225   -  Funding of positions is based  on budget allocation from National Treasury
Vacant posts	77  - Recruitment process towards the filling these positions in various stages

 

On its Budget Vote briefing to the Committee on 24 March 2015, the Department reported that it had a total of 227 unfunded posts and 620 funded posts. This means that the situation has not changed much since last year.

 

2.4. Location of DoE offices

 

The Department consists of a national office that is situated in Gauteng Province (Matimba House); and nine Regional Offices that are situated in various provinces, namely:- Eastern Cape (East London); Free State (Welkom); KwaZulu-Natal (Durban); Limpopo (Polokwane); Mpumalanga (Emalahleni); Northern Cape (Kimberley); Western Cape (Cape Town); Gauteng (Pretoria); and North West (Mafikeng).

 

3        Strategic Plan and the Annual Performance Plan of the Department

 

3.1. Strategic outcomes

 

For the five year period, the Department has identified seven strategic outcome oriented goals, see table 3 below.

 

Table 3: Strategic outcome-orientated Goals of the DoE

Strategic Outcome-Orientated Goals	Goal Statement
1. Security of Supply	To ensure that energy supply is secure and demand is well managed
2. Infrastructure	To facilitate an efficient, competitive and responsive energy infrastructure network.
3. Regulation and Competition	To ensure that there is improved energy regulation and competition
4. Universal Access and Transformation	To ensure that there is an efficient and diverse energy mix for universal access within a transformed energy sector.
5. Environmental Assets	To ensure that environmental assets and natural resources are protected & continually enhanced by cleaner energy technologies.
6. Climate Change	To implement policies that adapt to and mitigate the effects of climate change.
7. Corporate Governance	To implement good corporate governance for effective and efficient service delivery.

 

 

3.2. Challenges in the energy sector

 

The Department highlighted the following challenges in the energy sector:

·         Imbalance in electricity supply and demand

·         Eskom Build Programme - timeframes and budget overruns. The key three New Eskom Build programmes are the construction of the Medupi and Kusile coal-fired power stations and the construction of the Ingula pumped-storage scheme. The New Build Programme is taking significantly longer than anticipated, hence cost overruns.

·         The lack of clarity on the end-state of electricity industry is delaying progress in new entrants and regulatory reform.

·         Transmission access and bottle necks. The end state of the electricity sector needs to allow for improved transmission capacity and allow for non-discriminatory access to grid for new generation investors.

·         Lack of upgrading, refurbishment and extension of existing distribution network infrastructure in the last fifteen years by Municipalities and Eskom has led to a backlog of R70 billion. According to the Department, the situation is getting worse.

·         Progress in electrification programme - there is a need to improve oversight on electrification projects in order to meet the set targets.

·         Roll-out of the National Solar Water Heater programme - there has been delays in the implementation of this project partly due to the changes in the contracting model. The target is to install 1.75 million solar water heater systems by 2018/19 financial year. Originally, the target was to install 1 million solar water heaters by 2014. However, only 412, 959 solar water heater units were installed by the end of the 2014/15 financial year.

·         Recent crude oil price drop and exchange rate fluctuations impact on biofuels implementation.

·         Delays in finalising the Updated Integrated Resource Plan (IRP) - a planning tool for securing future electricity supply.

 

3.3. Key focus areas for 2016/17 financial year

 

The Department has identified eleven key priority areas to focus on in the implementation of the Strategic Plan and these are as follows:

 

·         National Solar Water Programme: The Department plans to install 38 375 units

·         Electricity generation - increase the capacity by adding 1 800 megawatts (MW)

·         Nuclear Build Programme: Implementation of the procurement plan

·         Public Buildings Energy Efficiency and Demand Side Management (EEDSM): signing of Service Level Agreements (SLAs) with implementing entities and implementation of EEDSM

·          Integrated Resource Plan (IRP): submit to Cabinet for approval and publication for comments

·         Integrated Energy Plan (IEP): submit to Cabinet for approval and publication for comments

·         Gas Utilisation Master Plan (GUMP): approval for publication and comments

·         Electrification: 235 000 new grid connections and 20 000 non-grid connections.

·         Energy Efficiency Measures: load shifting and switching - implementation of the Liquid Petroleum Gas (LPG) Strategy.

