Central Energy Fund and Department of Energy Annual Reports 2008/09

Meeting report

Central Energy Fund (CEF) Annual Report 2008/09
Mr Mputumi Damane, Chief Executive Officer, Central Energy Fund noted that without sufficient, appropriate and affordable energy a modern economy could not function. In recognition that the wastes from fossil fuels contributed to global climate change, a move to renewable and cleaner energy sources was an imperative that could no longer be ignored. Despite this fossil fuels would continue to play a critical role in energizing the South African economy. Central Energy Fund (CEF) played an active role in helping the country's energy industry develop in both fossil fuels and in renewables.

He outlined the CEF Group structure. This included the Energy Development Corporation (EDC), the South African Supplier Development Agency (SASDA), South African Fossils Fuels (SFF), the South African Agency for Promotion of Petroleum Exploration and Exploration (Petroleum Agency SA), the South African National Energy Research Institute (SANRI), the Petroleum Oil and Gas Corporation of South Africa (Pty) Ltd (PetroSA), the Oil Pollution Control Centre (OPC), active at Saldanha Bay and Cape Town but not Durban, the Central Energy Fund (CEF), the Carbon Energy Fund (CEFCARBON), the African Exploration Mining and Finance Corporation (African Exploration), IGAS (gas from Mozambique) and the ETA ENERGY (Energy Efficiency).

CEF operations fell under renewable energy operations, conventional fossil fuels and cross cutting energy related issues. Under EDC, there was a division between commercial projects and developmental projects, in line with the decision in 2003 that it would not only concentrate on pure commercially profitable operations.

The Chairperson intervened to ask Mr Damane to be rather more specific in his presentation.

Mr Damane noted that under ETA there was the question of the introduction of solar water heaters, which had been the subject of both a feasibility study and an environment impact assessment (EIA). He noted that the  installation of 100 0000 solar water heaters could lead to the saving of 300 0000 kilowatt hours, since geysers consumed 40% of all residential household electricity. However, this would require an inventive funding mechanism to persuade the consumers to switch. There had been publicity campaigns and it was hoped that  as many as 40 000 users would adapt to solar water heaters. He added that there was also a safe paraffin appliance campaign, mainly operative in KwaZulu Natal (KZN). At Ogies, with the land fill gas programme there was a pumping operation designed to pump out the water mixed in the stored oil fuel. The conventional energy activities were undertaken by SFF, OPCSA, iGAS, African Exploration PASA and Petrosa. The level of strategic oil stocks had been maintained, the environmental responsibilities and liabilities had been managed without incident, gas capacity had been expanded through investment in compressors, CEF had well established plans to exploit the coal reserves, and had managed petroleum licensing.

Cross cutting issues were under the wing of Saneri, National Energy Efficiency Agency (NEEA), the Supplier Development Agency (SASDA) and Carbon business. He added that at this time the USA was the world leader in this activity, but CEF had 20 PhD students in training. NEEA was centred in London, England where 35 emission programmes were under investigation and assessment. With regard to carbon emissions, the certification of compliance was costly and difficult, at about 30 000 euros per team. With SASDA there were break even balancing companies and Memorandums of Understanding had been arrived at, and signed, with several commercial companies. CEF was committed to setting aside business growth areas. However, he stressed that it was not the quantity of payment but the sustainability of the operations that was important, especially the breaking down the barriers for entry into the energy industry through SASDA. Even so, he was pleased to point out that CEF was generating income, and in the year under review had made a profit of R2 billion. The unqualified balance sheet showed R16 billion cash in hand.

PetroSA report
Mr Sipho Mkhize, Chief Executive Officer, PetroSA presented his report on PetroSA. He stated that the world wide financial situation had presented PetroSA with challenges, not least of which was that the year under review had consisted of two almost equally divided halves, the first being a good half and the second a challenging environment. Nevertheless, PetroSA had been profitable, with record revenues of R12.1 billion, an increase of 18% on the previous years. As a result PetroSA had paid a dividend of R725 million to its shareholders. However, challenges remained, including the finding of a long-term sustainable solution for a gas supply to Mossel Bay refinery. Deposits around the coasts were being explored, and the importation of Liquid Natural Gas (LNG), especially from Egypt and Equatorial Guinea, was being pursued. In addition, there was prospecting for gas supplies in Sudan, Equatorial Guinea and Gabon, with the costs associated with such exploration being non-recurring costs. There was concentration on containing the day to day costs of the operations.

