ATC140314: Report of the Portfolio Committee on Energy on the Energy Stakeholder Meeting, scheduled on 30 August 2012, dated 12 March 2014

Report of the Portfolio Committee on Energy on the Energy Stakeholder Meeting, scheduled on 30 August 2012, dated 12 March 2014

Theme: “ Exploring solutions to challenges on financing and certification of locally produced renewable products”

1. Opening remarks by the Chairperson, Hon SJ Njikelana

The Chairperson welcomed delegates to the fourth stakeholder’s meeting arranged by the Committee since November 2011. A number of challenges in the renewable energy sector were highlighted during the previous engagement with the Committee on 7 June 2012. Stakeholders were invited to brief the Committee on the challenges faced by the sector and to explore possible solutions. The renewable energy sector in South Africa was relatively new but progress had been made over the previous eighteen months. The third round of procurement (Window 3) would commence shortly.

2. Presentations

2.1. Overview by the Department of Energy (DOE)

Ms Mokgadi Modise , Chief Director: Clean Energy, DOE presented the briefing.

The legislation applicable to the renewable energy sector included the Energy Act and the Electricity Regulation Act (as amended), supported by the Preferential Procurement Policy Framework Act, Tax Incentive Regulations issued by the National Treasury and the Industrial Policy Action Plan (IPAP). The Independent Systems Market Operator Bill was intended to level the playing field for producers of electricity. The participation of the Economic Development Department in the National Economic Development Labour Advisory Council (NEDLAC) had resulted in the signing of a Green Economy Accord, the Local Procurement Accord and the National Skills Development programme.

Policy and regulatory framework developments included approval of the Renewable Energy White Paper in 2003; approval of the Biofuels Industrial Strategy in 2007; approval of the Integrated Resource Plan in 2011; provision for legal and regulatory frameworks for renewable energy in the New Generation Capacity Regulation Act and providing financial support for Government’s policy goals.

The major challenges were high capital costs and the need to build capacity. Government initiatives included opportunities for skilling people but continued support and proactive participation by all the stakeholders was required. The development of a sustainable renewable energy sector was costly and required mobilizing all the available resources at domestic, regional and international levels. Multi-disciplinary partnerships needed to be established.

The Renewable Energy Programme was launched in August 2011. The DOE had negotiated with the Development Bank of Southern Africa (DBSA) to assist with funding the black economic empowerment (BEE) portion of projects. The programme included specific requirements developers had to adhere to. The Department and the National Treasury had initiated a concessionary renewable energy funding programme and a number of funding institutions had expressed interest in participating in the programme. The DOE had formed a partnership with Kreditanstalt für Wideraubau to roll out solar systems in the Eastern Cape.

The German government had provided a grant for the non-grid electrification programme in the Eastern Cape. The United States of America had approached the Department of Science and Technology (DST) with a view to participate in the development of off-grid technologies for remote, rural areas. The Global Alliance for Clean Cook Stoves is a public/private partnership to promote clean and efficient household cooking solutions.

The Renewable Energy Market Transformation (REMT) programme of the DBSA offered financial support for feasibility studies of renewable energy power generation and solar water heating projects. The Energy and Environment Partnership (EEP) programme of the DBSA provided funding for off-grid and grid connected energy feasibility studies. The Energy and Environment Partnership Programme for Southern and Eastern Africa supports renewable energy projects in eight Southern and East African countries. The programme is jointly funded by Finland and Austria and was implemented in April 2010.

The Danish Energy Agency had engaged with the DOE in the development of a project document to provide funding for several renewable energy projects in terms of the Fast Start funding programme. The Cancun agreements include the establishment of the Green Climate Fund, a Finance Standing Committee and a Technology Mechanism. Progress was made in the establishment of the Green Climate Fund during the 17 ^th Conference of Parties (COP17) in Durban.

The South African Renewable Initiative ( SARi ) was established to support the development of the renewable energy sector in South Africa. SARi aimed to overcome the imbalance between the costs and benefits of renewable energy.

The DOE had examined the international experience in using public finding to leverage private investment which includes:

• providing partial risk guarantees,
• policy insurance and guarantees,
• carbon finance
• facilities, grants and contingent grants,
• loan softening programmes,
• foreign exchange liquidity facilities,
• export credit guarantees,
• pay-for-performance grants,
• equity capital pledge funds and
• ‘ green ’ bonds’.

2.2. Presentation by the South African Renewable Energy Council (SAREC)

Mr Johan van den Berg, Interim Chairman, SAREC presented the briefing.

