Risk Mitigation IPP Procurement Programme and Karpowership contract: DMRE briefing

Meeting report

The Chairperson welcomed everyone to the meeting.  He asked if there were any apologies.

The Committee Secretary said apologies had been received from Mr V Zungula (ATM), who was unable to attend due to prior commitments, and the Minister of Mineral Resources and Energy, Mr Gwede Mantashe, who was attending a National Coronavirus Command Council meeting.

The Chairperson said that the Committee would deal with the issue of the Risk Mitigation Independent Power Producer Procurement Programme (RMIPPPP) which includes the issue regarding the Karpowership vessels. He asked the Members if he could do something unconventional. He said that late on Monday 19 April, some correspondence which had been received was forwarded to the Members. He thought it was necessary, even though this was not normal procedure, to begin the meeting by going through the letters, so that those in the Department of Mineral Resources and Energy (DMRE) and the Members who did not receive the letters could know what they contained. The two letters discussed the need for there to be a public hearing and consideration for the RMIPPPP. He was unsure of the procedure when the matter did not relate to national legislation or regulations. He requested the Committee Secretary to present the letters to the Committee.

The Committee Secretary presented the first letter, which was signed by various environmental justice and civil society organisations. These organisations were concerned about the decision to raise “emergency power”, which would tie the country into fossil fuels for at least 20 years, which was an expensive choice of energy, provided little opportunity for local content, and undermined the just energy transition. The letter indicated that there had to be an investigation into the granting of preferred bidder status to Karpowership, which had to include how it circumvented local content rules and the fact that the application processes involved no meaningful public participation, from all South Africans and especially from the disadvantaged, who will be impacted by the increasing electricity prices due to the effects of these powerships. The letter requested public consideration on the RMIPPPP, as Parliament was required to do to hold the executive accountable, because Parliament could not be fully informed on these matters.

The second letter, written by Bishop Geoff Davis of the Southern Africa Faith Communities’ Environment Institute (SAFCEI), indicated a hope that the Committee would consider what it and everyone’s responsibility is regarding energy. It stated that God required everyone to care for one another, and this is what Ubuntu requires, yet the pursuit of money is seen as the priority. Money should only be used as a tool to care for life. The question should be how to generate energy, which requires a consideration of what the most environmentally sustainable methods of electricity generation are, which will employ the most people, which is the least polluting, and which is the least expensive. South Africa is lagging behind in terms of renewable energy, which is unfortunate for investments and global warming, as evident by the fires in Australia, California, and currently, Cape Town. It was clear that gas was not a sustainable alternative, and thus Parliament should investigate the decision to grant preferred bidder status to Karpowership.

The Chairperson said that he saw these letters very late and thus he might have been accused of concealing the information from the Committee. Hence, he had requested the information to be shared even though it was not in line with the 24-hour time period. If the information was dealt with later, it would have disadvantaged the DMRE in its briefing. He believed that dealing with the letters first would benefit the Committee and the proceedings.

He asked Advocate Thabo Mokoena, Director-General (DG), DMRE, to brief the Committee. He said that Members would be allowed to discuss the correspondence during the allocated time.

DMRE presentation on the RMIPPPP
Adv Mokoena said that Mr Jacob Mbele, Deputy Director-General (DDG): Energy Programmes and Projects, DMRE, would deliver the RMIPPPP presentation. He said that the Minister had gazetted a determination on 7 July 2020, following concurrence by the National Energy Regulator of South Africa (NERSA). On 24 August, the DMRE issued the request for proposals (RFPs) for new generation capacity, namely the RMIPPPP. The bids closed on 22 December. On 18 March 2021, the DMRE announced the eight preferred bidders, who were successful subject to them complying with all the regulatory requirements, such as environment, safety, and licensing.

He said that any party which was unhappy with any part of the procurement process had the right to engage the relevant authorities. It was the call of the Committee. No contracts had been entered into with any of the preferred bidders. Contracting through the Power Purchase Agreement (PPA) with Eskom would only take place after financial close when the preferred bidders complied with all of the regulatory requirements. The DMRE could confirm that if anyone wanted to take the DMRE to task on the procurement process, the DMRE must be able to account for issues and respond to matters. Further, for these issues, there were due processes that were to be followed.

Mr Mbele took the Committee through the presentation on the status of the RMIPPPP. He indicated that the Integrated Resource Plan (IRP) of 2019 recognised that the supply and demand gap created by challenges with Eskom’s generation plant required an urgent procurement of additional capacity. Urgent procurement was distinct from emergency procurement, as urgent procurement related to urgency of bringing additional capacity online as soon as possible.

The IRP was promulgated in 2019, following a long process which started in 2015. It took so long partly due to extensive engagements which took place during its development, with there being no less than three public hearings during that time. Most of the issues raised in the letters were raised by the same organisations during that time and there were extensive discussions. The first public engagement was when the DMRE went through each province engaging on the assumptions that had to go into the IRP. The second was when the public was allowed to comment on the draft IRP. The third was when the then Portfolio Committee on Energy invited the public to a two-to-three-week parliamentary process. The fourth was when the DMRE took the IRP through the National Economic Development and Labour Council (NEDLAC) process. There had thus been extensive public discussions on the technologies and resources involved in the IRP, which included gas as a fuel needed to balance the system.

