Unique Identifier 221-222 SUBMISSION DOCUMENT Document Type CCGTE Revision 1 Effective Date June 2011 Regulation & Governance SUBMISSION TO ICAS on 28 June 2011 EXECUTIVE SUMMARY 1. TITLE OF THE SUBMISSION High Load Factor Downlighter Mass Rollout Initiative 2. RESOLUTION REQUIRED Approve R471m of operating expenditure to incentivise approximately 910 GWh of energy savings in line with the NERSA guideline of R5.25m per MW for energy efficiency projects through the mass rollout of efficient downlighter technologies in high load factor environments as described in the following pages; Expenditure will not exceed the NERSA benchmark on an IDM aggregated base; All expenditure to be completed by end of 30 June 2012; Implementation will be a phased approach allowing more than one market issue of the Request for Proposal (RFP); To authorise the Senior General Manager (Integrated Demand Management) with the power to delegate further and to give effect to the above; including the signing of documentation thereto. 3. SUMMARY OF FACTS 3.1 SALIENT FACTS Project Context: A number of supply and demand initiatives are being implemented to reduce the energy gap; however a gap of between 3 and 6 TWh will still exist in 2011 and 2012. The risk to security of supply is significant unless extra-ordinary steps are taken to accelerate the realisation of the Eskom Integrated Demand Management (IDM) Programme. The historic Eskom IDM processes did not support the swift implementation or the introduction of a step change in the delivery of projects to achieve the current electricity system requirements. The current focus is on smaller projects with single customers, not allowing for aggregation of projects. This increases the administrative burden and 1
also the approval and implementation lead times. Eskom has also received various requests from stakeholders to consider the submission and approval of projects in bulk. Eskom is therefore reviewing the Demand Side Management (DSM) implementation processes to speed up the delivery of projects through various channels. NERSA approved the ESKOM DSM budget of R5,45 billion as part of MYPD2 from which the average benchmark of R5.25m / MW for DSM products was calculated. The proposed expenditure on Performance Contracting will form part of this allocation and was budgeted for in IDM. On aggregate, IDM funding needs to balance to this benchmark over the three years, allowing some level of cross-subsidisation between technologies and solutions. An initial concept of the mass rollout of efficient down lighter technologies was drafted and an Eskom specification for LED technologies compiled in the absence of a local market specification. A high-level industry workshop was held to obtain inputs from the lighting market in the development of the final offer to market. Project Scope: Significant energy savings opportunities exist in the high load factor downlighter segment of the market. The current Eskom mass rollout projects focussed on the replacement of residential incandescent bulbs in a low load factor environment. The current CFL focussed rollout programmes have transformed the efficient residential lighting market in South-Africa. There have been no focus to date on the high load factor environments i.e. the Commercial and Industrial market segments therefore the project will target the replacement of 2.76 million down lights with efficient equivalents in the commercial and industrial sector : Compact Fluorescent Lights (CFL) Light Emitting Diode (LED) The total project savings will be 910 GWh (over 3 years) or a 89 MW (non-peak) equivalent. Project developers may contract for multiple projects and/or technologies at multiple sites. They thereby significantly reduce the Eskom administrative requirements associated with management of individual projects. Sustainability of the projects is ensured by procuring energy savings over a 3 year period. Payments are based on a per kwh rate, only to be made based on actual energy savings verified through the formal Eskom Measurement and Verification (M&V) process. Project Developers will be invited to tender to sell large blocks of savings to Eskom. This minimum size of savings must be achieved during peak hours (16 weekday hours between 06h00 and 22h00), in line with electricity system energy constraints. Eskom will buy verified energy saving at a rate that would not exceed the NERSA benchmark of R5.25m per MW on an aggregate base. Over performance will be incentivised up to 10% of the contracted energy savings. With this in mind contracts will be allocated up to 90% of the approved value, allowing 2
