Strategy for Rolling out Solar Energy Geysers

5 November 2014

Portfolio Committee on Small

Business Development

Contents

1. Overview

2. Background

3. Approach

4. Commercial Strategy

5. Localisation Strategy for NSWHP

6. Partners & Stakeholders

7. Supplier and SMME Development for NSWHP

8. Supplier And SMME Development Eskom wide

9. Summary

2

Overview

3

Solar Water Heater is a complete operating system that uses the sun to

produce hot water and comprises of collector, hot water storage tank whether

supported by supplementary energy source or not, and all necessary

interconnecting pipes and functional components.

The SWH consist of two systems:

- Low Pressure system: It uses gravity to feed the water into system

- High Pressure system: It uses direct pressure from the interconnected point

Background

• The SWH programme started in 2008, and to date approximately 400 000 units installed in residential areas.

• The funds were appropriate through NERSA, Division of Revenue Act, (DORA) & DoE.

• Over 90% of the installed SWH were imported which resulted in 2012, the Department of Trade & Industry(dti) introducing SATS 1286 to drive local content & production of SWH.

• Two Low Pressure (LP) programmes were discontinued in December 2012 and May 2013 respectively due to local content requirements.

• The High Pressure (HP) programmed is still running.

4

Approach

• There are over 270 municipalities in SA, however the 1st phase of the SWH programme will rolled-out to approximately sixty (60) municipalities as provided by DoE.

• The municipalities will select the beneficiaries of the SWH units.

• Eskom as the implementing agent will undertake the following by scopes of work: Feasibility Studies, Manufacture, Project Management Installation,

Technical Audits and Maintenance.

5

Commercial Strategy

• There is a Memorandum of Agreement (MoA) signed between Eskom and DoE guides the implementation and contracting criteria.

• An amount of R4.3 billon has been allocated for the National Solar Water Heaters programme through the Department of Energy (DoE).

• The planned demand for SWH is 350 000 units for the next 3 years until 2018, as per Medium Term Expenditure Framework.

• The dti’s South African Technical Specification (SATS) 1286 guides the appointment of manufacturers.

• The Preferential Procurement Policy Framework Act (PPPFA) will be used.

• The SABS Mark of approval documents will be the gatekeeper to ensure quality of the procured systems.

• The open tender mechanism will used for the multiple contracts placement to ensure broader participation.

6

Localisation Strategy NSWHP

Eskom’s SWH Strategy focuses on the following SMME aspects:

Skills Development

The following are proposed skills development targets for SWH:

SWH Installation

- Welders - Plumbers

- Fitters - Safety Officer

- Boiler Makers - Logistics

Job Creation

• Comparatively There are limited number of job opportunities within the manufacturing industry of SWH.

• Large number of jobs (local to site ) to be created in the installation and maintenance phase of the programme

• Approximately 3000 job opportunities will be created during the installation phase and additional 1000 during the 5 year maintenance period.

Local Manufacturing / Production

• The introduction of SATS: 1286 encourages high local production content and growing the local economy and creating jobs..

7

Partners & Stakeholders for the Contracting Framework

8

Description

1 DoE-Eskom Funding Agreement (MoA) with all the conditions imposed on Eskom as the

Implementing Agent

2 DoE-SABS

Provision of services such as technical audits, independent measurement and

verification of local content; etc.

3 Eskom-Local Manufacturers Agreement, with a duration of up to 3 years, for the supply of designation-

compliant SWH systems, signed after following a competitive bidding process,

and subject to entering into an Implementation Agreement with the DoE

4 Local Manufacturers-Installers Service Level Agreement regarding the training of successful installers by

Local Manufacturers on the installation of their SWH systems

5 DoE-Local Manufacturers Implementation Agreement which, among other things, enforces compliance

with industry designation requirements and other pre-defined economic

development objectives, with recourse (including contract termination) in the

event of breach. Most importantly Manufacturers will need to commit to a

schedule that ramps up local production taking into account their lead times

for setting up manufacturing facilities. In this regard the DoE launched a

Request for Registration and Information (RFRI) process to sound the local

market.