The DMRE had to balance the inputs and take into account the technical requirements, which it did in the final IRP. The DMRE published a table as an annexure indicating how the issues raised in each engagement was dealt with. The last opportunity for public engagement was when the Minister issued a determination to NERSA, with NERSA going through a process of considering all public inputs, including those of the organisations which signed the letters. The decisions regarding concurrence and the procurement of the additional technologies were recorded in the public domain. Hence, the issue of whether gas should be included was engaged and debated extensively. Given the current circumstances and capability, it was very clear that gas had to be part of the energy mix. When the RFPs were issued, it was made clear that the RMIPPPP had to align as much as possible with the IRP.

Following the IRP, due to the urgent need to procure additional power, with the understanding that traditional procurement of power took about 36 months for the additional power to be placed onto the grid, the DMRE issued a request for information (RFI) in November 2019 to gather information on what was available in the public domain that could be brought online as quickly as possible. The outcome of the RFI indicated that there were two types of opportunities available. The first was that there was capacity from existing facilities, whose the owners were willing to enter into three-to-five-year contracts. The reasons for the short-term contracts were that those facilities were utilising that capacity for other ventures, and some of the facilities that had been paid for were able to offer a price that was affordable. The second was projects being worked on by people in anticipation of Bid Window Five and the IRP, which were ready to be brought online in 12 to 18 months. But, as these were greenfield projects which would require significant capital outlay, they would require a long-term PPA, similar to what was done with the Renewable Energy Independent Power Producer Procurement (REIPPP) programme. Thus, through discussions with Eskom, it was determined that Eskom was able to pursue the short-term contracts, which resulted in it concluding a short-term PPA. The second programme that was developed was to target the capacity that could be brought online in 12 to 18 months requiring long-term PPAs. Hence, the DMRE initiated the RMIPPPP.

The intention of the RMIPPPP was to bring capacity online from projects in 12 to 18 months, not those that would have to be started from scratch and take 36 months or longer. This was the intention behind the urgent procurement of power.

High level status update of additional capacity interventions
Mr Mbele outlined four interventions presently in place to procure additional energy capacity:

First there was Eskom’s Short Term Power Procurement Programme (STPPP). Eskom had managed to get 128 megawatts (MW) from that process. It had since obtained the necessary approvals from National Treasury and was in the final stages of the process. Eskom was now waiting on the final approval from NERSA.

Second there was the procurement of available power from existing renewable energy Independent Power Producers (IPPs), it was discovered that more than 200 MW could be harnessed from the various projects. Eskom had expressed interest in pursuing this additional capacity, and the DMRE therefore undertook internal approval processes. National Treasury’s approval of the variation of the contracts with the existing facilities was being waited upon. The next step would be to make offers to these IPPs.

The third project was the RMIPPPP – which was to be explained in detail next.

Fourthly there was the implementation of the rest of the IRP, beginning with the rollout of 11 831 MW as per the section 34 determination. So far, an RFP was issued on 12 April 2021 for 2 600 MW from renewable energy, as per Bid Window Five, which would generally follow the same requirements as the RMIPPPP, in that they would be long-term, 20-year PPAs. Additional RFPs will be issued for renewable energy, battery storage, coal, and gas. This was in line with the IRP, and the determination underwent public consultation before NERSA concurred with the procurement of these technologies.

RMIPPPP in detail
Mr Mbele said the Minister gazetted a determination on 7 July 2020 for the DMRE to procure 2 000 MW. This was done with the objective of procuring additional capacity from a range of technologies, in order to not limit where the energy was sourced from to be able to address the capacity supply gap due to the challenges of Eskom, and reduce the extensive utilisation of diesel-based peaking generators in the immediate-to-long-term, as this practice puts a great burden on Eskom.

The IPP Office was established in about 2010 to deal with the complexities of the procurement process. The DMRE mandated the IPP Office to develop the RFP for New Generation Capacity and assist with the evaluation of the bids that were submitted. The IPP Office appointed a team of transaction advisors on a project basis to complete these two tasks. The companies used were grouped into financial, economic development, technical, and legal advisors. This was an independent process, because generally the assessment was done by an independent team of advisors.

Outcome of the RMIPPPP
28 bid responses were received, with 17 deemed to meet the functional criteria and minimum threshold requirements. 11 projects were thereafter deemed eligible for recommendation. This was in line with the requirements that the projects had to meet the technical specifications, provide value for money, and were expected to contribute to economic development. Eight were finally announced on 18 March 2021 as preferred bids totalling 1 845 MW. A further three eligible bids were announced totalling 150 MW, but these were subject to a value for money proposition in line with the RFP, as the prices which they offered were slightly abnormal.  The project had sourced 1 995 MW out of the 2 000 MW proposed. As the determination prescribed only 2 000 MW, and the next possible project would have totalled more than 5 MW, there had to be a shortage of capacity.