for a 10% over-performance reserve. Over performance above the 10% per contract may be incentivised given available funds and/or under-performance on other contracts. Pricing and related Assumptions: As indicated above, the programme will incentivise savings mainly over the peak periods. Should project developers realise savings at maximum capacity (100% load factor) during the peak period, the NERSA benchmark of R5.25m/MW equates to an energy rate of 42c/kWh. Any lower load factor will result in Eskom being able to pay a rate higher than the 42c/kWh. Based on historical commercial market load factors, a utilisation factor (13 hours) was used to calculate a maximum (51. 8c/kWh) acceptable c/kwh purchase price to stay within the NERSA benchmark of R5.25m/MW. The utilisation factor was also used to calculate project savings and associated cost. The calculations for various utilisation factors over the 16 peak hours are shown in Table 1. Table 1: Sensitivity analysis of rates for varying burning hours (utilisation factors) Burning Utilisation Equivalent hours factor R/MW c/kwh 1 4% 5.25 673.1 2 8% 5.25 336.5 3 13% 5.25 224.4 4 17% 5.25 168.3 5 21% 5.25 134.6 6 25% 5.25 112.2 7 29% 5.25 96.2 8 33% 5.25 84.1 9 38% 5.25 74.8 10 42% 5.25 67.3 11 46% 5.25 61.2 12 50% 5.25 56.1 13 54% 5.25 51.8 14 58% 5.25 48.1 15 63% 5.25 44.9 16 67% 5.25 42.1 It is anticipated that the utilisation factor will be lower than 16 hours and could vary between 12 and 16 hours. Based on historical commercial market factors a utilisation factor of 13 hours was used in the project calculations. 3
Keeping the NERSA allowance of R5.25/MW constant it will be possible to pay between 51.8c and 42.1 c/kwh for a utilisation factor of between 13 and 16 hours per day. The total project budget was calculated using a maximum utilisation factor of 13 hours. Value Proposition: The solution was developed to derive maximum possible benefits to all participants. These include amongst others: South Africa: Increase the security of supply by meeting the DSM target Speed up and assist with the development of the ESCO and lighting industries in South Africa Stimulate the energy efficiency industry Job creation and localisation Energy savings will have a positive contribution in achieving emission targets Project Developers Long term planning benefits Bulk approval and quick mobilisation of projects Economies of scale benefits Bigger, fixed commitments to enable to increased internal capacity and better leverage funding. Up-front initial capital contribution Long term planning benefits Consumers Financial benefits associated with quicker savings By introducing energy efficiency measures the customer might be able to achieve specific green targets associated with the company or industry Eskom Enabling IDM delivery as a key vehicle to strengthen security of supply Limited operational implications and predictable savings delivery Achievement of Supplier Development and Localisation commitments Quicker mobilisation of savings by avoiding individual project approval delays Reduced financial, contractual and commercial risk associated with many contracts Single party contracting will lead to reduced project management Predictable and Sustainable energy savings delivery Market Programme will transform the efficient downlight market in South-Africa 4
Cost Breakdown: The following table indicates the cost breakdown. Figure 1 Project costing Pricing Principles Market will be invited to tender for energy savings delivered during the 16/5 peak time period (6am to 10pm, Monday to Friday) Off peak savings (all savings outside of the 16/5 time period) will not be incentivized Historical actual load profiles indicate that customers will not operate at 100% load factor during the 16/5 period, resulting in an equivalent R/MW savings less than the NERSA benchmark Similarly operations outside of the 16/5 period will not be paid for, thereby reducing the overall cost per kwh paid Based on historical commercial market load factors, a utilisation factor was used to calculate a maximum acceptable c/kwh purchase price to stay within the NERSA benchmark of R5.25m/MW. The utilisation factor was also used to calculate project savings and associated cost. Pricing Assumptions: Large customers & ESCOs will be engaged in sustainable energy savings Based on a market analysis we aim to replace 60% (2.76million) of the projected 4.6million down lighters in the commercial and industrial sector Total baseline rating is a mixture of 50W and 35W down lights resulting in an average baseline per unit of 42.5 Watts (Before) 5
