WWF

Dialogue on Utility and Local Scale Renewable Energy in South Africa

Overview of energy environment on Municipal level – challenges and opportunities

April 2015

Municipal Environment

Investment in Climate Change

Summary of Findings

Policy

Strategy

Legislation

Culture Process

Human

Capital

Networks &

Organisation

(Intangible

Capital)

Infrastructure

(Tangible

Capital)

Severely limits projects Problematic Difficulties , but not insurmountable

Findings: Key Themes Policy and Legislation

Generation National Competency – Distribution Local (less 1mw generated for own use).

About 183 municipalities – distributors (Eskom – continues to distribute in parts of the municipalities)

Provide land and planning approvals

Weak incentive environment, national coordination and support – weak “demand”.

Need for stable policy to “crowd in” private finance and participation.

Process

Transaction costs of lengthy processes (internal, intergovernmental, community consultation).

Lack of information on funding processes.

Culture

Excessive risk averseness to innovation, short term approach.

Leadership is key to drive complex projects.

Focus on survival and replicating past practices.

Large dependence on grants and off-budget instruments.

Infrastructure

Information to justify investments.

Bias towards engineering (vs ecological) Investment Choices .

Organisational

Silo approach, with social and engineering dominance.

Dependence on project champions to drive resourcing and approval processes.

Human Capital

Uneven with Metros and Large Cities have some capacity.

TA used to leverage international grants.

• Generation Mandate – Nersa.

• MFMA: Section 78

• MFMA: Section 33

• National electricity and water regulation is weak (increases risk)

• NERSA regulation is ambiguous

• MFMA: Criminalisation of wasteful and fruitless expenditure

• MFMA: Easy to appeal the award of tenders which stalls implementation

• No green procurement policy at the national and local government level

Policy

• Mindset: Risk averse , insular & short-termism

• Regulation interpreted in the narrowest and strictest sense, especially by Legal, Finance, SCM

• Limited teamwork between branches

• Myth: Reduction in electricity sales will harm the financial health of municipalities

• Myth: Expenditure outside 4A/4B is disallowed ( no mandate to spend on environment)

• Myth: Municipality must purchase cheapest electricity which thereby excluding RE

• Leadership prioritised the delivery of basic services , and climate change projects seen as a „nice to have‟

Culture

• PPP is expensive , time consuming and onerous

• No lifecycle costing

• Short-time horizon of financial and budgeting processes

• SCM: Selection of established technologies

• SCM: Difficult to identify qualified suppliers

• SCM designed to support large-scale engineering projects

• No incentive for departments to create operational savings

• Performance management system rewards compliance

• Income and finance model does not value potential savings or requires a fiscal strategy

• Complicated electricity tariff structures

• Poor communication of electricity tariffs

• Initial business case ignores maintenance costs

Process

• Engineers have disproportionate control over resource allocation

• Complicated intergovernmental structures & governance mechanisms

• CFO, Branches and Treasury apply a different interpretation of legislation

• Upgrade infrastructure : Potential investors inject capital upfront

Organ-

isation

Limited skills to

• Manage the fiscus strategically

• Create a financial strategy

• Take calculated risks

• Prioritise expenditure decisions

using multi-criteria weighting

models

Human

Resources

• Poor access to data

• Poor state of bulk

infrastructure: water & sanitation

& transport

• Landfills reaching end of life and

shortage of new sites

Infras-

tructure

KEY POLICY ISSUES • Municipal Mandates to engage in Generation (under

license)

• MFMA: Section 78 (Process bias, and capacity)

• MFMA: Section 33

• National electricity regulation is weak (increases risk)

• NERSA regulation is ambiguous

• Loss of Income

• Investing in Private Property

• Intangible Asset Trading

• MFMA: Criminalisation of wasteful and fruitless expenditure

• MFMA: Easy to appeal the award of tenders which stalls implementation

• No green procurement policy at the national and local government level

Process Issues • PPP is expensive , time consuming and onerous, community

participation

• Initial business case ignores maintenance costs

• No lifecycle costing

• Short-time horizon of financial and budgeting processes (mechanistic)

• SCM: Restrictive technologies (impact on specificztion)

• SCM: Bias towards selection of established technologies (ST – costs)

• SCM: Little qualified suppliers in new technologies – local content

• SCM designed to support large-scale engineering projects

• No incentive to create operational savings

• Performance management system rewards compliance

• Income and finance model does not value potential savings or requires a fiscal strategy

• No uniformity - electricity tariff structures

• True costs – particularly of projects (e.g. peak demands)

Institutional Cultural Issues • Mindset: Risk averse , insular & short-termism

• Regulation interpreted in the narrowest and strictest sense, especially by Legal, Finance, SCM

• Limited teamwork between different departments/sections

• View: Reduction in electricity sales will harm the financial health of municipalities

• View: Expenditure outside 4A/4B is disallowed ( no mandate to spend on environment)

• View: Municipality must purchase cheapest electricity which thereby excluding RE

• Leadership prioritised the delivery of basic services , and climate change projects seen as a „nice to have‟

Infrastructure and Data Issues • Distribution infrastructure – deteriorating

(leakages)

• Theft – low and middle income areas

• Poor access to data – to develop demand measure

or leakage strategies

• Information required for proper business plans

absent e.g. demand patterns, long term cost, etc.