The weighted average cost from the programme would sit at about R1.50 per kilowatt per hour. The average cost was weighted as each project did not contribute the same amount of energy to the grid. There were three projects in the Northern Cape, two in the Western Cape, three in the Eastern Cape, and one in KwaZulu-Natal. Umoyilanga Energy, for example, combined solar photovoltaic (PV), battery storage, liquified petroleum (LP) gas and wind technologies. This is so because the bids did not specify the technology to be used. Eskom had defined certain requirements based on its expertise that these facilities would have to meet to assist with the energy problem. Hence, all of the projects, bar Karpowership, had a combination of technologies.

In terms of the overall investment benefits from the RMIPPPP, based on the current 1845 MW, about R45 bn worth of investments will be attracted. These projects had committed about 50% local content. Local content was calculated as a percentage of total project value, which was calculated taking into consideration certain excluded amounts, such as banking and lease costs. Thus, the site where the project operates was not included in the calculation for local content. Further, for calculation, items were designated by the Department of Trade, Industry and Competition (DTIC). If a component was designated by the DTIC, and a producer could not obtain that component locally, there was a process to be followed with the DTIC for it to exempt that project. In terms of Karpowership, the big issue is around the leasing of the ships. As part of Oceans Operation Phakisa, shipbuilding was a designated activity. Hence, the bidders approached the DTIC, which then decided to exempt the ships from the local content requirement. Additionally, it was indicated that the exemption was subject to the ships being maintained and overhauled in South Africa.

The second point raised regarding Karpowership, is that the equipment on the ships, including the gas turbines, were not locally manufactured. The problem was that in South Africa, there was not a big gas to power industry. This was something that was hoped to be kickstarted. But currently, there was no local content for this component, and as it would take time to develop a local industry, it was not possible for producers to make the capacity available to manufacture the equipment and still produce energy in 12 to 18 months.

Another requirement for the programme was that of the minimum requirement for South African entity and black South African participation. The projects must have a minimum of 49% South African entity participation and 30% black South African participation. Currently, of the eight preferred bidders 53% of the projects had South African entity participation and about 41% black South African participation.

The other benefit of the RMIPPPP is job creation. About 71 000 jobs were to be created, which meant that 71 000 people would be employed for one year. This included jobs during construction. Further, there was an estimated R1.5 bn from these projects that would go towards socio-economic and enterprise skills benefits.

Key features of the RMIPPPP
The technical requirements for how the power should be generated was provided by Eskom, not the DMRE. Eskom allowed for companies to put together solutions providing for dispatchable and non-dispatchable facilities. Non-dispatchable facilities pertain to renewable energy, namely solar PV and wind, which cannot be utilised whenever it is needed, it was dependent on the weather. The System Operator, Eskom, allowed for this flexibility, as it needed to ensure that if problems arose, there would be contingencies. Normally when Eskom has load shedding, the public is informed about an hour in advance, due to something happening that was out of Eskom’s control. When that happens, Eskom has no capacity to close that gap.

These plants guaranteed a minimum of 50% dispatch per year, hence Eskom wanted to be able to access the other 50% when problems occurred. This was where battery storage and gas assisted, as these technologies were stored energy which could be used whenever necessary.

There were issues raised that the cheapest solution would have been for entities to deploy battery storage which would be charged from the system. Currently, Eskom’s capacity was unable to meet the system demand, hence this proposed solution would only place further burden on Eskom. When Eskom does load shedding at night it was largely due to the need to use the power to pump water up the pump storage. Hence, for this idea to work the batteries would have to be charged by those entities and not Eskom.

The tariff was all-inclusive. The 20-year PPAs were also used for renewable energy. These tenures enabled investors to recover capital that was employed and the operating costs at a rate and pace that was affordable to the buyer and the end-user, which was Eskom. For example, when buying a house, many take out a long-term bond, as this would be more affordable than a short-term bond. The same principle applied here. If the preferred bidders were asked to provide a tariff on a five-year PPA, it could confidently be said that those prices would be about four or five times greater than what had been offered.

Price
The evaluation price was a weighted price, made up of 95% for capacity availability and energy output, and five percent for ancillary services. The programme was intended to enable Eskom to call on these producers when necessary, and there was a requirement for Eskom for system stability. The PPAs provided for penalties for plant unavailability.

Fuel
In terms of the technologies utilising gas, the process followed for determining and managing the price was in line with the Gas Act No 48 of 2001, and regulated by the Regulator. The regulatory clearance account (RCA) was a mechanism which managed the fluctuation of Eskom’s costs. The adjustment was made annually by the Regulator under the RCA, for gas and diesel. Looking at the volume of energy from gas, it was about five percent of the total mix, so the likelihood of significant movement in the tariff was minimal and not necessarily true. For the preferred bidders using gas, NERSA will approve the maximum price after the bidders lodge applications for gas trading licences.