PetroSA had a liquid cash reserve of R16 billion which was destined for the Coega Refinery once the final decisions had been taken, .The Mthombo Refinery Project had progressed well, the feasibility studies had been initiated, and more detailed technical studies would begin in early 2010. Petrosa had achieved Black Economic Empowerment (BEE) procurement expenditure of R1.1 billion, or 41% of total procurement spend. It had exceeded the Industry Charter prescription of 25%. PetroSA itself had achieved a level 2 BBBEE contributor status, which was just 1 level below the maximum attainable status. In addition, PetroSA had been awarded a BEE facilitator status for the acquisition of downstream assets by the Department of Trade and Industry (dti). PetroSA continued to develop skills across the board and empower women. In the year under review 280 artisans had been trained at the Mossel Bay Centre of Excellence, some of whom were currently engaged in the Shutdown, 50 bursaries had been awarded for university study across the country and PetroSA had sponsored Masters Programmes in Geophysics, B Techs in Chemical Engineering and Leadership in Oil and Energy studies for women. It was envisaged that the changes to the Refinery at Mossel Bay would create 30 000 jobs, of which 10 000 would be artisan jobs, and approximately 16 000 permanent jobs after conclusion of the construction phase. In addition there was a strong revenue growth of 18% but unfortunately the cost of sales was also increasing to 24%

With regard to Corporate Social Initiatives, (CSI), R50 million had been spent in the year under review and a school at Nqadu Village in Eastern Cape had been built from scratch for R13 million. R9 million had been committed to the University of Johannesburg to build academic capacity for previously disadvantaged persons at Ph D level. He concluded that despite fairly high operating costs the profitability of PetroSA was assured. Challenges were the impact on the poor of the end user prices, the skills challenge and the unfavourable rate of the rand / dollar exchange.

Mr Damane said that the effect of the recession or financial downturn could not be emphasised enough.

Discussion
Mr S Radebe (ANC) asked whether the Financial Report could be broken down into a pre- and post-rescission report, so that the Portfolio Committee could better follow the figures referred to, especially as the Annual Financial Statements for the CEF Group of Companies were very complex and difficult to follow.

Mr Radebe was especially interested to hear more about in the plans to favour women, the youth and the disabled.

Mr Radebe was concerned about the environmental impact aspect of the activities of the CEF Group of companies.

Ms F Mathibela (ANC) expressed concern about the absence of piped water schemes, reminding all present that in the rural areas women have to walk long distances to fetch water that was often impure. In addition, she expressed the opinion that the rural areas were most in need of the upskilling of the people, through the introduction of new and better skills. She wished to know how many of the 40 PhD students receiving assistance with their studies actually came for the rural areas.

Mr S Motau (DA) congratulated PetroSA on seemingly doing well, but he expressed concern about what was happening in the research and development area.

Mr Motau also stated that the skills shortage was impacting severely and deleteriously upon the small pool of available talent. He conceded that there was a large pool of unemployed, but he wondered whether they had the skills and initiative to take advantage of the upskilling programmes offered and whether the publicity about upskilling programmes was not creating unjustified expectations. He suggested that the wave of service delivery protests currently taking place throughout the country were not a reaction to lack of service delivery but a reaction to the creation of unjustified expectations.

Mr Motau expressed concern about the impact on the environment of all the activities undertaken by the CEF Group of Companies.

Mr J Schmidt (DA) warned that Eskom had also been showing profitability before its great shock, and he asked whether the renewable sector of operations could be profitable.

Ms E Thabethe (ANC) also posed the question as to whether the focus on upskilling women was going to be warranted in the long run, and whether the CEF Group of Companies took the upskilling of women seriously. She observed that the team presenting itself to the Portfolio Committee that morning was conspicuous in not having women representatives.

Dr Manny Singh, General Manager, replied that the CEF Group concentrated on women and the disabled. However, the nature of the work undertaken by PetroSA was such that physical strength and agility was required in the Refinery and on explorations. Their experience was that most women had neither the strength nor the agility required of persons working in the refinery. Many men also did not have these attributes. The CEF Group of Companies had to comply with the Health and Safety standards administered by the Department of Labour. That meant that most of the women employed by the Group were in fact employed in the laboratories and the administrative structures. It was easier to develop administrators, even though they too were required to have skills and training, as scientists require a long and slow process of training. Recognising this, the CEF Group had adopted a deliberate policy of a bias to women, the youth and persons with disabilities. The process of readying such persons was inevitably a slow one and such persons would not appear overnight in the higher echelons of the CEF Group.

