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 !!!!!
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