6 Municipalities – Eskom Memorandum of Agreement outlining roles and responsibilities

Supplier and SMME Development NSHWP

Increased SMME opportunities:

• Multiple contracts and work packages will be used as opposed to the previous turnkey approach increasing SMME opportunities.

• The expected local content on the SWH as designated by the Department of Trade and Industry has a threshold of 70% for both the storage tank and solar collector.

At least 70% of storage tank and solar collector shall be locally procured.

Contracts for both Manufacturers and Installers will be placed with local entities.

• Non-black manufactures will be require to demonstrate that 30% of black owned businesses participate in the whole value chain.

• PPPFA framework special condition : Black-owned companies for all installations.

• Manufacturing contracts to be separated from installation – this closes the import opportunity and forces local manufacture.

• The DoE will be responsible for the development black manufacturers in the SWH industry.

• Black installers will be trained by the SWH Manufacturers to become competent for the installation and maintenance phase.

• Individuals from communities will be further trained and given necessary skills and support through the incubation programme.

9

SUPPLIER AND SMME DEVELOPMENT

10

Supplier Development’s role is to increase the capacity and capability of local suppliers across Eskom’s value chain

Please note: Emphasis is on Black Owned Suppliers to accelerate transformation

Focus is on opportunities identified in Primary and Secondary Plant; Primary Energy and Capex

Source: Extract from the Supplier Development Strategy document; Team analysis

Strategic imperatives Description

Create an

enabling

environment for

new suppliers

• Identification of priority and high

impact commodities with no local

supplier (BO) presence

• Creation of an enabling

environment for the development of

new suppliers to do business with

Eskom

Develop and grow

existing emerging

suppliers

• Source EMEs and QSEs (BOs)

from the data base and through

industry analysis for development to

increase capacity and capability to

contract with Eskom in high impact

areas

Grow emerging

suppliers into

sustainable LMEs

• Ensure QSEs (BOs) are developed

and provided with sufficient,

sustainable business to become

established LMEs

• Clear linkage to priority/high

impact spend areas with a

focus on Primary Energy,

Primary and Secondary Plant

and Capex

• Thorough understanding of

supplier types, their growth

trajectories and related needs

• Strong integration and

collaboration with internal

Eskom departments

• Establishment of strategic

external partnerships

• Range of suitable

intervention mechanisms

How will this be achieved

A strong and capable localised energy supply chain will benefit Eskom, benefit local industry and benefit South Africa as a whole

Source: CSDP; IPAP2; Group Technology and Commercial

Driving economic development... Will benefit….

Enhanced

industrialisation

Localised

energy

industry

Accelerated

job

creation

Greater local

skills base

The South African economy:

• Reduced cost of doing business

• Investment in plant and

technology

• Greater export potential

• Reduced unemployment and

poverty

• Larger and more skilled

workforce

• Increased diversity in work

• Improved quality of life

Eskom operations:

• Reduced supply chain costs

• Greater security of supply

• Shorter lead times

• Improved efficiencies and quality

• Co-development of solutions for

operation specific problems with

manufacturers

Investment in

building local

communities

12

Eskom proactively drives socio-economic

development

13

Source: Eskom Group Technology and Commercial Department

Su

pp

lie

r D

eve

lop

me

nt,

Lo

ca

lis

ati

on

an

d T

ran

sfo

rma

tio

n

Te

ch

no

log

y

Strategic

Sourcing

• Drives TCO, risk & local development through

long-term sustainable spend

Tactical

Sourcing

• Looks for opportunities to maximise value from

transactional (once-off) procurement activities

Identifies opportunities to design for local to drive

development of local industry

Identifies and integrates local development opportunities into

once-off, strategic commodity and project contracts

Project

Sourcing

• Capital procurement excellence

• Incorporates technology and SD&L to drive local

industry development while maintaining the project

life cycle

Elevates tactical commodities through

standardisation and aggregation of demand

Enhances long-term view by pooling the

demand of project and strategic commodities

13

Socio-economic transformation pillars

B-BBEE

NGP

NDP

Programmes

ASGI-SA

NIPF

IPAP

CSDP

NIPP

Skills

Develo

pm

en

t

Development objectives

Jo

b c

reatio

n

Lo

calis

atio

n

Ind

ustria

lisatio

n

Source: Introduction to the Competitive Supplier Development Programme; B-BBEE Act 53 of 2003; ESKADAAT6