·          Regulatory Framework: Amendment of the Electricity Regulations Act (ERA)

·         Petroleum Infrastructure: Policy and timelines finalisation regarding the following: increasing/upgrading of  refinery infrastructure, Convert Clean Fuels II to EU Standard of cleans fuels

 

There are seven key legislations that the Department plans to submit to Cabinet and Parliament in the medium term and these are listed in table 4 below.

 

Table 4: Legislation scheduled for submission to Cabinet and Parliament

Name of the Bill	Strategic Focus	Submission date to Cabinet	Submission Date to Parliament
Electricity Industry Structure Bill	To encourage increased investment in electricity generation to enable the country to meet the required electricity supply capacity needed for economic growth.	March 2016	March 2017
Electricity Regulation Amendment Bill (to amend the Electricity Regulation Act, 2006 [Act No. 4 of 2006], as amended)	To provide a regulatory framework that promotes IPP participation	September 2015	March 2016
Energy Regulator Amendment Bill (to amend the National Energy Regulator Act, 2004 [Act No. 40 of 2004])	To promote efficient regulation of the Energy Sector.	September 2015	March 2016
Promulgate National Nuclear Regulator Amendment Act	To review & update existing legislation, taking into consideration the current developments.	March 2016	March 2017
Nuclear Energy Act Amendment Bill	To review & update existing legislation, taking into consideration the current developments.	March 2016	March 2017
National Radioactive Waste Management Fund Bill	To ensure existence of the funding mechanism for radioactive waste management	March 2016	March 2017
Develop Strategic Fuel Fund (SFF) Bill	To establish a national petroleum reserve	March 2016	September 2016
	organisation to manage the strategic stock of petroleum & gas

 

The Department, in its presentation to the Committee also showed how the Department's key focus areas for the current financial year are linked to the National Development Plan (NDP), see table 5 below:

 

3.4. National Development Plan viz a vis the Annual Performance Plan (APP)

 

Table 5: NDP - APP 2016/17

	NDP	Progress	2016/17 APP
1	Gas should be explored as an alternative to coal for energy production	In November 2015, the Minister made a determination for gas to power generation	The Request for Proposals (RFP) for gas to power will be issued in 2016/17
2	There needs to be a greater mix of energy sources and a greater diversity of independent power producers (IPPs) in the energy industry	There has been R194 billion investment between bid window 1 and 4 of the IPP programme, including renewable energy.	Additional bid windows will be open in 2016/17 as part of the IPP programme
3	Electricity pricing and access need to accommodate the needs of the poor.	The prices remain regulated by the independent regulator, NERSA and government provides free electricity to the poor.	NERSA would continue to approve price adjustment on a sliding scale to cushion the poor
4	The timing and/or desirability of nuclear power and	The feasibility of the nuclear programme has been completed.	The RFP for procurement of nuclear power will be issued in 2016/17
5	A new petrol refinery need to be considered.	The stakeholder consultation and monitoring of the balance of supply and demand is ongoing	During 2016/17, a decision will be made regarding the refinery or imports or a hybrid
6	Improve demand-side management	The EEDSM programme is ongoing at municipal level and in retrofitting the public buildings.	The target for 2016/17 is to save 0.5 TWh through EEDSM
7	Subject to costs, South Africa could aim for at least 90 percent grid connection by 2030, with alternative off-grid options offered to the remaining households for whom a connection is impractical.	86% of households have been connected to the grid and others electrified through non-grid technology.	The target is to connect 235 000 households on the grid plus 20 000 in 2016/17
8	Clean fuel standards require major investment in upgrades and conversions of existing refineries at a time when the major oil companies are increasingly selling-off refinery assets.	Stakeholder consultation is underway regarding the financing model	A decision will be made about the supply of clean fuels to the SA market
9	Biofuels are also a possibility in the future, but because South Africa is largely a dry country, production is likely to be located in the southern Africa region.	Consultation and formulation of the funding model has been completed	Submission of Draft Biofuels Regulatory Framework for Ministerial approval
10	South Africa's approach to energy planning needs to become more holistic and integrated.	The Integrated Energy Plan (IEP) consultation has been completed	The IEP will be submitted to Cabinet for approval
11	Amend the National Energy Regulator Act (2004) and the Electricity Regulation Act (2006) to ensure a more efficient and predictable regulatory environment.	The inter-departmental consultations have been completed on the amendments of both Acts	The Bills will be submitted to Cabinet for approval and onward processing
12	Ring-fence the electricity-distribution businesses of the 12 largest municipalities, representing 80 percent of municipal distribution, and resolve their maintenance and refurbishment backlogs.	The assessment of the scale of the backlog has been completed and the funding requirement determined.	Further discussion with COGTA and National Treasury on the funding of the programme.