Mr Mkhize also assured that Portfolio Committee the CEF Group was vigorously searching out for suitable candidates among the women, the youth and the disabled. They were in the training programmes. These full programmes must be completed over a number of years, to allow the trainees and the Group to benefit fully. He cautioned that people could have qualifications, have a skill but nevertheless be unsuitable for appointment as they simply did not, or would not deliver. He reminded the Portfolio Committee that Mossel Bay had a limited life, although everything possible was being done to extend it. Coega was seen as the natural successor to Mossel Bay. He reminded the Committee that currently the production cost of petrol was cheaper than the costs of desalinated water, and there had been requests from Limpopo, KZN, Eastern and Western Cape for consideration of water production facilities. The remaining provinces were not under consideration because no suggestions or requests had emanated from them.

Mr Xiaphe, a representative of the CEF Group, explained that the CEF Group could not work without budgetary paradigms and so there was a constant emphasis on cost reduction or cutting. He assured the Portfolio Committee that the CEF Group did not participate in “hedge funds” and that there was little danger from such activities.

Mr Mkhize added that the CEF Group expected delivery from every person employed.

Mr D Chapman, CEF Group representative, explained that the CEF Group found job counting and job creation for the sale of job creation difficult, and the challenge at all times was to remain competitive and so to keep the employee force as lean as possible by maximising the production from each employee. He added that the ultimate aim was to keep the CEF Group sustainable

Dr Singh added that the CEF Group could not afford a bloated labour force for it had to remain profitable and sustainable in the long term. It had learned from the Eskom predicament and was determined to avoid similar problems.

Mr Radebe suggested that in regard to skills development the “use it or lose it” principle should apply.

Mr Motau said he was happy to hear that there was no hedging.

Mr Radebe wished to know what progress had been made with regard to the roll out of solar power as a substitute for renewable energy sources.

Ms B Tinto explained that she had listened to the references to reserves of gas and the supply of gas but she was of the opinion that the price of gas was simply more that her constituents could afford.

Mr Xiaphe referred her to page 75 of the Petro SA report, and stated that on the current figures it was impossible to bring the cost of gas any lower to the end consumer. With regard to solar power, he reminded the Portfolio Committee that the ultimate decision regarding the extension of solar power lay not within the province of the CEF Group, but other vested interests. He believed that CEF must look after its own interests first, and it was incumbent on CEF Group to cut costs wherever possible.

Mr Mkhize again reminded the Portfolio Committee that the approach of the CEF Group was to have a bias towards women, youth and the disabled. However, this would not be done at the expense of the long-term profitability of CEF Group companies. He added that the CEF Group companies had targets for women, youth the disabled, and employment equity, and intended to create opportunities for such persons. However, he referred the Portfolio Committee to page 75 of the PetroSA Annual Financial Report. He noted that items 222 and 221 depended on item 211, and if item 211 had not been met, or could not be met, then the supporting dependant items could not be met either, as the one depended upon the other.

He added that the figures produced revealed that the CEF Group was doing well with the development of a BEE programme at an acceptable level. However, he cautioned that the CEF Group required access to information about contractors which was not always available or which the potential contractors were not willing to supply. He added that with LNG there were always EIAs performed before a decision was reached.

Mr Mike de Portes, Chief Operating Officer, iGas, also cautioned the Portfolio Committee that every possible EIA and other impact study was performed before the CEF Group embarked upon a project, and all measurements were tested against the profitability and sustainability of the Company and the project.

Dr Singh pointed out that with regard to the solar heating project, the CEF Group had performed their functions and it was now a question of the affordability of the financing mechanisms, which lay in the province of other vested interests. He reminded the Portfolio Committee that both the Nelson Mandela Bay and Ekuruhleni Metropolitan municipalities had elected to proceed with their solar powered water schemes, and together these schemes would amount to a saving of 30 000 kilowatts – which translated into savings of R100 billion. The funding for the installation had still to be found. This was not the province of the CEF Group.

