Department of Energy Third Quarter Performance Report

Meeting report

Chairpersons’ opening remarks
The Chairperson welcomed the Department of Energy (DoE) and Members of the Committee to the meeting. He said the Committee would be looking at the Department’s report for the third quarter of 2013/14.

DoE Third Quarter Performance Report
Ms Thandeka Zungu, Chief Operations Officer, DoE, said the DoE had met towards the end of 2013 to re-look at the Department’s strategic plan, as well as to assess its performance plan in comparison to its overall performance. The Auditor-General had also been concerned with the DoE’s number of targets, and the achievability of these targets. The Annual Performance Plan for 2013/14 had therefore been combined with the DoE’s Operational Plans. The outcome of that exercise was that two documents had been adopted -- the revised Annual Performance Plan 2013/14 and the Situational Operational Plan.

Some of the highlights for the quarter were the announcement of the successful bidders for Window 3, the conclusion of the Integrated Energy Plan (IEP); finalisation and review of the Integrated Resource Plan (IRP), completion of the self-assessment report on nuclear, and completion and submission of the annual Management Performance Assessment Tool (MPAT) report to the Department of Public Monitoring and Evaluation.

Financial Report
Ms Yvonne Chetty, Chief Financial Officer, DoE, said she would be giving an overview of the DoE’s financial performance report , and the order of the presentation would begin with a presentation of an overview per economic classification, a presentation on the top five cost drivers (goods and services), an overview per programme and a presentation on the transfer payment schedule for 2013/14.

Overview per Economic Classification
Ms Chetty said the total budget allocation for DoE for the entire 12-month period was R6.5 billion. At the end of nine months, the DoE had spent R4.1 billion, leaving R1.5 billion unspent. Compensation of employees showed an unspent budget of R14.6 million, and this variance was attributed mainly to vacancies. Goods and services had an unspent budget of R41.7 million due to various projects which could not commence as planned. Transfer payments had an unspent budget of R1.4 million, and this was attributed to an under-spending in the Energy and Efficiency and Demand Side Management (EEDSM)-Eskom programme, which was accountable for R1.1 billion of the total transfer payments’ budget balance.  Payments for capital assets had an unspent budget of R2.4 million, and most of this amount was currently committed in the system.

Top Five Major Cost Drivers (Goods and Services)
In total, DoE had spent R110.8 million on goods and services. The top five costs accounted for 68.6% of the total spending, and amounted to R75.9 million. Travel and subsistence constituted R40.9 million of the total budget, the operating lease amounted to R15.5 million, R7.9 million was spent on consultants and other professional services while R6 million was spent on computer services. DoE’s advertising accounted to R5.5 million of the actual spending.

Third Quarter Financial Performance Programme
Ms Chetty said the presentation would highlight the under-spending of each programme. Programme 1, Administration, had a total budget allocation of R161.1 million, and spent R157 million of this allocation. The programme was left with an under-spent budget of R4 million. Programme 2, Energy Policy and Planning, received R30 million, spent R30 million and had a slight under-spending which would be recovered in the fourth quarter. Programme 3, Energy Regulation, received R33.5 million, spent R16.8 million and was left with R16.6 million unspent. Programme 4, Electrification & Energy Programmes Management, received R3.3 million, and of this R3 million was spent and R227.9 was left unspent. Programme 5, Nuclear Energy and Regulation received R682.1 million.  Of this, R664.8 was spent and R17.3 million was not spent. Lastly, Programme 6, Clean Energy, received R1.4 billion, spent R184.3 million and was left with R1.2 billion unspent.

Ms Chetty explained that the variance in transfer payments under Programme 4 was mainly attributed to the performance of the non-grid electrification project, which was R33.3 million behind in spending. The delay in the finalization of service providers’ contracts contributed significantly to the variance. The transfers to certain municipalities were also withheld, and an application was made to Treasury for the re-directing of these allocations to other municipalities. National Treasury sanctioned the proposal. Under Programme 6, she explained that the planned clean energy/energy efficiency awareness campaigns could not commence as planned due to conflicting engagements, resulting in the above-stated variance. The saving from this project would be redirected to the Solar Water Heater local content verification project.