 

4.      Budget of the Department of Energy (2016/17)

 

1.1.            Final Budget Allocation

 

The Department's budget allocation for 2016/17 is R7.54 billion. Earmarked transfer payments to public entities, municipalities and other implementing institutions amounts to R6.80 billion which is equivalent to 90.15 per cent of the Department's total budget. The remaining budget of R743 million or 9.85 per cent is for operational expenditure, inclusive of payments for capital assets.  This is consistent with the trend of the budget for the past five years.

 

The history of the fiscus allocations is as follows:

·         2011/12 - R6.200 Billion

·         2012/13 - R6.734 Billion (Increased by 8.6%)

·         2013/14 - R6.503 Billion (Decreased by 3.4%)

·         2014/15 - R7.415 Billion (Increased by 14.0%)

·         2015/16 - R7.482 Billion (Increased by 0.9%)

·         2016/17 - R7.545 Billion (Increased by 0.8%)

 

1.2.            Baseline reductions

 

The 2016 Medium Term Expenditure Framework (MTEF) Final Allocation letter, after deliberations by the Ministers' Committee on the Budget (MinComBud), was released by National Treasury in January 2016.

 

Owing to the reduction in the revenue estimates of the country over the 2016 MTEF period relative to the estimates contained in the Medium Term Budget Policy Statements (MTBPS), substantive budget reductions had to be implemented by National Treasury over this period.

 

The total original indicative allocation for Vote 26 of R24.85 billion over the MTEF period,  R7.69 billion in 2016/17, R8.33 billion in 2017/18 and R8.82 billion in 2018/19 has been adjusted downward by incorporating the following adjustments:

 

·         Compensation of Employees:  R33.56 million reduction over the MTEF period, R989 thousand increase in 2016/17, R14.46 million reduction in 2017/18 and a R20.09 million reduction in 2018/19.

·         Goods and Services:  R356.33 million increase over the MTEF period made up of budget increases of R239.58m in 2016/17, R55.95m in 2017/18 and R60.79m in the final year of the 2016 MTEF period.

·         Transfer Payments:  R1.01 billion reduction over the MTEF period made up of budget reductions of R390.36 million in 2016/17, R246.85 million in 2017/18 and R372.02 million in 2018/19.

 

The above adjustments brings the final baseline to R24.16 billion over the MTEF period reflecting an average reduction of  2.76 per cent with R7.54 billion in 2016/17, R8.13 billion in 2017/18 and R8.49 billion in 2018/19.

 

Table 6: Overall Budget of the Department of Energy

Programme	Budget
R million	2015/16	2016/17
Administration	242 598	240.1
Energy Policy and Planning	45 096	46.7
Petroleum and Petroleum Products Regulation	74 378	77.9
Electrification & Energy Programme & Project Management	5 778 297	5 699.9
Nuclear Energy	654 398	863.6
Clean Energy	687 327	616.9
TOTAL	7 482.0	7 545.2

 

As indicated earlier, the above table shows an increase in budget allocation for the Department, from R7.4 billion in 2015/16 to R7.5 billion in 2016/17. Of the R7.5 billion, R6.8 billion is for transfer payments, see table below:

 

Table 7: Transfer payment schedule

VOTE 26 - ENERGY	2016/17
	Indicative	Final	% Reduction
Programmes
Employee Social benefits	409	409	0.00%
EWSETA/CHIETA	985	985	0.00%
Households: Bursaries	-	1,790	100%
Non-grid: INEP	166,424	166,424	0.00
ESKOM: INEP	3,776,334	3,526,334	-6.62%
INEP: Munic Grant	2,036,246	1,946,246	-4.42%
NECSA	599,338	599,338	0.00%
NNR	16,636	16,636	0.00%
International membership	17,375	17,375	0.00%
SANEDI	20,625	20,365	0.00%
Nat. Solar Water Heater programme	372,473	320,326	-14.00%
EEDSM: Municipal grant	185,625	185,625	0.00%
TOTAL	7,192,470	6,802113	-5.43%

 

The following Programmes' funding has been significantly reduced, contributing to the total reduction of R1.01 billion over the MTEF period in the Transfer payments classification:

 

·         INEP Eskom programme which reduces by R500 million over the medium term by, 6.62 per cent or R250 million, 1.77 per cent or R70 million and 4.31 per cent or R180 million in 2016/17, 2017/18 and 2018/19 respectively;

·         INEP Municipal grant's total reduction is R320 million over the medium term, 4.42 per cent reduction in 2016/17, 5.01 per cent in 2017/18 and 5.16 per cent in the final year.