Organisational Structure and Networks • Engineers have disproportionate control over resource

allocation – environmental departments small and under-capacitated

• Institutional Hierarchy

• Institutional Incentives

• Complicated intergovernmental structures & governance mechanisms – resource mobilisation

• Limited professional networks to raise seed funding and develop excellent relationships with donors (public and private

• Requires multi-disciplinary approaches

• Silo structures

• CFO, Branches and Treasury apply a different interpretation of legislation

• Upgrade infrastructure : Potential investors inject capital upfront

Human Resources • Limited skills to manage the current core operations

of the municipality.

• Inability to recruit and retain skilled and

experienced people with climate change expertise

• Focus on financial and basic services skills

• Limited pool – high demand for such skills – metro

bias

Financial Issues

• Technology Change Projects have High

Upfront Costs

• Debt and Compliance Conditions - Pay Back

Period of Greater than Three Years

• Reluctance to Self-finance CCR Projects

• Financing Private Gain with Public Resources

• Uncertainty of Project Outcomes and

Returns

• Lack of Information and System Costs

Civil Society Interventions

Equity Investors

Banks

Government, Donors & Development Institutions

Project

Inception

DRYLANDS FUND - R6.6M

Detailed

Business Plans

ACID MINE DRAINAGE BUDGET - R20.8M

Enabling

Environment

Investment

Proposition

Pre-

Feasibilities Feasibility

Study

SUSTAINABLE SETLEMENTS FACILITY - Unfunded

RENEWABLE ENERGY IPP FUND

SWH REBATE [R2.5BN]

CLEAN TECHNOLOGY FUNDS

$500M

NATIONAL GREEN FUND - Gross Fiscal Allocation R800M (with window for multi donor facility)

GEF - DBSA accreditation as NIE ($50m)

Adaptation Fund - SANBI Accreditation

Capital Raising

Finance Mechanisms

PRACTICES AND

OPPORTUNITIES CASE STUDIES

eThekwini: Waste Management –

Landfill to Gas/Energy Description

The LGEP project has two components. First, the collection,

flaring, and combustion of landfill gas to convert methane into

CO2. Second, generation of electricity from landfill gas and

supplying this electricity into the municipal grid. Current

power production is 7.5MW and certified emission reductions

(CER) are estimated up to 7.7 million tons of certified

emission reductions (CER). The project is a reregistered CDM

project with the World Bank.

.

eThekwini: Landfill to Gas/Energy

Landfill gas is burned in 20 cylinder spark ignition engines that drive a generator to produce electricity, which is fed into the local electricity network. The Mariannhill landfill comprises a single 1MW engine, takes in 450 tons of refuse per day, peaking at around 700 tons. The project currently has 13 vertical wells and 6 horizontal wells but will expand as more waste is deposited. The Bisasar Landfill comprises six 1MW and one 0,5MW engines, takes in 3500 tons of refuse per day, peaking at 5000 tons, and has 77 vertical wells and 77 horizontal wells.

Key Success Factors Technical Assistance - The Prototype Carbon Fund (PCF ); World Bank, and other global technical cooperation agencies.

Financing (Own and a mixture of private, international, and public resources) 120million from Municipal Budgets,

Debt finance (5 million Euro),

DME – Seed Financing (6 million)

Private Nedbank, Standard, and FDB (R120m)

DTI (17m)

CDM Process was difficult – long process and date intense.

Key Risks Factors

Policy and regulatory risk – DWAF requirements increased costs, Generation License NERSA

Security of supply – adequate volumes

Planning Risk – financing and funding approvals

Construction Risk

Transaction Costs – Accreditation and supply chain

Carbon Trading – Volatility impact on revenue stability

Asset Trading - Compliance

City of Johannesburg

Dual Fuel Engines

- Conversion of municipal transport assets – to combination of liquid fuels and CNG.