The Chairperson of the Portfolio Committee remarked that he expected a fuller and more coherent report when the individual companies in the CEF Group would next report to the Portfolio Committee early in 2010. He intended to ensure that they did so.

Department of Energy: Annual Report 2008/09
The Chairperson noted that energy challenges only constituted about one third of the challenges facing the Department.

Ms Elsie Majuba, Acting Director General, Department of Energy,  then announced that her report would consist of an introduction, an account of the Department of Energy (the Department) programmes and the State Owned Enterprises (SOEs) reporting to the Department. She reminded Members that the Department had been split in the current year.

Energy was central to the development of the South African economy and society. South Africa had a bitter history in which access to energy was influenced by race and class. In making a break with the past, the Department was mandated with responsibility to champion universal access to electricity services. The Departmental mandate to provide basic service was not only a social right but also a human right dictated by the Constitution.

Programme 1 related to Hydrocarbon and Energy Planning, the purposes of which was to promote the sustainable use of energy resources through integrated energy planning and appropriate promotion, including policy and regulation development of petroleum products, coal and gas. Programme 2, the Electricity and Nuclear and Clean Energy programme, intended to govern the electricity and nuclear sector with special emphasis on ensuring sustainable security of supply, universal access and the development of the nuclear sector. The Corporate Services programme was a support programme  to enable the Department to deliver on its mandate through the provision of strategic management and administrative support to both the Ministry and the Department. In this regard the office of the Chief Financial Officer (CFO) provided support with regard to financial, supply chain, facilities and information management, as well as audit Services, which encompassed the provision of independent assurance, and consulting services.

The State Owned Enterprises (SOEs) reporting to Parliament, through the Minister, in the energy sector were the South African Nuclear Energy Corporation (NECSA) the national nuclear regulator (NNR) the Electricity Distribution Industry Holdings (EDIH) the Central Energy Fund (CEFGroup) and the National Energy Regulator of South Africa (NERSA).

She submitted that the policy achievements were the implementation of an Energy Security Master Plan for liquid fuels. She noted that hat a consolidated report on energy supply management and implementation had been completed, and that the critical issues affecting the implementation were being addressed. The National Energy Act, Act 34 of 2008, had been assented to by the President in November 2008. The Petroleum Pipeline Regulations had been promulgated in 2008. An Electricity Pricing Policy had been gazetted in December 2008 to provide a policy framework for the setting of electricity tariffs. A Renewable Energy Framework had been developed and approved by a Forum of Executives in Energy. The National Energy Efficiency Strategy had been revised and had been submitted to Cabinet for approval with public comment.  Sections 17, 18 and 19 of the National Energy Act, Act No 34 of 2008, had been promulgated in December 2008. With regard to Standards for efficiency, the labeling of light motor vehicles, electric motors, Compact Fluorescent Lamps, the labeling of Refrigerators and stand by power loss of set up boxes had been developed in conjunction with the South African Bureau of Standards (SABS) and a Nuclear Energy Policy had been approved by Cabinet in June 2008, to provide a framework for the prospecting, mining, milling and use of nuclear materials.

She further submitted that the main priority achievements were the National Electrification Programme, by which 6 substations and 8 bulk feeder lines had been completed and about 123 364 households and 712 schools had been electrified. With regard to National Energy, a bilateral agreement had been signed with Argentina to strengthen multilateral relations. In regard to energy efficiency, a high level national communication and information dissemination campaign had been undertaken through a variety of media platforms, as a result of which 22 million compact fluorescent lights (CFLs) had been rolled out with a saving of approximately 600 Megawatts. A Renewable Energy Summit had been held and assistance was rendered to reviewing the White Paper on Renewable Energy. The REFSO Office had achieved the target of subsidising three projects; a number of renewable energy projects had been launched, including the National Demonstration of the Darling Wind Farm, and categories of renewable energy feed-in-tariffs had been developed to address barriers relating to competitiveness. With regard to the Clean Development Mechanism (CDM), a mass awareness campaign had been embarked upon throughout the provinces, and sectoral workshops had been held. The Board had registered 15 CDM projects and four had started claiming carbon credits. With regard to the licensing of petroleum projects, approximately 14 050 licence applications had been received, 9 330 processed and 4 660 were awaiting processing.

She was pleased to be able to announce that the Department had maintained 4% under spending, with 1.5% under-spent in 2008/9, mainly occasioned by outstanding invoices at year end, vacancies, and delays in transfer for two programmes. For the fourth consecutive year, the Department had received an unqualified audit from the Auditor-General (AG).