·         The National Solar Water Heater (NSWH) project reduces by R189.87 million over the MTEF period, 14 per cent in each year of the 3 year cycle.

 

According to the DoE, the budget reductions in the 2016 MTEF period were not implemented on any of the entities reporting to the Department of Energy.

 

Table 8: Economic Classification - 2016 MTEF - Indicative vs Final baseline per economic classification

Vote 26 - ENERGY	2016/17			2017/18			2018/19
	Indicative	Final	% reduction	Indicative	Final	% reduction	Indicative	Final	% reduction
Economic Classification
Compensation of Employees	309,808	310,797	0,32%	328,560	314,102	4,40%	347,617	327,522	-5,78%
Goods and Services	188,583	428,166	127,04%	196,154	252,109	28,53%	207,528	268,316	29,29%
Transfers and subsidies	7,192,470	6,802,113	-5,3%	7,805,297	7,558,442	-3,16%	8,258,005	7,885,984	-4,5%
Payments for Capital assets	4,095	4,095	0,00%	4,327	4,327	0,00%	4,578	4,578	0,00%
Total	7,694,956	7,545,171	-1,95%	8,334,338	8,128,980	-2,46%	8,817,728	8,486,400	-3,76%

 

Compensation of employees

•       The baseline increase of 0.32 per cent in 2016/17 in this classification, only provides for the 2015 public sector wage settlement. In the two outer years of the 3 year cycle, budget ceilings for compensation of employees funding are set by implementing budget reductions of 4.40 per cent and 5.78 per cent respectively.

•       These outer years' reductions have an impact on staff establishment and the ability of the Department to fund contract or positions that are additional to the establishment.

•       The estimated budget shortfall during the two outer years, in relation to the current heads on the ground, is R89.12 million and R98.09 million respectively.

 

Goods and services

•       Baselines increases in this category of 127.04 per cent in 2016/17, 28.53 per cent in 2017/18 and 29.29 per cent in 2018/19 are mainly as a result of:

ü  The Nuclear New Build Programmes' (NNBP) additional non-recurring allocation in 2016/17 significantly contributes to the baseline increase of 127.04 per cent;

ü  Budget increases in the outer years of the MTEF cycle are mainly attributable to additional allocations in the SWH programme for social facilitation and technical feasibility assessments as well as the oversight and monitoring and evaluation of Non-grid electrification installations. 

 

Transfer Payments

•       The budget reductions in this category of 5.43 per cent, 3.16 per cent and 4.50 per cent in 2016/17, 2017/18 and 2018/19 years respectively are mainly attributable to budget reductions implemented on the Integrated National Electrification Programme (INEP) Eskom, INEP municipalities and on the SWH programme.

•       All these programmes had to decrease the performance targets in order to align to the revised expenditure ceilings.  

 

 

5. Observations and findings

 

·         Eskom's performance does impact and affect the performance of the Department of Energy, there appears to be an overlap in terms of responsibilities between the two Departments. This concern was also raised by the Committee in last year's Budget Report. The Department also pointed out that it is difficult to exercise oversight over another entity which reports to another department, in this case relating to Eskom who reports to the Department of Public Enterprises, however the department reported that it meets frequently with both the Department of Public Enterprises as well as Eskom.

·         There are still a number of issues which still need to be addressed, such as transmission and distribution lines as well as the functioning of the grid. The issue of electricity distribution infrastructure was also noted with concern by the Committee in its previous Budget Report. The backlog in electricity distribution infrastructure is estimated to cost R70 billion and the Department has acknowledged that the situation is getting worse.

·         There is a growing need to accelerate the conversion of gas to power in order to meet the       country's short and long term supply needs. In this regard commitments, through Ministerial Determinations and Request for Proposals have been made, with a deadline to issue request for proposals for gas to power projects in the 2016/17 financial year.