The local content requirements for Solar Photovoltaic (Solar PV), Solar Thermal with storage and wind in the first round (Window 1) and second round (Window 2) of procurement were compared. The thresholds for the solar technologies were met but it was uncertain if the targets for wind energy would be achieved. The Department of Trade and Industry (DTI) had commissioned studies into the localisation of the Solar PV, Solar Thermal and wind energy industries. The outcomes of the studies were expected to provide a roadmap for the optimum localisation of the three main technologies, used in the renewable energy sector.

The Sustainable Energy Society of Southern Africa (SESSA) was collaborating with the DST and the Council for Scientific and Industrial Research (CSIR) to build a platform for the monitoring, measurement and reporting of actual job creation, enterprise development and skills development in the renewable energy sector.

A long-term vision and roll out plan across the various technologies was required. The Integrated Resource Plan (IRP) was flexible enough to allow Government to take advantage of new technologies but manufacturers and investors required a degree of certainty and clarity on the allocations for the various types of technology in the medium to long term. The IRP should only be amended to encourage local manufacturing. Each type of technology required a minimum annual procurement allocation to allow the local industry to develop. The studies being undertaken should provide an indication of what the minimum allocation should be for each type of technology.

The briefing included a diagram to illustrate the complex project financing process applicable to the renewable energy sector. Various certification and guarantee requirements were applicable to each type of technology. Project financing did not require the developers to sign surety to a bank. The loans could be very large and the bank’s depositors had to be protected against any default. Instead, each piece of equipment had to be tested, certified and guaranteed by a financially strong company. The testing and certification process was lengthy and companies required a strong balance sheet in order to provide the necessary guarantees. Start-up companies were not able to produce the kind of balance sheet to support a guarantee. Development institutions such as the Industrial Development Corporation (IDC) were alternative sources of financing. The cost of financing impacted on the cost of renewable energy and needed to be kept as low as possible.

Each renewable technology requires a minimum annual procurement for a number of years (medium term) to activate local manufacturing. SAREC further pointed out that suggesting exact figures may be premature and the answer will be different for different technologies, however a collaborative investigation between government and industry will assist to refine these figures. SAREC further highlighted that there has been a clear and rapid response by local manufacturing firms in investigating localisation potential based on the 3 725MW allocation.

Challenges include the following

1) Certification and guarantees – Project finance

In project finance, the equity providers (developers) do not guarantee or sign surety to the bank for the very large loans (can be more than ZAR 1 billion). If the project does not perform, the bank must be able to sue someone who has the money to pay - or the public’s deposits at the banks might ultimately be jeopardised. For this reason each piece of equipment must be certified and guaranteed by a financially strong company.

Certification of new equipment involves testing and takes time (eg 12 months or more for wind). Guarantee is essential – a big balance sheet is needed. It is possible to provide other kinds of finance through development institutions (eg IDC). If no bank loans are used and developers are asked to provide everything themselves , there may not be enough money and the cost of renewable energy will go up, as this kind of money is more expensive than bank loans

2. Certification and guarantees – PV

According to SAREC, the PV industry is confident that local manufacturing of certain components can take place affordably in South Africa. Currently 3 module assembly plants exist in South Africa with a capacity of approx 120MW/yr. Several more plants for module assembly and inverter manufacture are under development but require clear procurement roll-out plan.

3. Certification and guarantees – Solar thermal

Steel, glass piping, tanks, construction materials, cement and cooling equipment can be sourced locally. There is no local manufacturer of turbines and receiver tubes. If a manufacturer came it would has to be international coming with certification and guarantees otherwise time and a balance sheet would be required. Appropriate certification would allow local manufacturers to compete in the growing global market for CSP.

Certification and guarantees – Wind

There is currently no local turbine manufacturer at commercial scale to buy from and no certified and guaranteed local blade manufacturer to buy from. One un-guaranteed, local turbine assembler and blade manufacturer is currently closing its doors due to guarantee requirements of banks and the bid rules. Certification will take about 12 – 18 months after erection of pilot plant – thus perhaps 2 years away. If a certified and guaranteed international firm comes to SA, this shortens to the time required to complete the local factory

Possible solutions include:

(i). Change the scoring system

At present the scoring is 70:30 for Price: Socio-economic. Strong localisation success may save money even if the prices rise a little – more employment, money stays in the country. With regard to the PV, SAPVIA suggests that the scoring needs to be analysed per technology and per component. The actual number of jobs created for each component manufactured locally must be quantified and balanced against increased costs. Increased costs will lead to higher energy costs, less installed capacity (there is a limited budget available for government to procure) and fewer jobs through installation and operation – a balance is required.