The human resource figures indicated that the staff complement was 1 194, with 574 males and 629 females, the turnover rates was 17.5 %, with a rate of 2.1 % in the senior management staff, and there had been 666 promotions broken down into 337 males and 329 females. The training and expenditure budget had been R3 549 million and the expenditure budget had been R2 5464 million, with 289 females and 324 males trained. The bursary budget was R1 234 million of which R1 050 million had been expended. She submitted that the Department of Energy was faced with serious challenges in respect of resources and capacity to provide service to South Africans, in fulfillment of its Constitutional obligation.

Finally, she submitted that the splitting of the Department of Energy from Mineral Resources presented an opportunity to consolidate and grow the Department. She cautioned that adequate funding was required. She cautioned that the split was at the interim stage but that approval of the interim and end state of the two departments had been granted, and in anticipation a scoping exercise had been undertaken and completed, which entailed an analysis of the functions to be split, a process mapping exercise, as well as an analysis of the HR capacity and the development of a business plan on the split. In this regard strategic planning for the 2010 MTEF had been conducted in August, and the new independent organisational structures for the two departments had been finalised and submitted to the Minister of Public Service and Administration for a decision. In anticipation of this, the job profiling and job evaluation had started in order to confirm the job levels and the remuneration levels. The matching and placing would be initiated soon between employer, employees and employee representatives, and the remaining vacancies would be advertised and filled after all the current staff had been placed. In this exercise some of the challenges were support services for the current capacity, job-hopping and the recruitment and retention of skills and the financial constraints.

She concluded by stating that the Department's mandate and quest for the transformation of the energy sector could not be confined to race and gender, but rather the service that the Department rendered. In this regard, she reminded the Portfolio Committee that the principles of Batho Pele remained the Department's guiding compass as the Department navigated its way towards serving the South African people. She added that the imperative behind transformation was the rendering of an improved service to the recipients, as well as efficiency in its daily work.

DIscussion
Mr Radebe commented that the welfare of the staff did always seem to a first priority and he wondered whether this impacted upon delivery of product and service. He also wanted assurance that the recipients of the bursaries received them after wide advertising. He did not want to have another crony situation developing.

Mr Radebe expressed concern about what he viewed as negligible attempts to ensure that the end product that the consumer received was as cheap as possible. He also raised the question of the employment of consultants, who, very often, he alleged, were former employees of the Department, who took their intellectual property with them on their departure, and were then charging enormous fees.

Mr Radebe expressed reservations about the efficacy of the solar heating systems.

Mr Motau said that he noted the emergence of the same old challenges, which had been identified previously, and the lack of progress towards solving them. He asked where the Department was going in regard to budget. With regard to the Medium Term Expenditure Framework (MTEF) he wanted to know whether the suggestion was for one year, or three, and whether the concentration on the transformation of race and gender would not have unintended consequences.

Ms E Thabethe (ANC) asked for an explanation about the reasons for the delay with the Darling Wind Project, asking whether the reason was an insufficiency of wind. She also wished to have answers as to why it was claimed that the Department had no schools in the Western and Northern Cape Provinces without electricity, when her personal experience during electioneering for the last election had revealed that in fact there were many schools without electricity. Those learners did not enjoy the services that learners in other schools and provinces enjoyed without question. She also took umbrage at the use of the phrase “black out”, saying that the correct term was load-shedding.

The Acting Director General answered that the Department relied upon information provided by other departments, including the provincial departments. She also reiterated her claim that the staff of the Department enjoyed a reasonable relationship with the Department.

Mr Mkhize cautioned that there was only so much the Department could do within the parameters of Public Service regulations. He gave an illustration that some staff members had left the Department for higher remuneration, but may have found that they were neither challenged or extended, and so had asked to be re- employed by the Department at a lower remuneration, in areas where they would be more challenged. Where possible, the Department re employed those with skills

Mr Singh explained that the lack of progress with the Darling Wind farm arose not from a lack of wind or any other physical problem, although he conceded that the turbines could be improved, but a squabble between the shareholders of the company, which was moving towards solution.

The Chairperson said that the Committee had noted the challenges, and would be concentrating on this when the CEF Group and its individual entitles returned the following year.

The Committee adopted its Report.

The meeting was adjourned.