·         The committee has raised concerns regarding the estimated R141 billion that was allocated for expenses for certain projects and then subsequently amended, relating to the Central Energy Fund (CEF).

·         The Department of Energy has secured the expertise of the Independent Power Producers Office (IPP Office) in the Nuclear Build Programme, and has further appointed a procurement specialist with regard to the Nuclear Build programme, to assist and advice during the procurement processes.

·         With regard to legislation, the Department has reported that the Electricity Regulation Amendment Act (ERA) did go through the Cabinet processes, and was sent back to the Department, due to unresolved issues concerning the "end state" of the electricity sector. As things stand, the end state of the electricity sector remains undefined

·         The Department pointed out that the National Regulator Amendment Bill (NERA) was approved by Cabinet on a certain condition. The condition relates to the introduction of a review body. The aim is to segregate the "referee for the player". A requirement will also be that the review body be chaired by the Minister of Energy.

·         On the Gas Amendment Bill, the Department indicated that the Bill had been submitted to Cabinet, however, it was found that the issue with the Bill is that it focusses on the downstream element of the sector, and the upstream elements are dealt with in the Mineral Petroleum Resources Development Act. (MPRDA). The Gas Act therefore might have to await the amendment of the MPRDA process.

·         In last year's Budget Report, the Committee observed the slow pace in the finalisation of the biofuels strategy. According to the Department, progress on this has been made, however tabling of the strategy has been put on hold due the prevailing drought in the country.

·         The Committee notes concerns with the Integrated National Electrification Programme. By all measures, the programme is remarkable, having electrified 85 per cent of households currently, compared to 36 per cent in 1994. The target for 2015/16 financial year was to electrify 260 000 households through grid. In the current financial year, the target has been reduced to 235 000 grid connections. The target is reduced partly because of the reduced budget allocation, but also the main issue that the Department is confronted with is that the remaining households without access to electricity are predominantly in rural areas and the additional infrastructure required to reach them is more expensive, as these households tend to be located far from the national grid electricity network that distributes electricity to households.

·         In last years' Budget Report of the Committee, a concern was raised regarding the slow pace in implementation of the National Solar Water Heater Programme. This is still a concern in the current financial year. Originally, the target was to install 1 million solar water heaters by 2014. However, only 412, 959 solar water heater units were installed by the end of the 2014/15 financial year. Part of the delay, as cited by the Department, is the change in the Contracting Model - shifting the programme from Eskom to the DoE. The new target is to install 1.75 million solar water heater units by 2018/19. This target is unlikely to be met.

 

6. Department of Energy responses to Committee Budget Vote Report for 2015

 

The Portfolio Committee on Energy requested that the Department of Energy provides responses on the recommendations it had made in the 2015 Budget Report. The table below summarises the responses as provided by the Department.

 