• All of this is underpinned by getting previously disadvantaged into the

mainstream and fighting inequalities, poverty and unemployment

Su

pp

lier/E

nte

rpris

e

Develo

pm

en

t

PPPFA

Op

era

tio

na

l

Priority focus

areas

▪ Boiler Maintenance

▪ Primary Energy

▪ Cables and Conductors

▪ Metering

▪ Valves

▪ Protection Schemes

▪ Grinding Elements

▪ Pumps

▪ ICT

▪ Vessel (Containers)

▪ Generators

▪ Switchgear

▪ Generation Spares

▪ Fabric Filter Bags

▪ Transformers

▪ Turbines

▪ Control systems

▪ Ash & Stockpile Handling

▪ Pipes

▪ Rotors

▪ Conveyor

▪ Tubes

▪ Air Heater Pack

▪ Economiser

▪ Capacitor Bank

▪ DC Equipment

▪ MV Motors

▪ CSP

▪ Solar PV

▪ Wind

▪ Gas CCGT

▪ Nuclear New Build

▪ Tx Line Construction

▪ Biomass

▪ Network Strengthening

▪ Substation construction

and refurbishing

▪ Koeberg Nuclear

▪ Electrification of homes

▪ Civil Construction

▪ Fabric Filter Plant

Retrofit

▪ Steel

▪ Building and Build

maintenance

42 operational and project spend focus areas making up ~89% of our procurement spend

Pro

jec

ts a

nd

New

Bu

ild

IR

P2

01

0

Source: Eskom SD&L Plan and Analysis

Other

Total

Spend

42 Focus

Areas

Total forecasted 5

year spend, R’billion

Provide a platform for sustained demand

through our operational and project spend

15

Acceleration socio-economic development

transformation

b Enhancing our Strategic

Sourcing process

• Integrating technology and SD&L

into the process

c Creating our SD&L Plan • Following a strategy to drive

development through our spend

d Making transformation a

key focus

• Accelerating the development of

black industrialists, SMMEs and

Cooperatives

e Including SD&L and

collaboration in all our

transactions

• Implementing our SD&L plan through

our strategic sourcing activities

• Changing the way we strategically

work with our suppliers - Developing

collaborative, long-term relationships

a Embedding SD&L into

our organisation

• Ensuring SD&L becomes an

integral part of our operations

Source: Eskom Supplier Development and Localisation Department 16

SD&L Key Performance Indicators

KPA KPIs 2014/15 2015/16

Localisation Percentage of B-BBEE attributable spend against TMPS 75% 80%

Percentage of BO attributable spend against TMPS 12.5% 40%

Percentage of BWO attributable spend against TMPS 6% 12%

Percentage of BYO attributable spend against TMPS 2% 2%

Percentage of BPLwD attributable spend against TMPS 1% 2%

Percentage of QSE attributable spend against TMPS 10% 15%

Percentage of EME attributable spend against TMPS 10% 15%

Percentage of Local Content Contracted in New Build 65% 65%

Percentage of Local sourcing in procurement 65% 65%

Skills

Development Investment in skills developed by suppliers SPC SPC

Youth Development through suppliers network 2500 2500

Jobs Creation Jobs creation by suppliers 16 334 8 317

Industrialization Investment in plant by suppliers SPC SPC

Technology Transfer (Rand Value) RVPC RVPC

Export Promotion (Rand Value) RVPC RVPC

Enterprise/

Supplier

Development

Suppliers developed (number of suppliers) RVPC RVPC

Payment duration to black owned QSE/EMEs 14 days 14 days

SPC = Set Per Contract

RVPC = Rand Value Per Contract

17

MEDUPI

• Up-skilling opportunity of local business owners through Eskom Contractors Training Academy

which is a registered programme offered in partnership with the University of Limpopo