Third Quarter Transfer Payment Schedule 2013/14
DoE’s projects and entities were allocated R5.3 million for transfer payments.  Of this allocation, R3.8 million was spent and the DoE’s transfer payments schedule was left with a R1.4 million under-spending for the 2013/14 financial year. The under-spending was mainly attributed to the following:

• EEDSM Municipalities: R31.65 million (30.8%) under budget as a result of the withholding of transfers from certain municipalities in terms of the provisions of Division of Revenue Act (DoRA).  Through re-gazetting, these transfers will be directed towards other municipalities before year end.

• EEDSM–Eskom: R1.24 billion or 100% under budget, due to the delayed finalization of the implementation contract with Eskom.

• Integration National Electrification Programme (INEP) Municipalities: R193.40 million (13.7%) under budget, mainly due to the late submission of payment requests from municipalities. Expenditure was expected to increase during the last quarter of 2013/14 financial year, following the re-gazetting of some withheld allocations.

• INEP Non-grid: R25.5 million (42.9%) under budget. Work already undertaken by service providers had first to be verified before payments could be processed.  This would be done during last quarter of the 2013/14financial year. 

As at the end of the quarter under review, the Department had utilized a total of R4.13 billion, or 63.5% of its total 2013/14 budget of R6.50 billion. The DoE was left with an available balance of R2.37 billion to be utilized in the fourth quarter.

Ms Chetty concluded by saying that in the 2012/13 financial year, the DoE had spent 98.9% of its allocated budget. Therefore, based on the best available information to date, it was anticipated that in the 2013/14 financial year, the DoE would spend 99% of its allocation.

The Chairperson thanked Ms Chetty for the presentation. He asked that the DoE explain to the Committee its marketing strategy for non-grid technology.

Discussion
Mr J Smalle (DA) thanked the DoE for the presentation. He asked whether the DoE was putting enough effort into cutting down on luxury spending.  He made reference to the R100 000 which the DoE had spent on gifts. In addition, the DoE had a target of spending 99% of its allocated budget -- was this achievable?

Mr L Greyling (ID) raised concern about the EEDSM, and said Nersa had indicated that all energy efficiency should be handled by the DoE instead of by Eskom. The EEDSM system was breaking down.  Why was this the case? Energy efficiency was a huge priority within the country.   The emphasis on localisation and verification around the Solar Water Heating programme was a good move. However, why was there not much progress being made around low pressure solar water heaters? He asked about clean energy -- what exactly did the programme entail, and how did it differ from solar water heaters and energy efficiency?

Mr G Radebe (ANC) congratulated the DoE on its performance. He referred to the DoE’s use of consultants and asked whether the DoE was working towards ensuring sustainable skills transfer. It was highlighted as a concern that 7.1% of the DoE’s budget was spent on consultants. On Programme 4 he asked about transfer subsidies -- what were the reasons for under-spending?   There seemed to be a disjuncture between the DoE, Eskom and the contractor -- how was this problem being addressed?  What were the reasons for the under-spending on education programmes around nuclear? Was there a problem with skills shortages; how could the SA Nuclear Energy Corporation (Necsa) and the National Nuclear Regulator assist? He argued that localisation around solar water heaters needed to be elevated into becoming a national project.

The Chairperson thanked the DoE for the presentation. He said quarterly performance needed to be looked at in a balanced form -- where the achieved targets are looked at against the non-achieved targets. He asked whether the threshold given by National Treasury was applicable for all DoE’s divisions. How was the DoE faring in making attempts for developing internal capacity so there would be less reliance on the use of consultants? It seemed that it was more lucrative to be outside the DoE than to be inside.  He asked whether the DoE was still practising fiscal dumping. Was the Department of Public Enterprises invited for the management performance assessment tool (MPAT) report? How was the DoE marketing non-grid technologies? Why was the nuclear awareness campaign slowing down? Why were there delays in finalising the contract with Eskom -- what were the hiccups? An argument was made that municipalities needed to be part of the communities which were working towards improving energy efficiency.