Next steps
The preferred bidders had to reject or accept going to the next stage. To prevent undermining of the process by uncommitted entities, a non-refundable fee of R25 000 per MW had to be paid to accept preferred bidder status. Further, a preferred bidder guarantee of R200 000 per MW had to be provided. The bidders were required to reach financial close by no later than July 2021. There were several activities that the preferred bidders had to complete, most of which were their responsibility, including obtaining the necessary final environmental authorisations, regulatory approvals and permits from the relevant authorities, such as the Transnet National Ports Authority, the South African Maritime Safety Authority, and the Regulator. The RFP was very specific on the requirements to be met before signing of the contract. The contracts will only be signed after financial close.

In conclusion, Mr Mbele said the 20-year PPAs enabled the obtaining of a lower cost per unit of electricity from greenfield projects, and this was a requirement applicable to all bidders. The solutions used by the preferred bidders were aligned with the long-term vision of the IRP 2019. The RMIPPPP process and outcome was transparent, open, and fair.

Adv Mokoena emphasised that the primary objective of the RMIPPPP was to ensure the alleviation of challenges of electricity supply the country was currently faced with and reduce the extensive utilisation of diesel-based peaking generators in the medium-to-long-term. This included the work being done on other programmes and bid windows. The DMRE was responding to the call for the security of the energy supply.  

Discussion
Mr K Mileham (DA) believed that it was very important that Parliament gave due consideration to the various civil society bodies. Hence, he said it was worthwhile for the Committee to hear the concerns of those bodies and what they had to say. Maybe the Committee could have a meeting with those bodies on this matter?

He was very concerned that Adv Mokoena was so dismissive of public hearings. It was not for him to tell Parliament how to conduct its business and who it should listen to. He believed that was unacceptable and hoped the Chairperson would call Adv Mokoena to order for that. He asked if Adv Mokoena could advise the Members if he played any part in the decision-making process to select the successful bidders. Did he think it was appropriate for him to be part of the decision-making process given he was a director and shareholder in a company which had directors from subsidiaries of Karpowership? Had Adv Mokoena received any compensation for assisting, or consulting on, or facilitating Karpowerships’ bid?

In December 2019, President Ramaphosa used the RMIPPPP as an example of the emergency procurement that would take place, and he then spoke about it at the State of the Nation Address (SONA) 2020. The Minister then backed this up last year. Did this not imply that the process would be undertaken speedily? So, it seemed clear that there was a distinct lack of urgency on the part of the DMRE. Why was Bid Window Five not opened last year?

What was the likelihood that each of the eight bidders would be able to meet financial closure by the end of July, particularly in light of the regulatory approvals and permits? What environmental assessments had been undertaken, and at what stage was that process? It was understood that Transnet had yet to be approached to provide a permit for the powerships, so how would the powerships intend to obtain these permits when consultation had not yet begun with Transnet and Portnet? Have any of the projects applied to NERSA for generation permits, and if so at what stage was that process? It was well-known that that process took a long time. What was the likelihood of NERSA permits being issued by the end of July?

What happens if the eight bidders do not get the requisite approvals and permits in time? Was it true that there was an exclusion zone around each powership that other people and vessels were not allowed into? If so, what was the radius of that zone and how would it impact the operations in the harbour? Who bore the responsibility and financial liability for any delays to other shippers arising from fuel transfers in the harbour that would prevent other shippers from off-loading, or for any accidents or incidents which may occur, such as the explosion in the Beirut harbour? All of the other bidders had built storage or a back-up supply into their projects, so why would the powerships, which was essentially a dirty solution, that emitted about 20 m tons [of CO2e (carbon dioxide equivalent)] per ship over the 20-year period, being preferred to the renewable solutions which were far cleaner?

Instead of a fixed or predictable tariff for electricity which the other bidders provided, the powerships were dependent on the cost of liquified natural gas (LNG) and the exchange rate which would result in fluctuating increases over the 20 years. The wholesale price was already more than double the reference prices used in the RMIPPPP bids. How could it possibly be preferable to go for a solution that was so unpredictable and uncontrollable?

Mr S Kula (ANC) said that he did not agree with the notion that when approaches were different, people had to chastise one another. One could not take every little difference to a public hearing. He did not believe that it was dismissive of the concerns raised by organisations. The Committee had to agree that the country was having serious electricity challenges, and the RMIPPPP was intended to alleviate these concerns. While there might be misgivings of the programme, it was much needed to provide solutions for the current issues.

He asked why it took so long for the RMIPPPP to be initiated. What happened when the preferred bidders failed to meet the requirements that were set? Some Members supported the programme as it was aimed at closing the supply gap resulting in periodic blackouts, which were stunting socio-economic growth. Hence, the RMIPPPP had to be supported.