• A consortium, made up of 46 local BWO companies , takes pride in feeding Medupi’s construction

workers

• A wholly Black Owned business doing general maintenance at Medupi

KUSILE

• Bulk Earthworks

o A SMME employs 89 local people from the Mpumalanga Province and this contract enabled

the contractor to increase its CIDB level from grade 5CE to grade 8CE

• Rock Crushing Contract

o Joint Venture engaged for Rock Crushing at Kusile

o The purpose was to give local entities an opportunity to participate in tenders whose scope of

work needed a higher CIDB grading.

• Construction of 336 units

o The JV participation ratio was 50:50

SMME development

19

• Eskom has invested R2.3 billion in infrastructure development

o Eskom has built 995 houses and purchased 321 houses

o Eskom and Exxaro jointly invested R180 million on the roads upgrade

o Eskom has upgraded the two sewage plants serving Lephalale

• Eskom invested over R3,8 million in wellness centers and medical equipment to

seven clinics in the local communities

• Hitachi invested R1.2 million in building Segwati crèche

• Eskom invested R8.6 million invested in a paediatric mobile unit for primary

school health care

• Eskom invested R3.5 million in the refurbishment and upgrading of the Seleka

Community Hall and Traditional Offices

• Eskom invested over R620k in refurbishing Itereleng Creche in Marapong

• Eskom refurbished the Olifantsdrift Primary School after it was damaged by

storms

Eskom Investment at Medupi

Increasing the capability and penetration of BO suppliers in priority spend areas requires Eskom to address challenges head-on

Lack of access to

funding

▪ Historically, black people were excluded from accumulating capital making it difficult to start and

sustain businesses

▪ The private sector in SA tends to be risk averse and venture or start-up capital is not readily accessible

▪ DFIs e.g. the IDC, have been set up by government to bridge the funding gap, but their lending criteria

is stringent and they demand security in the form of supplier contracts

▪ The high capital requirements in high impact areas amplifies this challenge

Lack of human

capital and skills

• Human capital is a key asset for any business - managerial and entrepreneurial skills are not well

developed and the overall scarcity of critical skills pits BO companies against established business in

the “war for talent”

• The technical/ engineering driven nature Eskom’s high impact areas requires specialist human capital

up to date with the latest knowledge

Lack of IP

▪ Barriers to entry for BO suppliers in the highly technical and engineering driven fields (Primary Energy,

Primary and Secondary Plant) are sizeable

▪ This limits black owned companies to “easier” general services industries, such as catering, cleaning,

security and certain professional services

Access to work

opportunities

• The technical specifications of tender documents are often set at a prohibitively high level of

complexity, making it impossible for local BO firms to compete with OEMs and established large local

businesses

General difficulty in

doing business in

South Africa

• South Africa has a low tolerance for entrepreneurial failure – people dissociate themselves and

finance institutions tend to black list failed entrepreneurs

• SA has one of the highest failure rates of start-up businesses in the world with almost two-thirds of

start-up businesses failing within the first two years

• This reduces the number of entrepreneurs starting new ventures as failure can easily result in a poor

financial future

Challenges

Source: Eskom Supplier Development Strategy 20

Summary

• The biggest portion of the budget is allocated to the manufacturing supply & delivery of the SWH systems.

• Programme to be implemented applying a multiple contracts approach in order to create opportunities for the SMMEs

• Black Economic empowerment through the special conditions using the PPPFA framework in the installations contracting model.

• Big corporates to outsource or subcontract in order to demonstrate 30% participation in the manufacturing phase.

• Sustainability, Localisation and SMMEs development for the 5 year period during the maintenance phase of the programme

• This is a new industry and an industry of the future, Eskom intends building capacity and capability of local and targeted players. This will be done through focused Enterprise Development initiatives like Subcontracting and Incubation programmes.

21

Thank You