Table 9: DoE Responses to 2015 PCE Budget Report Recommendations

ISSUE	PROGRESS UPDATE
Implementation of the directives of the State of the Nation Address  (SONA) and the NDP	Cabinet approved IRP 2010-2030. The IRP provides for the deployment of 9600MW of nuclear power to the grid by 2030.   The following are some of the blockages: ·         The Nuclear New Build Programme (NNBP) has not received any funding allocation for its implementation activities such as the appointment of a Transactional Advisor(s) until the current financial year, 2016/17. This is despite the approval of the IRP 2010-30 in 2011, allocating 9 600 MW of nuclear energy capacity by 2030. ·         The NNBP has not had any permanent/dedicated specialised human resources allocated to its implementation. In order to advance key areas of the work undertaken under the Energy Security Cabinet Subcommittee structures, The Nuclear Branch has been relying on interdepartmental resources that were not fully available to advance work under the Energy Security Cabinet Subcommittee structures. ·         Nuclear Procurement Process has been approved by Cabinet in December 2015. ·         Finalisation of the Procurement Strategy has taken longer than expected. Following the Integrated Nuclear Infrastructure Review, the DoE addressed the requirements of the NDP through several studies and strategies to include amongst others: costs, financing options, institutional arrangements, safety, environmental costs and benefits, localisation and employment opportunities, and uranium enrichment and fuel fabrication possibilities.
Implementation of the President’s directive on the NNBP	Delays were experienced in issuing the Request For Proposal (RFP) due to consultations with National Treasury.
Update on the developments and implementation of the Five Point Plan	The reduced availability factor of the Eskom generation fleet coupled with the high levels of out of service generation plants had the effect that the electricity demand was critically close to available electricity on the grid. The reduced margins between available energy and the demand had led to load shedding in the latter part of 2014 and early 2015, which is exacerbated by an increasingly unreliable generating fleet due to a combination of factors such as poor coal quality, ageing generators, but of particular concern is the poor quality maintenance leading to growing unscheduled breakdowns.
Update on Integrated Energy Plan	·         Questions have been asked about the development of the "Energy Master Plan". In response the IEP has been developed which incorporates the plans for electricity (IRP), gas (Gas Infrastructure Plan and GUMP) and petroleum (Liquid Fuels Master Plan).  ·         The Department completed the drafting of the IEP Report and initiated final consultation with the Economic Sector, Employment and Infrastructure Development Cluster (ESEID). ·         The ESEID cluster recommended that the report be further refined. The expected date of publication is in the 2nd Quarter of 2016/7 financial year.
Integrated Resource Plan	The IRP Update forms part of the IEP development process and given the interdependencies with the sector plans (IRP, GUMP, 20YLFMP), it is anticipated that the IRP Update will be completed by September 2016, subject to Cabinet approval.
Gas Utilization Master Plan (GUMP)	The Draft Gas Utilization Master Plan (GUMP) was developed and will be submitted together with the Integrated Resource Plan in 2016, after the tabling of the umbrella plan (the Integrated Energy Plan).
Electricity Regulation Amendment Bill	The Bill was tabled in Cabinet in October 2015 and was referred back due to lack of clarity regarding the end-state of the electricity industry structure.   .
National Energy Regulator Amendment Bill	Cabinet approved the Bill in October 2015, subject to the Review Board being led by the Minister of Energy. A regulatory impact assessment process has been completed in relation to this Bill, so that it can be reintroduced in Cabinet.
Petroleum Product Amendment Bill	Draft Petroleum Products Bill completed and sent to State Law Advisor for pre-certification.
Petroleum Pipelines Amendment Bill	After engagement with NERSA, indication is that the Petroleum and Gas Pipelines regulatory frameworks might need to be amalgamated. Consultation process ongoing.
Mineral and Petroleum Development Amendment Bill	The DoE is participating in the Project Executive Committee (PEC), which oversees the development of the Strategic Environmental Assessment (SEA) for Shale Gas in South Africa.   It also participates in the Task Team  led by the Department of Mineral Resources (DMR) to address the requirement to amend the MPRD Bill taking into account the concerns raised by various stakeholders.
National Radioactive Waste Fund Bill	The delayed responses from National Treasury (NT) for concurrence.
Champion for the Energy Efficiency	·         The Energy Act provides for SANEDI to play the role of energy efficiency agent, with the mandate as outlined in the legislation. ·         SANEDI is also mandated under the Income Tax Amendment Act to implement the energy efficiency tax incentive scheme, by verifying the savings claimed by various entities. The role of verification cannot be undertaken at the same time as project developer, due to conflict of mandate concerns.
Biofuels strategy	·         A Cabinet Memo has been completed with the Draft Biofuels Regulatory Framework and all relevant annexures, including: the revised Feedstock Protocol, Financing Model; and the Socio-Economic Impact Assessment System (SEIAS) Report, and is due for consideration by Cabinet. ·         A revised Cost-Benefit Analysis was completed.
Progress in the Solar Water Heating programme	Bids for the local manufacture and supply of baseline systems have been placed with 23 preferred bidders. The delivery of the first batch is due by 30 April 2016.
Roll out of the National Electrification Programme- reaching of universal access	·         Slow delivery of national electrification programme ·         Bulk infrastructure challenges as the programme is now being rolled out in deep rural areas. ·         Decrease in INEP allocations for 2016/17 to 2018/19 financial years, with a combined decrease of R820 million in these next three financial years. ·         In all provinces, out of 271 municipalities, 65 is about to reach universal access and now only dealing with growth or new development. Municipalities reaching universal access are defined as and when they have achieved 95 per cent access to electricity to all households. ·         260 000 Grid Target (Over 231 012 households connected to grid by end of March 2016) and 20 000 Non-Grid Target (Over 25 076 households connected using non-grid technology solar home system)