It was assumed that the new technology will lower the load to 10W (After) The total potential savings of 42.5W (before) minus 10W (after) of 32.5Watts (savings) was used in the calculation Maximum project savings was based on 13 daytime, weekday hours 260 payment days per year was used in the calculation Sustainability period of 3 years was used in the total energy savings calculation The market will be invited to tender in phases, to ensure that prices are not fixed for the full 2.76 million units. The process will aim to reduce the overall cost of more expensive LED technologies Cost avoidance model The following results were obtained using the IDM cost avoidance model. From Figure 2 it can be seen that the project energy savings will result in an equivalent 66.6c/kWh avoided cost of generation. The anticipated payment of between 42 to 52.8 c/kwh is lower than the avoided cost of generation. Figure 2 Cost avoidance model LED Commercial - 2.76m installations Project Cost (in 2010/11 Rand) R 470 000 000 NPV (in 2010/11 Rand value) R 486 292 865 Project PI 2.03 Project MIRR 33.0% Discounted payback period 1.68 years Avoided Cost of Generation (in 2010/11 Rand) R 887 746 391 Loadfactor of intervention 57.1% Evening Peak Demand reduction (MW) 89.000 Average Demand reduction (MW) 59.333 Annual Efficiency Savings (GWh) 444.288 Cumulative Efficiency Savings (GWh) 1 332.864 Sustainability period (years) 3 Avoided Cost of Gx per kwh saved (c/kwh) 66.60 Environmental benefits Annual Cumulative Water (megalitre) : 644.22 1 932.65 Coal (thousand tons) : 248.80 746.40 Ash (thousand tons) : 73.31 219.92 SO2 (ton) : 3 772.01 11 316.02 NOx (ton) : 1 950.42 5 851.27 CO2 (thousand tons) : 457.62 1 372.85 3.2 HUMAN RESOURCE IMPLICATIONS No additional Human Resource implications. 6
3.3 RISKS Risk Description Technical - Product quality might impede sustainability as LED technology is relatively new. Savings - Non realization of energy savings Technology - Inappropriate application of technologies Uptake - Slow take-up of offers by external parties Uptake - Project developers will submit similar project to the Performance Contracting project limiting uptake Double dipping between the various Eskom IDM offers (submission of the same project to more than one IDM approval channel) Compliance to legislation by Project Developer Mitigation Strategies Conformance to the Eskom specification, Supplier guarantees and contracting with multiple suppliers will mitigate the quality risk. The developers will also be contracted for sustainability with payments only for actual energy saved. Payments will be based on Measurement and Verification after proof of savings realization Turnkey approach is followed The project developer is will responsible for the appropriate use of technologies. Eskom developed a guideline for use of specific technologies. Take up is incentivized with market required to set price Evolution will be based on common base of calculations to ensure price parity with other offers The savings benefit to Eskom is similar regardless of the offer Internal Control via the M&V process Implement operational mechanisms to avoid double dipping Contract between Eskom and Developer will include section to avoid double dipping The legislative and regulatory requirements and duties are the accountability of the project developer and covered in the contract. 3.4 VERIFICATION BY INDEPENDENT PARTY (IF APPLICABLE) N/A 4. OTHER APPROVALS REQUIRED N/A SIGNATURE DATE ANDREW ETZINGER, SGM (IDM) Submission prepared by: Tom Skinner Contact Number: 0828544993 7