(ii). Lure international manufacturing firms

• Lure international firms with existing certifications and guarantees to SA, which shortens the delays.

(iii). Develop non- recourse finance packages

The IDC and DBSA can choose to apply project finance rules differently to serve a development objective, and thus choose to “bank” unproven South African technology without certification or guarantees. In time the certification issue will disappear and the companies may be able to provide some of the guarantees themselves

(iv) . Allow bids at varying levels of local content

If firms are allowed to submit two bids with two prices corresponding with two different localisation levels, it will be clear to government what localisation really costs. Government could allocate bids at both levels and achieve the optimum, blended levels of price and local content. In this manner the target is achieved at industry level and not project level and projects can indirectly “help” each other.

(v). Look at the regional potential

SA firms have a competitive advantage in Southern Africa, due to the lower transportation costs. The regional market will be bigger than the local market and if the regional market can be accessed the feasibility of local firms will be strengthened.

(vi). Promote training and r&d

Facilitate funding for Training, Research and Development in universities and businesses, specifically as part of the project Socio Economic Development spend in REIPPP. This will create the intellectual component to SA’s emergence as a power in RE.

(vii). Distributed solutions

Mostly in PV but also in wind, to facilitate the roll out of the smaller-scale distributed generation (own use and Net Metering). Smaller projects allow local companies to provide technology more easily and bolsters their track record and ability to provide guarantees (project finance not required)

2.3. Presentation by the South African Bureau of Standards (SABS)

Mr Sadhvir Bissoon , Executive, SABS presented the briefing.

The SABS was established in 1945 and was governed by the Standards Act, No 8 of 2008. Responsibility for regulatory functions was transferred to the National Regulator for Compulsory Specifications (NRCS) in 2008. The Standards Division comprised 400 Standards Committees and deals with international (e.g. International Standards Organisation (ISO) standards and the food safety certification HACCP) and local standards (e.g. the South African National Standards SANS). National standards are developed by technical experts. The SABS conducts conformity assessments and testing for system and product certification as well as training programmes. Certification of a product provided the assurance that the product complied with the specified standard. The SABS Mark was a highly recognizable symbol of credibility and was synonymous with quality, reliability and dependability. The certification processes for products and for systems were explained.

The ESKOM rebate scheme for domestic solar water heaters required compliance with SANS 1307. Mr. Bissoon indicated that performance testing of heat pumps was currently in progress. The feasibility study on wind turbines had been completed and submitted to the DST. SANS 941 applies to the energy efficiency labeling of electronic appliances. The SABS was currently engaged with the DTI to upgrade the laboratory and testing facilities where appliances were tested, to determine if energy efficiency claims were met.

ISO 50001 applied to energy management systems. The SABS is currently engaged in training assessors and auditors on ISO 50001 and preparing for accreditation by the South African National Accreditation Society (SANAS). The applicable South African National Energy Efficiency Standards were illustrated.

The main challenges were identified as:

• financing challenges in the small, micro and medium-sized enterprise (SMME) sector;
• education on the differences between product and system certification;
• the development of standards for new innovations;
• the maintenance of certification requirements by companies;
• abuse of the SABS Mark and
• building testing and certification capacity for the SABS.

2.4. Presentation by the National Regulator for Compulsory Specifications (NRCS)

Mr Musa Ndlovu, Executive, NRCS presented the briefing.

The NRCS was responsible for administering the compulsory specifications included in regulations. The specifications are applicable to products that are imported, manufactured, sold and/or exported. Other responsibilities were defined in the Trade Metrology Act, the National Building Regulations and the Building Standards Act.

Functions include;

• the drafting of technical regulations;
• the registration of manufacturers, importers and builders;
• issuing of letters of authority and approval documents;
• conducting inspections and enforcing sanctions and
• the removal and destruction of unsafe products.

The NRCS does not participate in the writing of SANS or the certification and testing of products. The Regulator consulted widely with the relevant sectors, and the technical regulations and specifications were published for public comment.

Details were provided of the progress made in providing technical regulations for solar water heaters, domestic hot water storage tanks, electrical appliances, lighting, the energy-efficiency of new buildings and electric vehicles.

2.5. Presentation by the Banking Association of South Africa (BASA)

Mr Pierre Venter, General Manager, BASA presented the briefing (see attached document).

The presentation covered the role and contribution of the banking sector to the development of the renewable energy sector in South Africa; the experiences and lessons learnt in the procurement of renewable energy and the prognosis on the key issues.