According to the Council for Scientific and Industrial Research (CSIR), the RMIPPPP would cost more than R10.9 bn annually. Could the DMRE confirm this estimate? Powership programmes had proven effective for supplying emergency power in the past, but generally the time period for these programmes were ten years. What does the procurement of the powerships for 20 years say about the power situation in the country? Further, what does the decline in the price of renewable energy say about the long-term planning of the country? He understood that Karpowership undertook the same process in Lebanon, wherein it supplied 440 MW for nine years. Why would the same project take a period of 20 years?

Ms P Madokwe (EFF) asked about the regulations that had been amended in terms of how municipalities can procure power from IPP’s. She understood that this process was specifically on bidding, but if there was a process where IPP’s were part of the programme and municipalities were given the power to procure power directly, currently, IPP’s were supplying power to municipalities, and the general public was complaining that the IPP’s were expensive, unreliable, and did not provide free electricity. In the new regulations and the contracts with these bidders, were these issues taken into consideration?

She asked why the projection for the Karpowership project was 20 years if the project was for emergency purposes. There were other companies which had created these powerships, so had the DMRE tried to investigate if other countries had powerships that would compete with Karpowership? Were any of these countries African? Had the DMRE approached institutions of higher learning, in line with its partnership with the Department of Higher Education, to investigate the research papers written by the post-graduate students involved? Was there an effort of the DMRE to liaise with these institutions to determine if there was any research which could assist the current situation?

What was the projected cost of the 20-year projects, as these costs will be incurred by future Parliaments and citizens? The DMRE had announced the successful bidders, which created the impression that everything was in order, but the reality was that there was still work to be done before the RMIPPPP could properly be implemented. What was the likelihood of these producers meeting the requirements in place? It was not right to merely dismiss the content of the letters on the basis of this being a procurement process. Environmental impact assessments were required to be done, and they had to be a crucial factor for the selection of the projects, and required public participation. If the government did not look into renewable energy, the current air quality in Cape Town due to the fire would become the lived reality for the country.

She did not understand how the DMRE could only consider projected multiple one-year jobs instead of sustainable jobs. What clauses existed in the contracts to hold the producers liable for failure to deliver? How is it that the country was still investing in fuel-based technologies, with the current uncertainty around these technologies? What guarantee was there that there would be a supply of the fuel to drive these technologies?

Ms V Malinga (ANC) said that she would like to believe that all of the consultations were done for the RMIPPPP processes, given that NEDLAC was mentioned. She wanted to know if Eskom was ready for the mix of additional capacity, given its current state. The second letter mentioned God’s mandate that the people utilise the natural resources effectively. She did not believe that the DMRE was going about accessing what the Earth had to offer to power society properly. She hoped that the successful bidders will be intensely monitored by the DMRE. It was not correct for the bidders to check their own compliance with the requirements and regulations, there had to be a supervising and monitoring entity.

Mr J Lorimer (DA) also was concerned with the reluctance of Adv Mokoena to have public participation in the process of signing the 20-year contract with Karpowership. The government did not have a good record with huge energy acquisition projects. If the Karpowership deal was as good as the DMRE was claiming, it should stand up to public scrutiny. The over-reliance on diesel had been spoken about for ten years, so why was the need for gas only a matter of urgency now? One wonders if that had to do with who was involved with diesel procurement.

It was said that the spiking gas prices would not affect the overall price as it was only a small part of the mix. He did not believe that was the case. Adv Mokoena had a conflict of interest with regard to the Karpowership deal. How much of the process was political and how much was administrative? Which of the DMRE’s political principals were involved in the decision-making process? What value were the local partners adding? Did the price of electricity increase or decrease due to local participation? The 20-year contracts were not the same as buying a house with a bond, because at the end of paying off the bond one owns the house. The contracts with the IPPs were lease deals. When the 20 years is done, the Karpowership ships will sail away. It was very important to see what other countries were paying. Karpowership was servicing some of the poorest countries in the world, so it was difficult to believe that its prices were expensive.

Mr M Wolmarans (ANC) asked whether WSP Group Africa (Pty) Ltd, Amandla Engineering, and Webber Wentzel had a joint venture with the DMRE, as they were involved as RFP and bids evaluations transaction advisors. What the criteria was used for selecting those advisors? Why was Gauteng excluded from the area where the projects were taking place? Four provinces were also excluded in terms of where the projects were situated. What was the impact of this on job creation in these provinces? How will the DMRE handle the issues of province-to-province exclusion? What was impact on Small Medium and Micro Enterprise development where those projects were not done?

He asked where nuclear power fitted into the RMIPPPP. He noted that there would be environmental impact assessments and management plans. But what were the rehabilitation plans and had they been part of the considerations in the programme? Could the DMRE explain the dynamic of the eight preferred bidders versus the 11 bidders, and whether the other three bidders which were ‘ringfenced’ will come on board at a later stage?

Mr T Langa (EFF) had two clarity-seeking questions. Firstly, on the process, he asked if there were any specific reasons for why WSP Group Africa (Pty) Ltd, Amandla Engineering, and Webber Wentzel were allowed to work as transaction advisors on both RFP and bids evaluation processes. He was concerned about undue influence in this regard. Secondly, on the tenure, what happened if the appointed service provider failed to deliver within the prescribed period? Should the DMRE not initially contract on a shorter period and then extend the deal in light of the producer’s delivery?