Backlog of the electricity distribution infrastructure	·         The Department has done an assessment of the asset refurbishment backlogs in the electricity distribution sector, covering Eskom and municipalities. ·         The pilot project regarding the Approach to Distribution Asset Management (ADAM) is nearing completion. The close out report of this mini-ADAM will be submitted by May 2016.
Progress update on the Nuclear New Build programme	·         Possible dynamic and complex procurement process. Outstanding financing/funding model incorporating current market tested data. ·         Delay in securing funding for key nuclear new build programme activities such as the Transaction Advisor(s). ·         The programme has not been allocated funding in the MTEF since 2011, despite multiple MTEF submissions. For the first time the programme has been allocated a once-off R200 million for preparatory work in 2016/17 financial year. The outer years of MTEF not been allocated funding. ·         This is a major blockage because there is no budgetary commitment made beyond 2016/17 financial year. ·         The lack of funding means that the Department is constrained and is not in a position to appoint full time dedicated programme management team.
Grand Inga	·         The treaty between the DRC and RSA entered into force on 20 March 2015. The DRC has commenced the selection of the preferred project developer. ·         RSA has committed to procure 2500MW from the first phase of the project NOTE: RSA does not build the project but is a Buyer, whereas the DRC is the project sponsor who takes the financing and construction risk of delivering the power at the border between DRC/Zambia.
Operationalisation of the NRWDI	·         Governance issues hampering activities of the Board. Lack of management structures, in particular the Chief Executive Officer (CEO) and Chief Financial Officer (CFO). ·         Lack of progress in the functional shift to move resources from NECSA to National Radioactive Disposal Institute (NRWDI) due to lack of shared vision for the functional shift between NECSA and NRWDI.
Clarification of the end state of the electricity sector.	The end-state proposal was tabled under the Independent System and Market Operator (ISMO) Bill in Cabinet, approved and introduced in parliament, where it was passed by the Portfolio Committee unanimously and then not tabled for final approval
Building of a new crude oil refinery	The decision is due by June 2016, in accordance with the NDP
Present an update to the PCE on the cleaner fuels II specifications implementation	·         The intention to upgrade refineries to produce cleaner fuels by 2017 has proved to be complex and difficult to realise. ·         The difficulty arises from the fact that industry expects the consumer to pay for the refinery upgrades. ·         DoE has convened an industry task team on the matter, including the South African Petroleum Industry Association (SAPIA) to find an acceptable alternative
Conduct a comprehensive evaluation on the gas value chain in terms of the current legislation, policies, status, challenges and the way forward	The evaluation of the gas value chain is catered for in the development of the Gas Utilization Master Plan (GUMP).  Proposals will be made on the way forward in December 2016.
Restructuring of State Owned Entities	·         CEF is in the process of implementing the hive-off of African Exploration Mining and Finance Corporation in line with the recommended government decision and in consultation with relevant stakeholders. ·         The hiving off of the Petroleum Agency of South Africa (PASA) is dependent on the finalisation of the amendment bill to the MPRDA. ·         CEF has finished its restructuring process and is now implementing programs to make it an agile organisation that will quickly respond to the needs of the market.  Within CEF programs like High- Performance and ONE CEF which will enable the group to leverage on each other's skills and achieve synergies across the group are being implemented. There has been a review of the governance model to address misalignment within the group.  ·         CEF has also setup a company to look into what we believe to be the new future- renewable energy and clean energy. Through the newly formed Energy Projects Division, CEF has started investing into renewable energy with the main focus being concentrated solar power. We are also increasing the gas quantities of imports from Mozambique through activities of our gas infrastructure company (iGAS), by investing into Loop 2 (of ROMPCO gas pipeline) which aims to increase the gas volumes being imported into the country. ·         The board-approved Project Genesis in December 2014 and most of the positions are expected to be filled by the end of the financial year. The position of PetroSA CEO has been advertised and the process is still on-going. The vacant executive positions at PetroSA will be filled once the new CEO commences his/her term.
Use of Communications Chief Directorate instead of consultants to demystify nuclear.	·         The Nuclear Branch with the support of the Chief Directorate Communications is implementing the approved Short Term Nuclear Communication Strategy. ·         Due to the non-implementation of the DoE's revised line function and support services structure, the current personnel resources are wholly inadequate to fully deliver on the communication needs of the DoE and especially for programmes such as Nuclear which need fulltime dedicated capacity in order to build the required public buy-in and acceptance of the technology and the new build programme.
Funding of vacant positions	·         Owing to the low economic growth of the economy , amongst others due to  low revenue estimates of the country over the 2016 MTEF period relative to the estimates contained in the MTBPS, substantive budget reductions was implemented by National Treasury hence departments are required to manage the staff compliment and to keep within the budget ceiling for Compensation of employees. ·         Public sector wage negotiations came in higher than planned, adding more strain to the Departments budget for compensation of employees. ·         It is imperative to indicate if critical vacancies are not filled timeously the Annual Performance targets will be negatively impacted. ·         The use of donor funds often restricts the Department from utilizing these funds for compensation of employees.