Annexure B CHECKLIST 1 Please note: the headings should NOT be deleted if it is not applicable to the project, the sequence of the headings should not be changed. 1. BUSINESS PLAN Has the total value of the project / request been included in the business plan? 2. INTEGRATED STRATEGIC ELECTRICITY PLAN (ISEP) Has the project / request been included in the IRP plan? 3. NERSA Is NERSA approval/consultation required? No Has the project and the total value thereof been included in the price application to NERSA? If approval or consultation is required, provide details and also highlight the time lines, deadlines, etc. N/A 4. BUDGET If financial approval is required, is the project / request within budgetary constraints? 5. HUMAN RESOURCE IMPLICATIONS Does the project / request have any HR implications? 6. BLACK ECONOMIC EMPOWERMENT IMPLICATIONS Does the project / request have any BEE implications? 7. PUBLIC FINANCE MANAGEMENT ACT (PFMA) Is any PFMA approval required? N/A N/A * Please complete Annexure B1 8. FINANCIAL EVALUATION Has the project / request undergone a financial evaluation? (IDM Cost Avoidance Model) Has the evaluation been verified? By whom (internally or independent)? ISEP, Dx Level 1 Investment Committee and Corporate Finance Has the impact of IAS 39 been evaluated N/A (Embedded Derivatives) 8
9. TECHNICAL EVALUATION Has the project / request undergone a technical evaluation? IDM Management team Has the evaluation been verified? Performance Contracting Steering Committee 10. LEGAL/CONTRACTUAL ISSUES Are there legal implications? Has Corporate Legal input been obtained? If opinion had been obtained, is it consistent with approval sought? 11. EMPLOYMENT EQUITY Was due consideration given to employment equity in terms of the following: Project team Drafting of submission documentation Individual(s) presenting to ICAS 12. SUSTAINABILITY Has the project / request been evaluated in terms of its sustainability implications? (If, yes, by Performance Contracting Team) Has the evaluation been verified? By whom, internally Performance Contracting Steering Committee 13. PRESENTATION Will a presentation be made? If yes, who will make the presentation: Andrew Etzinger and Tom Skinner. Time requirement (presentations should not exceed 20 minutes and 10 minutes for discussion/clarification). Contact person and contact no. Tom 0828544993 SIGNED ANDREW ETZINGER DATE SENIOR GENERAL MANAGER INTERGRATED DEMAND MANAGEMENT Who hereby confirms that all of the above requirements have been complied with. 9
Annexure B1 Transactions requiring ministerial approval in terms of the Public Finance Management Act (PFMA) 1. Does the transaction involve any of the following? (please tick the appropriate box or No) A1 Establishment (or participation in the establishment) of a company? 54(2a) Y N A2 Establishment (or participation in the establishment) of any new entity? 51(1g) Y N B1 Participation in a partnership? 54(2b) Y N B2 Participation in a trust? 54(2b) Y N B3 Participation in an unincorporated joint venture? 54(2b) Y N B4 Participation in any arrangement similar to a partnership, trust or unincorporated joint venture? 54(2b) Y N B5 A change in the nature of the existing interest in B1, B2, B3 or B4? 54(2f) Y N B6 A change in the extent of the existing interest in B1, B2, B3 or B4? 54(2f) Y N C1 Acquisition of a shareholding in a company? 54(2c) Y N C2 Disposal of a shareholding in a company? 54(2c) Y N D1 Acquisition/construction of an asset more than R 500-million? 54(2d) Y N D2 Disposal of an asset more than R 500-million? 54(2d) Y N E1 Commencement of a new business activity? 54(2e) Y N E2 Cessation of an existing business activity? 54(2e) Y N Not applicable NB: A answer to any of the above questions (or any uncertainty) requires consultation with at least the Corporate PFMA office or the Legal Department to confirm if ministerial approval for the transaction is indeed required: Ministerial Consulted with: Comments approval required ( or No) Signature & Name PFMA Office AA Laher Legal Dept If yes, unique no. allocated to transaction for tracking purposes: WJ du Plessis 10
Annexure C CHECKLIST 2 (Refer to the section on Criteria for evaluating Capital projects ) NAME OF PROJECT: CRITERIA COMMENTS/ RECOMMENDATION SIGNATURE DATE Refurbishment: Electrification: Mandatory: DCF: Quality of Supply: Other: Financial, Economic and Pricing Productivity: Ismail Mulla Sustainability Nthikeng Letsoalo Statutory Requirements Insurance Safety: Not applicable Wendy Poulton Kerseri Pather Taxation Mabaeti Molelekoa Funding Jacqui Kilani Technical Review Caroline Henry Wendy Poulton 11