Ms Chetty replied to the question on fiscal dumping, and said the DoE monitored all its spending and for the programmes which were falling behind in performance, the funds were re-allocated well in time. However, all funding remained for its intended purpose, and permission was requested from National Treasury if there was a need for re-allocation. On consultants, she said the DoE made use of them only where there was a gap in skills of a technical nature. Skills transfer was encouraged within the DoE.  On travel, she said the DoE was making all efforts to contain travel costs, therefore delegations for things like study tours were reduced.  The 99% expenditure estimate was the best estimate on the table. She said the reduction plans for consultants would be presented to the Committee in March 2014.

Programme Performance
Programme 1: Administration
Ms Zungu said reporting on the DoE’s annual audit had taken place during the second quarter. The DoE had achieved 100% of its target of paying approved invoices within 30 days of receipt. It had also planned to hold five Imbizos, and this target had partially been achieved, with three Imbizos held. The other events were postponed due to other commitments by political principals.

Programme 2: Energy Planning and Policy
Mr Thabang Audat, Chief Director: Energy Planning, DoE said in the absence of Mr Ompi Aphane, the Deputy Director General for Energy Planning, the presentation would be led by Ms Maserumule and Mr Ndlovu.

Ms Rebecca Maserumule, Demand Modelling Specialist, DoE said with regard to the Integrated Energy Plan, the DoE had started in September 2013 with a stakeholder engagement. The DoE went to all nine provinces to present the plan. The DoE was now in a process of gathering all stakeholder inputs and devising a strategy on how the work of the DoE could be improved. All targets for the third quarter were achieved.

Mr Jabulani Ndlovu, Director: Petroleum Policy, DoE said the finalised gas infrastructure development options report had been submitted to the Minister for approval. Consultants had been appointed and would interview all stakeholders involved.  However, the DoE had not set any targets for the second quarter. The liquid fuels roadmap report was also submitted to the Minister for approval. Some misalignments had been identified by consultants and the draft report was revised. Consultants were given a deadline of 14 March to submit the finalised report to the DoE.
The Liquid Petroleum Gas (LPG) pricing policy framework had also been submitted to the Minister for approval, and public consultation on the draft LPG pricing policy framework had been concluded. In addition, the legislative amendments to the Petroleum Products Act had been submitted to the Minister for approval. The draft Bill had been prepared. With regard to amendments to the Gas Act, many consultations had taken place throughout all the nine provinces and the processing of the Bill had entered the National Economic Development and Labour Council (Nedlac) consultations.   In the third quarter of 2014/15, the DoE would be able to complete the second version of the Integrated Resource Plan (IRP).

Ms Mokgadi Modise, Chief Director: Clean Energy, DoE said National Treasury had issued an instruction note for compliance concerning the local content of Solar Water Heaters (SWH). This instruction note was signed in July 2013, with effect from 5 August 2013. One concern raised was the transfer to Eskom and this had delayed the DoE. Initially the allocation of SWH was done under the Division of Revenue Act but the bulk of the R4.7 billion was done under the Appropriations Act. It was directly appropriated to Eskom, and not to municipalities. The DoE was therefore supposed to sign a funding agreement with Eskom to indicate how the bulk of the money should be utilized.
The country had heavily emphasised the issue of localisation, and to address this concern the Department of Trade and Industry (dti) had conducted a designated study concerning capacity within the country, and whether the country was ready to produce all the required local content. The study had been finalised and an instruction note was the final output.  Manufacturers within the country were required to have a 70% local content. However, the issue of localisation did not fall under the DoE’s mandate, and therefore the dti had appointed the South African Bureau of Standards to facilitate the process. In addition, there were issues which Eskom had with the contract, and both legal teams had to meet and address the concerns.

Progress Report on the Solar Water Heater Programme
Ms Zungu reported that 395 000 solar water heaters had been installed provincially. Some of the provinces still had a low uptake on the SWHs. Some of the concerns were in respect to provinces such as North West, Limpopo and Mpumalanga, which had low SWH installations. These concerns were being addressed in the current allocation. Gauteng was the province with the highest number of installations. The provinces with a lower uptake would now be getting a higher allocation.

Mr Greyling asked whether these figures were for high pressure or low pressure SWH’s.