Mr M Mahlaule (ANC) warned that two issues as they pertained to the letters had to be separated. These were the raising of genuine concerns of the public and lobbying the Committee. The public announcement of the eight preferred bidders happened a month ago, yet the letters were received right before this meeting. He asked if there was an ulterior motive to push the Committee to a particular decision or was there a genuine reason. If the intention was genuine, the available channels should have been followed immediately after the decisions were made to request a specific meeting.

He did not think it was proper for the Committee to mediate around procurement processes which was not within its purview. Certain provinces were not touched by the RMIPPPP. It was the reality that local content was differently interpreted. It could pertain to within a province or region, or it could pertain to the whole country. For example, people from Mossel Bay thought that the Petroleum Oil and Gas Corporation of South Africa (PetroSA) was a regional company when it was actually a national company. Does local content differ for international and South African companies? Further explanation was needed.

Did the DMRE agree that solar and wind energy were not entirely reliable sources of energy in the entire mix, in light of the non-dispatchable facilities being given a 50% chance of generation per year? One could not alleviate load shedding if the proposed solutions only have a 50% chance of generation.

Prof C Msimang (IFP) said that it was concerning that there were no contracts in the Free State, Limpopo, Mpumalanga, and the North West. He wondered what criteria was used for the selection and situation of these projects. Many economic activities happened away from the Northern Cape, so why were three projects located there? Was the arrangement of these projects temporary or permanent, as there were both five year and 20-year contracts? This was concerning. Were eight bidders enough to alleviate the load shedding concerns, especially in light of the possibility of the producers walking away from the programme?

He said that the media had flooded the Committee with complaints that the public was not consulted when Eskom was considered, so the question now was whether the relevant stakeholders had been consulted for the RMIPPPP, especially the Congress of South Africa Trade Unions (COSATU).

Responses
Adv Mokoena handed over to Mr Mbele and the team to respond before he wrapped up the responses.

Mr Mbele said that Mr Bernard Magoro, Head, IPP Office, was in the meeting to respond as well. On the pronouncement of President and the alleged lack of urgency, putting together a project of this nature involved many stakeholders, with Eskom being key to this programme, as they were the buyer of what was procured. Hence, much time was spent in discussions with Eskom, as its challenges had changed since the last procurement process was undertaken. Thus, adjustments had to be made to the technical and operational requirements. The RFP could not be issued before concurrence to the determination by the Regulator, which was only done in May 2020. Thereafter, the process of finalising the engagements concluded in July and the RFP was issued in August. As the bidders had to have enough time, the initial closing date for bids in November was extended to 22 December.

There was a sense of urgency on the part of the DMRE, but the stakeholders had to be engaged to implement the programme. This was similar to Bid Window Five, wherein the initial announcement in anticipation of exemptions being granted was delayed due to issues being raised. Hence, the process was not dependent only on the DMRE.

There were regulatory processes that the parties had to undertake in order to meet the requirements of the RFP. The programme was thus dependent on authorisations from those parties. Engagements with the authorities were ongoing, but those were independent processes, and the outcome was dependent on the bidders meeting the requirements. Hence, the risk of compliance was solely on the bidders.

Bidders were subject to penalties for not reaching financial close by the due date and there was pressure on them to ensure that the projects were done to the extent to which they committed. Part of the bidders accepting their status was the provision of the guarantee and the non-refundable fee. Discussions on the use of the harbours were ongoing with the South African Maritime Safety Authority and the entities were engaging with it. Authorisations will have to be obtained by the bidders to operate around the ports.

On the cost of LNG and its supposed preference to the renewable projects, Mr Mbele said renewable energy was considered to be non-dispatchable, as one cannot switch that power source on and off to manage system. This was different for other technologies, such as gas. Thus, normally for the dispatchable plants, there had to be a minimum dispatch running time to operate. The current arrangement was that the gas plants minimum dispatch was guaranteed at 50% in year. The other 50% will be decided by Eskom as needed, considering the cheapest option available.

On the comparison with projects elsewhere, the price paid was linked to the volume taken. If gas was taken at peaking, hence, taken for short time at about 6%, the investor will try to recoup capital by including this in the price. This was why the diesel rate would be slightly expensive. Eskom deployed those generators between 05:00 and 09:00. Other countries run them for 24 hours, which increases the price.

There were penalties for failure to meet the deadlines that were made clear prior to bidding, through the specifications. The 20-year PPAs were done due to affordability. Here there was an open bidding process. The procurement process did not allow picking and choosing, thus every producer which satisfied the requirements that were disclosed at the start of the process had to be selected. The RFP was put together on the basis that every producer would be assessed uniformly.