The involvement of Independent Power Producers (IPP’s) in the IRP since March 2011 was considered to be a great success story by the banking sector. Project financing by 2012 totaled R100 billion, of which R70 billion was from debt financing, mostly provided by the commercial banking sector. The first two rounds of renewable energy procurement had resulted in a lot of interest from the financial sector. The commercial banking sector was looking forward to the next round of bidding, had the finance available and was ‘ready to play’.

BASA recognized that the development of the renewable energy sector in South Africa was at an early stage but had noted the development of healthy competition in the sector. The commercial banking sector was willing to support and exploit commercially viable and sustainable opportunities. Banks had already moved into investing solutions such as; the Green Exchange Traded Fund, foreign exchange (FX) products, interest rate and commodity hedging and agency/transactional services. Banking premises were being converted to be more energy-efficient and a substantial amount was being invested in electricity back-up systems for IT platforms.

The challenges concerning IPP’s included risk factors, time constraints, inexperience of bidders and bureaucracy. The challenges for the State including balancing social and economic imperatives, meeting local content criteria, low manufacturing output (particularly in the Solar PV sector), determining feed-in tariffs and a conflict of interest as the State was both referee and player.

Critical focus areas identified were;

• providing policy and market certainty;
• optimising local content;
• attracting foreign manufacturing investment;
• developing suitable financing packages for projects;
• the lack of expertise;
• de-coupling the value chain and
• providing infrastructure support.

The prognosis on the key issues was generally positive, provided that the message from the State was positive and that over-regulation of the renewable energy industry was avoided. The new industries had to be commercially viable and sustainable. Increased competition was welcomed. More needed to be done to educate consumers and provide consumers with coherent information.

The policy on renewable energy had been established and the necessary research had taken place. South Africa should now focus on implementation. More attention had to be given to develop ancillary businesses and attracting expertise. The regional options needed to be considered and investors should be encouraged to invest in South Africa rather than in the neighbouring countries.