Ms Zungu said the figures were a combination of both high pressure and low pressure SWH’s.
Other challenges highlighted were the subsidization of imported products, poor quality of installations, unreliable verification of the number and location of installed systems due to the lack of systematic reporting and independent verification, poor alignment with the objective of reducing electricity demand due to focusing on low electricity consumption areas only, and the lack of maintenance obligations from suppliers

In an attempt to resolve these challenges, a Revised Contracting Model had been adopted in terms of which a rebate scheme targeted a minimum of 70% local content of products, which would qualify for subsidies. An installation programme was also set out separately to allow for the training of youth and local installers. A web-based portal was also created for the electronic tagging of the GPS coordinates, with pictures to aid the verification of each installation. In addition, from December 2012, exclusive space was created for local manufacturers to take up the opportunity to create jobs through the new SWH rebate programme.  An offtake commitment had to be secured from Eskom to allow suppliers to ramp up their production to 30 000 systems per month.

Programme 6: Clean Energy
Ms Zungu said ten energy consumption baselines had been received from municipalities. It was important to note, however, that the financial year for municipalities started in July, while government’s financial year began in April. This caused problems with regard to planning and alignment of targets. The National Energy Efficiency Strategy document had been submitted to Cabinet and the review of the strategy had been completed. The feasibility study report for both solar park sites in Prieska and Upington was submitted in January 2014.

Programme 4: Electrification and Energy Programme Management
Mr Wolsey Barnard, Deputy Director-General: Energy Programmes and Projects, DoE mentioned some of the Programme’s achieved and not achieved targets. All enforcement notices were issues where non-compliance was identified. The percentage of cases where enforcement notices were issued had been identified during routine compliance inspections. The DoE had also set a target to submit a progress report on the revised Basic Fuel Price (BFP) Working Rules Process and Magisterial District Zones, but only two bidders had submitted their proposals and therefore this target had not been achieved. The bid would be re-advertised. The DoE had also set a target to submit a draft report on the Benchmark Service Station (BSS) asset base.  However, only two bidders had passed the technical evaluation stage and submitted their proposals.

The DoE had also set a target to report on the allocation of funding and monitoring of the electrification of household projects, in comparison to the electrification plan. The DoE had planned to electrify 86 356 households in municipalities, but only 60 328 houses were electrified (including rollovers). Eskom had also planned to electrify 157 839 households, but managed to electrify only 104 416households. As a corrective action, INEP was establishing a Projects Steering Committee to intervene on under-performance within municipalities. In addition, out of a total of 15 956 non-grid connections, the DoE was able to achieve 7 684. Additional non-grid service providers had been appointed to accelerate the rollout of the non-grid programme in rural and urbanized areas.

Programme 5: Nuclear Energy
Mr Zizamele Mbambo, Deputy Director-General: Nuclear Energy, DoE said that the Programme had achieved 25% of its targets, partially achieved 50% of the targets, and the remaining 25% of the targets had not been achieved.

The DoE had planned to commission an additional 9 600 MW of nuclear energy into the grid by 2030, by establishing a procurement body in accordance with the approved process. To date, the target had been only partially achieved due to a number of delays. The DoE had also planned to establish a National Radioactive Waste Disposal Unit. This would be done by developing a framework to engage affected employees from the SA Nuclear Energy Corporation. The target had been partially achieved.  Discussions had commenced on the framework and a Board of Directors had been appointed. The DoE had, however, managed to achieve its target of submitting the number of nuclear safeguard compliance reports to the relevant decision-making structures.

Discussion
The Chairperson thanked the DoE for the presentation. He said the concerns raised on non-grid issues needed to be addressed.

Mr Smalle asked how the nuclear Self-Assessment Report affected the Integrated Resource Plan (IRP) going forward.

Mr Greyling said proper reform was needed for the restructuring of the electricity industry, but there did not seem to be any political appetite to reform the industry. The DoE needed to set itself a goal in the next five years, to develop the vision of an end-state within the electricity industry. He asked what the process was for the IRP updates. On the INEP programme, one of the key problems was that concessionaires were blocked by Eskom from doing any work there. He asked whether mini-grids were an option the DoE was considering, especially in rural areas. This would assist in getting electricity to people.

Ms B Tinto (ANC) asked whether the DoE made follow-ups on the implementation of solar water heaters.

The Chairperson thanked the DoE for the presentation, and adjourned the meeting.