On long-term planning, the RFP was done in line with what was identified in the IRP to resolve the issues going forward. The energy procured in the programme was in line with the IRP. Nuclear energy projects take much longer than 12 to 18 months. The IRP provides that these facilities must be developed. But none were available for urgent procurement nor bid for the RMIPPPP.

On the municipalities, the RMIPPPP provided that the buyer was Eskom. Eskom, in terms of its applications for tariffs to the Regulator, considered the implications of the tariffs on poor. Hence there was free basic electricity and the income-blocked tariff required by distributors.

The RMIPPP was not about procuring emergency power, but rather the urgent procurement of power. Emergency power was short term, which was a process that Eskom undertook. The RMIPPPP was meant to unlock a longer term solution and arrangement.

Post-graduate student research and academic research papers on the electricity challenges and solutions were looked at through some of the DMRE’s international partners and Eskom,

On who bore the cost, the user paid. There was no money from the fiscus going into the procurement process. The bidders will not be paid for anything. They would only be paid for energy produced, thus if no energy is produced, no money would be paid to them.

On the prematurity of the announcement, it was not. It was part of the two stage process, as was done for renewable energy IPPs. The announcement had to be made early to allow four months for the bidders to do what they have to do.

On Eskom’s’ readiness, part of the initial stages of the process was spent in engagement with Eskom, which had sight of the IRP and had to approve the PPAs. Hence, Eskom was ready as it was part of the process. But Eskom was not involved in deciding which bidders were successful. Communication was sent to Eskom regarding the confirmation of the preferred bidders.

On the prudence of a public process for the signing of the contracts, no contracts were signed as of yet. There were a number of environmental issues raised in the letters. The environmental process did provide for public input and thus would provide the appropriate platform. One would hope the Department of Environmental Affairs would allow for public participation in those instances and consider these inputs.

On the timeline and current urgency of gas, diesel was now an urgent matter due to load shedding. Eskom was clear in saying that it did not see itself getting out of the challenges soon.

The process of procurement was an administrative process. It started at the IPP office, then came to the DMRE as part of the supply chain processes, and thereafter the applications were approved by the Director-General.

Mr Mbele said that Mr Magoro would explain further on the transaction advisors. But, over the course of the IPP projects, starting with renewable energy, the DMRE decided that it could not have the same big companies providing advisory services. Hence, the DMRE decided to introduce local players, and in order to allow these emerging companies to obtain the necessary skills, they were paired with the big companies. The fruits of this practice could be seen, for example, with the Tick and Mend company being able to operate alone in its capacity as governance transaction advisor. This was not a joint venture, but it was a deliberate pairing.

There was a requirement on the bidders to provide for rehabilitation programmes and plans as part of their projects. On the process for the other three bidders, the provision in the RFP was to benchmark and look at the costs put forward by them. These three bidders offered slightly abnormal costs. Engagements had occurred, and the team at the IPP Office was almost done in this regard, and hence an announcement should be made soon.

There were penalties if the service provider was connected and operating, but unable to meet Eskom’s request at that particular time.  

The location of the projects was not a requirement as what was needed was availability. As the Eskom grid became more constrained, projects were looking at other provinces. Solar PV projects all wanted to go to the Northern Cape as resources were very good there and thus the outputs would be about 30% better than elsewhere. But, due to the limitation of the grid in the Northern Cape, projects were coming up in the other provinces. As part of the just energy transition and what would happen in Mpumalanga, there was a discussion about redirecting some of the projects to locations with available grid capacity.

On the concern of having only eight preferred bidders, the evaluation process was a two stage process. The first stage was whether the bidders met the minimum requirements. The second stage was where the consideration of price and issues of economic developments kicked in. Only 11 bidders came within the 2000 MW, so the capacity that was intended to be procured for was effectively all taken up.

Mr Magoro said that the process undertaken was in line with the Preferential Procurement Policy Framework Act No 5 of 2000, the regulations and the Constitution. It was a fair, open, transparent, and equitable process. The IPP Office had received confirmation to undertake the process from the DMRE, and thereafter all the processes were done in the IPP Office. The IPP Office only went back to the DMRE for certain authorisations. Hence, the final outcome given to the DMRE was the product of the IPP Office process.

The appointment of the transaction advisors was done by the IPP Office and the Development Bank of South Africa (DBSA). The RFP and evaluation processes were all monitored closely by the IPP Office with the assistance of the advisors. The IPP Office was in constant discussion with all the entities involved in the authorisations. So far, it had not been made aware of any risk of not meeting financial close. Workshops had been held to ensure all of the processes for port permits were finalised.

On the decline in the renewable energy price, this was correct. However, there were limitations, thus the programme structured as dispatchable. There were issues with standalone renewable projects, thus the projects were combined with non-renewable projects to ensure the effective operation of the grid. He said that Members would remember the challenges of California and Texas where there were limitations of deploying only one technology. From an engineering perspective, there was no one technology which could resolve the country’s energy issues.