3. Discussions

• The IDC established a ‘green’ unit, where concessionary finance options include preferential interest rates (prime minus 3%) and capital breaks to allow enterprises to develop.
• The IDC is currently engaging with two foreign Solar PV partners, who are willing to invest in South Africa and who have the necessary expertise.
• The IDC is investigating the potential of renewable energy in neighbouring countries. According to Prof Uken (CPUT – Energy Institute) the cost of solar panels has escalated since the SANS standards were imposed. He stated that is doubtful if the panels would last ten years, and according to him these solar water geysers only last for three years.
• Mr Thomas Schaal , Director: ESA-Meridian (Pty) Ltd was a shareholder of Isivunguvungu Wind Energy Converter (Pty) Ltd (i- wec ). The company was established in 2009 and manufactured wind turbines, using German technology. The first turbine was successfully assembled and tested. The company was facing financial difficulties and found it difficult to get funding. As a start-up company, the enterprise was unable to provide the kind of balance sheet to get a guarantee for a loan. Local content was a prerequisite for loans. The company had requested several Government entities to consider providing support but had not received a response. The IPP procurement process did not support the development of the local industry and encourage SMME’s to get involved in the renewable energy sector.
• Members recalled that Isivunguvungo was one of the first companies to get involved in the renewable energy sector and raised concern that the company is facing closure.
• According to Mr De Beer (SANEDI), Corporate Consultant, South African National Energy Development Institute (SANEDI) there is room for small-scale energy producers but consideration had to be given to who would purchase the product. Currently, energy could only be sold to ESKOM as the Municipal Finance Management Act (MFMA) did not allow local government authorities from purchasing electricity from other power producers. In addition, the legislation required municipalities to purchase the cheapest electricity available and renewable energy currently costs more than energy from non-renewable resources. He suggested that the Department of Cooperative Governance and Traditional Affairs (COGTA), the National Treasury and the DOE considered amending the MFMA to allow local government authorities to buy energy from IPP’s.
• The Department of Energy stated that they are currently working with SANEDI at the installation of mini-grid systems. The National Treasury had been approached to provide funding and the availability of international funding options is also being considered.
• The Department of Energy stated that although it would appear that little progress was being made with regard to SARi , the main issue is that it is a cross-cutting exercise that requires an integrated approach. The Department is following a broad approach and need to ensure that an enabling environment is created and that all the issues are considered.
• According to Mr van den Berg (Chairperson: SA Renewable Energy Council) localisation and household demand for renewable energy will increase. The cost of preparing bids is substantial but he did not think that bids at different levels of local content would significantly increase the cost. He agreed that access to financing is difficult for small and start-up enterprises. The banks were risk-averse and the plight of Isivunguvungo was a prime example of the problems of companies to secure adequate funding.
• The DTI pointed out that they do have a product testing and product enhancement programme in place. Various incentives are available, depending on the size of the investment and the number of jobs involved. Companies are encouraged to submit applications. The programme could be used by small companies to finance the cost of component testing by the SABS. The DTI promotes local procurement rather than encouraging the import of foreign products and technology.
• Members enquired if the core role players are working together, as they do not get the impression that there have been sufficient engagement amongst all the stakeholders. There appeared to be a degree of uncertainty in the sector and it is essential that the stakeholders engage with each other to deal with the issues and challenges experienced.
• SAREC conceded that more engagement is necessary. According to SAREC the industry is under pressure and representatives had little time to devote to discussions. The DTI arranged regular discussion sessions and an indaba had been arranged. SAREC highlighted that the Energy Stakeholder Meetings convened by the PC on Energy is also very valuable.
• Mr Venter (Banking Association of SA - BASA) agreed that BASA should have further engagement with SAREC. He disagreed that the banking sector had not done enough to encourage investment in the sector. However, market certainty is a prerequisite and initiatives should be applied consistently. Consideration should be given to the prevailing adverse economic conditions. There is a high level of over-indebtedness in the country and consumers were already over-burdened. The escalating cost of electricity made the installation of solar water heaters more viable. The ‘green bond’ concept allowed for added value if green technologies are used. However, the concept had not been adopted in South Africa. The ‘green’ economy was still in its infancy but was expected to develop rapidly.
• According to BASA , bondholders are allowed to access the equity in their bonds to fund the installation of alternative energy systems in their homes but other solutions should be developed as the real estate market is also under pressure.
• BASA pointed out that renewable energy is a recent innovation in South Africa. Reliable products and substitutes if equipment broke down had to be available. BASA further agreed that they need to work closer with the IDC and other funding institutions in order to work together to develop solutions.
• According to BASA, SMME’s and start-up enterprises are a higher risk. BASA confirmed that a toolkit for SMME’s would be useful. The banking sector could consider developing products aimed at the SMME sector.
• BASA acknowledged that they could do more to mitigate the risks associated with SMME’s and start-ups.
• Mr Justin Burnett, Managing Director – South Africa, Obelisk Group said that there need to be more clarity on what the market demand would be in the next ten years. Mr Burnett stated that he anticipates the development of an ancillary maintenance and support services sector but this aspect had not been given much attention.
• Mr Theo Lötter , Executive, Actom Group stated that the purpose of the local content requirements is to create jobs. Existing businesses should consider expanding their operations to supply the contractors. He disagreed with the statement made by BASA that locally manufactured products were more expensive than imported products.
• Members pointed out that a number of SMMEs has raised concern regarding the costs involved for SABS testing for products.
• Members enquired if the core role players are working together as they do not get the impression that there has been sufficient engagement amongst all the stakeholders. There appeared to be a degree of uncertainty in the sector and it is essential that the stakeholders engage with each other to deal with the issues and challenges experienced.
• The IDC administers a government-sponsored programme to encourage innovation. The IDC also has a venture capital programme to assist SMME’s and start-up enterprises with funding. The major consideration is whether the product is commercially viable. The reasons for SMME’s being regarded as high-risk included the higher marketing risk, limited access to big companies and the unwillingness of large corporations to listen to start-up enterprises with no track record. Start-ups and SMME’s want to play with the big players but lack the necessary experience and financial backing. The BBBEE scorecard promotes skills development and access to big companies by SMME’s. An example was a client of the IDC who manufactures solar water heaters and who established a training center to train people to install solar geysers.
  
  

4. Recommendations

• That the provision of small solar powered grids be provided in the areas which are not on ESKOM’s list of areas to be electrified as an interim measure.
• The Minister of Energy engages with the Minister of Trade and Industry with regards to resolving what is alleged as high cost for testing products and work a mechanism that will cater for emerging SMMEs in particular.
• Members further noted that the initial costs involved in solar water heaters is substantive, and requested the Banking sector to become more involved in the process.
• Advocacy and information sessions relating to the building regulations be strengthened and reinforced.
The Minister takes an initiative to facilitate better cooperation amongst role players in the renewable energy sector. Furthermore, the Minister to ensure that SAREC engages with BASA, the IDC and other financing entities as well as the SABS to explore solutions to problems faced by the renewable energy sector, and that, SAREC engages with the National Treasury, the DOE and COGTA to explore ways of resolving the issue of local government authorities being prevented from purchasing energy from IPP’s.
The Minister of Energy should develop a consistent market demand for small scale power production and develop a framework for the development of the local industry.
The Minister of Energy to ensure more engagement with Further Education and Training (FET) institutions to address the issue of skills development be facilitated.