 

 

7.         Conclusion

 

The Portfolio Committee on Energy will continue to fulfil its Constitutional mandate. It is guided by the Parliamentary rules in conducting the oversight on the functioning of the Department of Energy. This is done to ensure proper and effective functioning and compliance with the legislation and policy requirements.

 

 

8.         Recommendations

 

Having considered the Budget Vote of the Department of Energy, the Portfolio Committee on Energy recommends that the House support the Budget Vote 26: Energy and further recommends that,

 

The Minister of Energy, within the current financial year:

1.     Ensure optimal performance of the Department, notwithstanding the current budget constraints.

2.     Without prejudicing the interests of the country, present the key nuclear procurement documentation including the Integrated Nuclear Infrastructure Review, Finance Options, Models and Solutions for the nuclear build programme and Economic Impact of Localization of the Nuclear Programme, and any other relevant documentation to the PCE and update the Committee on a regular basis regarding the nuclear procurement process.

3.     Ensure that the scale and pace of the nuclear procurement programme is done in a manner that is affordable to the country as directed by the President.

4.     Present to the Committee the Integrated Energy Plan (IEP), in the 3rd quarter of 2016/17

5.     Present to the Committee the Updated Integrated Resource Plan (IRP), in the 3rd quarter of 2016/17

6.     Present to the Committee the Gas Utilisation Master Plan (GUMP), in the 3rd quarter of 2016/17

7.     Ensure that the South African National Energy Development Institute (SANEDI), as an energy efficiency champion, presents its energy efficiency programme to the Committee, particularly its role in coordinating all energy efficiency activities.

8.     Ensure that the shareholder compacts for all State Owned Entities (SOEs) are in place in the next six months and present them to the PCE thereafter.

9.     Present with CEF, the details of the turnaround strategy and any process of restructuring of CEF and its entities not later than three months.

10.  Conduct robust oversight and continuously update the committee on the performance of the entities reporting to the Department.

11.  Ensure that the Strategic plans of the Entities are aligned to the objectives of the DoE and that the entities are correctly funded and staffed to meet their objectives.

12.  Update the PCE on progress on the implementation of the cleaner fuels II specifications.

13.  Submit a report on the hiving-off of the entities of the CEF and the implications thereof, to the PCE, by the end of the 3rd quarter for 2016/17.

14.  Monitor and update the Committee on developments in the MPRDA and the impact thereof on the Gas Amendment Bill.

15.  Facilitate the process leading to the definition of the ‘end state" of the electricity sector and report to the Committee within the next three months.

16.  Ensure that the National Energy Regulator of South Africa's (NERSA) public hearings are more accessible to ordinary citizens.

17.  Update the PCE on the overall transformation in the energy sector especially in the petroleum sector.

18.  Put emphasis on the roll-out of the National Electrification programme, with a particular focus on rural areas and provide the Committee with a comprehensive plan thereof.

19.  Continuously update the committee on the developments regarding the decision on building a new petroleum refinery.

20.  Regularly update the Committee on the Grand Inga Hydro Project

21.  Ensure that electricity distribution challenges are addressed working together with the relevant departments and municipalities.

22.  Expedite the solar water heater (SWH) rollout plan in partnership with the supporting departments in order to meet the set target of 1.75 million by the end of 2018/19.

23.  Ensure  that issues relating to the National Radioactive Waste Disposal Institute are addressed, and the Institute is made operational as soon as possible

 

 

Report to be considered.