On the appointment of the transaction advisors, a deliberate decision was made to pair the companies. 30% of the work was sub-contracted to the emerging panels. There had been a drop in the prices by creating this competition. Hence, the cost of running the RMIPPPP from a procurement perspective was the cheapest of any programme run by the IPP Office. The benefits of this process could already be seen.

On the rehabilitation plans, each project was required as per the PPAs, to have a Rehabilitation Trust for the duration of the 20 years. Every year the producers would have to report to the IPP Office, and audits would be done as to the status of the Trust. This was introduced for the RMIPPPP and found its way to Bid Window Five.

On the related question of the transaction advisors working on both processes, there was no requirement to separate the processes in terms of the companies working on them. A decision was taken to enable more parties to be involved to separate the activities. This had worked well, and money was saved. This procedure will be continued in the future. The companies that appear for both activities were successful as advisors.

Local content was defined as utilising South African products, both in terms of construction periods, and operation and maintenance. The DTIC, with National Treasury, designated regions and components which meant that some products could only be produced locally, and were thus excluded from price. If a bidder received an exemption on a certain product, that exemption would be applicable to all of the other bidders. The minimum local content threshold of 40% was calculated by excluding the exempted products in terms of the DTIC and National Treasury, and then by calculating the total value. From there, the amount left, one must look at how much of that will be spent locally. That amount spent had to exceed 40%.

Adv Mokoena said that there was no political involvement in the procurement process, as required by the law. He clarified that the director of that entity [mentioned by Members] has the same name as him, but it was not him. He explained that in the government, interest had to be disclosed annually, if one serves as a director or shareholder of any company. That exercise had been done, and the information was available for public consumption. There were also regulations governing the public service which prohibited public servants from conducting business with the government or any organ of state. Eskom is an organ of state as per section 239 of the Constitution. If anyone is found to do business in government, that constitutes criminal conduct. He asked how he could be less considerate of those instruments.

His involvement in the procurement process was only to act as the final point of approval. Information could be requested if there were any concerns about a lack of transparency. The DMRE welcomed questions and comments. It understood the Committee’s role as well as its own.

The Chairperson said that the meeting was supposed to be closing soon. A new approach had been developed, that issues had to be deliberated on when Member’s views were necessary. He suggested that, as the Committee had to adopt the minutes of the prior Committee meeting, this discussion regarding the letters be included. When this issue came in, it was seen as a rapid response exercise, as it was thought that, by the time the Member’s views were expressed in the normal course of the Committee’s programme, too much time would have passed. Hence, if the letters were deemed a matter of urgent intervention, it could not be that it was only dealt with when another normal meeting was scheduled.

Whilst the DMRE report was good, it missed something that was concerning to the Members, as certain things were not clarified. For example, when Mr Mbele made a submission, the Members may have been left with the impression of uncertainty regarding whether environmental authorisations were conducted. This had to be explained with certainty, so that the Committee could identify with which Portfolio Committee the matter fell to be discussed and thus act within its purview. The report was not explicit enough.

If the programme was for the short-term, how could it be justified that certain projects were short-term, others were subject to renewal and others were long-term? This would remain an issue that had to be taken up. The process was one of implementation in relation to existing policy, but there were disputes over the nature of the process. What recourses were available and how were those involved in the process differentiated?

The Members should not be shy about disagreements of interpretations of the IRP. But the Committee must unite on the point on the point of whether there was an over-emphasis on what a government policy was and what recourse there was. He wished to avoid a situation where the basis of a disagreement was ignored, and the issues were labelled as having other motives.

He said that it would have been nice of Adv Mokoena to explain how the procurement process and the bids worked in detail, particularly with regard to the cost of the programme, as this programme was costing about R280 bn. If clarity was provided, the public perception of the process would improve. There was nothing in the presentation that would assist in enlightening the public.

What would happen if there was a disagreement that led to a stalemate and the producer walked away? He said he would appreciate a more detailed explanation of the operation of these processes. The Committee could not be given a speculative and subjective explanation.

He asked if this issue could be carried over to Wednesday 28 April to be dealt with together with the presentation on the basic fuel price and the state of the refineries. He asked if there was agreement so that the minutes could be adopted.

Mr Mileham said that a few of his questions were not answered. He thanked Adv Mokoena for clarifying that he was not a director of the entity and apologised for implying that the Director-General was involved in that enterprise. He did not receive a response on the exclusion zones in harbours and the impact on shipping operations.

The Chairperson asked Adv Mokoena to respond to these questions in writing. If they were not answered, he committed that the next meeting would start with a response to that question.

The Committee Secretary said that the minutes had not been sent to the Members.

The Chairperson said that the meeting the following week would start with the adoption of the minutes. He asked if everyone agreed. He said that there was a Bill which had reached Parliament and had not yet been referred to the Committee. Depending on when the Bill is referred, the Committee’s programme may be adjusted to deal with that matter, thus, the Committee may have an extremely tough task when coming back from recess, but the Bill may be provided by next week.

He thanked everyone and asked for a consensus on if the meeting could be adjourned until the following week.

The meeting was adjourned.