- Key benefits – reduction in opex ca 40% (CSIR)

- Payback – less than five years

Smart Meters

- Implementation to mange demand

- Facilitate embedded generation

- Manage revenue risks

Other Generation projects

Pilot stage – important to collect and analyse the data, technology and capacity requirements

!Keis

Household DC Off-Grid System

- Provides PV solution lighting, heating, TV, refrigeration, radio, etc

- Modular system – powered by PV

- Smart meter – facilitate remote management including Wifi solutions.

- Targets exclusively indigent households

- Financed through the FBS grant

Benefits

- Addresses service delivery

- Better management

- Reduces leakages

- Skills and Employment Generation

Siyathemba Solar Generation Proposal

◦ Multiple technologies

◦ Generation Capacity (2000 – 3000 MW)

◦ On the Solar Corridor

◦ Part of CEF priorities

Drivers

◦ Income Generation

◦ Economic Development strategy

Model

◦ EIAs Completed on State Owned Land

◦ Municipal Entity (Investor Requirements)

◦ Governance Completed

◦ Feasibility Studies Concluded

Challenges

◦ Transmission Lines – Capacity

◦ Project Preparation – Financing

◦ Capacitation of Entity

POLOKWANE ENERGY EFFICIENCY Description: Demand side management, energy efficiency project to replace lighting in

municipal owned buildings and street lights, as well as air-conditioners

Technology: The technology used is to replace old 125w Mercury Vapour bulbs with 70w

(proven technology) – high pressure sodium

Key Success Factors

Pilot and demonstration with a practical business plan

Desktop study – prepare the proposal

Use of the University as a key technical partner and M&V partner.

Financing – Department of Energy Grant (40m over five years)

Cost savings – key driver.

Used the simplest mechanism to raise funding

Key Risk Factors

Technology failures – particularly with the newer technologies that are being used.

Dependency of grant funding – need to move to self financing – through ring fencing

some of the savings.

Description: Kuyasa CDM Pilot Project is classified as an energy efficiency project. 2309 low-cost houses in

Khayelitsha were retrofitted with a solar water heater (SWHs) to provide hot water on demand, an

insulated ceilings to improve the thermal efficiency of the household units, and energy efficient lighting to

provide artificial lighting more efficiently

Key Success Factors

Partnership with communities and NGOs (SouthSouthNorth) that provided a special mechanism

to implement the project.

First CDM Gold Registered project in SA.

Financing –Publics Works Employment programme which provided the bulk of the R33m required,

R4m from the Provincial Housing, SAEDF, and German Technology Agency.

Raised income through the CDM process.

Key Risks Factors

Processes and procedures to get UNFCCC CDM accreditation are difficult and can lose an income

stream.

End-user fees difficult to collect

Stakeholder management difficult

Implementation – complex partnerships

Future of the carbon market.

CITY OF CAPE TOWN, KUYASA CDM

Smart Grids A number of municipalities implementing smart grid technologies (or components)

Better management

Loss Reduction (including leakages through theft)

Quality and reducing nett consumption

Managing peak demands Early Trends/Findings

Cost - benefits – unclear at this stage

Technology and Skills (dependencies)

Standards – not clearly defined

Procurement complex

Local Content (related to standards)

What Worked Well: Key Success Factors • Sound Project Preparation Is Critical for Success

• Low Risk Implementing Mechanisms

• Off-take agreements

• Strong Policy Leadership and Drivers Crowd-in Finance

• Low Risk, Off Book Financing Instruments

• Ensuring Sustainability and Mainstreaming Post- Implementation

• Intergovernmental relations - good

• Demand side – shift to RE and behavior change: Impacts on

Finance

• Lack of Clarity on Policy – Understanding the generation

mandate

• Supply Chain Systems Challenges

• Risk Aversion Inhibits Access to Finance

• Technology – range and lock in.

• Delays in Decision Making – A Major Financial Disincentive

• Disparate Knowledge and Complexity of Climate Finance

Mechanisms

Challenges

Recommendations

High Level Recommendations • Short Term – Leveraging Current Momentum

• Establish a cost-effective TA units

• Sustainable funding mechanisms – Existing IGFS and special purpose mechanisms to crowd in private

finance

• Deterioration of Distribution Infrastructure

• Technology Standardisation – incentive to drive local content and quality.

• Programme Driven – Policy, Finance and Coordination.

• Key Task

• Develop programme level interventions – based on priorities and current trends

• Address Generation – Policy (Clarity and Incentives)

• Addressing financial challenges – by municipalities such as the potential revenue loss and and

upfront capital requirements.

• finance mechanisms and implementation support.

• Demand Creation Initiatives

• Information exchange – best practice network (Cities network)

• Research on specific programmes and challenges

• Incentives (subsidies and taxes),

• Deepening the quality and content of subnational planning and investment tools,

• Green procurement

Comments and Questions !!!!!