Energy Efficiency and Demand Side Management Incentive Program (EEDSM)

South Africa is ranking high among the world’s most energy-intensive nations, and is the highest contributor in terms of national greenhouse gas emissions per capita. This can be attributed to the fact that the economy is predominantly coal based and a legacy of comparatively low electricity costs. The industrial and mining sectors combined are the largest users of energy in South Africa and account for 38% of total end-user energy demand. Together, Commercial and public building sectors contribute to 8%, while the residential sector accounts for 18% of final energy demand in the country (Department of Minerals and Energy 2005).
In 2008 a combination of different factors resulted in a power crises in South Africa. As a consequence, the South African government has recognized the relevance of energy savings and energy efficiency. The need for a strategy to overcome the national problems led to the implementation of an energy efficiency strategy as well as demand side management policies.
The National Electricity Regulator of South Africa already published the “Regulatory Policy on Energy Efficiency and Demand-Side Management for the South African Electricity Industry” in 2004. This document strengthened the relevance of energy efficiency, energy service companies and monitoring activities.
One year later the “Energy Efficiency Strategy of the Republic of South Africa” was published with the aim to establish national targets for energy efficiency improvements and a timetable (International Bank for Reconstruction and Development & World Bank 2011).
The National Electricity Regulator established the EEDSM programme together with Eskom, the largest utility company of South Africa and defined the rules and procedures of the policy in the same year (2004) (International Bank for Reconstruction and Development & World Bank 2011).

The aim of the policy is to improve energy efficiency to reduce the absolute electricity consumption during peak load hours (Institute for Industrial Productivity 2014)”. The EEDSM sets targets relating to various interventions in the domestic, commercial and industrial sectors. The 2008 National Energy Efficiency Strategy of South Africa sets an overall target for final energy demand reduction of 12% by 2015. This shall be achieved by the implementation of different initiatives including energy efficiency programs under the guidance of the Energy Efficiency and Demand Side Management (EEDSM) programme. The aim of this EEDSM is to incentivise providers of (large) energy efficiency programmes by offering them a fixed remuneration for verified units of energy saved.

It is a national policy.

Relevant sectors

• Residential: New and existing buildings are addressed
• Services: New & Existing buildings are addressed, buildings targeted under this policy are all government-owned buildings (particularly hospitals, clinics, prisons, offices etc.) and commercial buildings (offices, hotels and other hospitality facilities, employee compounds at mines, refineries and power stations).

Eskom has published a list of technologies and measures, which are eligible for payment under the EEDSM scheme.

The policy supports the replacement of inefficient technologies and the purchase of different technologies like efficient lighting, insulation, efficient HVAC systems, motion sensors, etc.

Relevant target groups

• General management company
• Manufacturer
• Investor
• Investor-occupier
• User
• Energy company
• Energy Service Company

Direct beneficiaries

• Manufacturer

• Investor

• Investor-occupier

• User

• Energy company

• Energy Service Company

Indirect beneficiaries

• Installation contractor

• System supplier

• Tenant

• Wholesale company

• Governmental actor

• Research institution and university

Relevant barriers

• Economic and financial barriers: Financial incentives are direct means to overcome financial barriers.
• Organisational barriers: Financial incentives are direct means to overcome financial barriers.
• Lack of interest and motivation in energy efficiency-improvement: Financial incentives will motivate investors and suppliers to consider energy efficient technologies supported by the programme.

Relevant incentives

• Saved energy costs: The participants can save energy costs when they invest in energy efficiency measures. This is a major incentive for customers to take part.
• Directly increasing earnings or profits for actors on the supply side: Energy service companies will have a good incentive to run energy efficiency programmes, as this will increase their profits
• Improved reputation: Assisting their customers to save energy and costs will increase the reputation of energy companies and may induce them to such programmes.
• Contribution to protection of the environment: The EEDSM plays a significant role in achieving the national energy efficiency targets

The Energy Efficiency Demand-side Management Incentive Program is part of the energy efficiency strategy of South Africa. The vision of the strategy is to encourage a sustainable development of the energy sector by means of efficiency measures in order to minimize negative impacts of energy usage upon health and environment, as well as to contribute to the aim of secure and affordable energy for all (International Bank for Reconstruction and Development & World Bank 2011)”.
The EEDSM has direct effects through programmes such as the standard offer model policy, which addresses electricity users of residential, commercial and public buildings.
The EEDSM is part of a policy package that influences the demand and supply side. The programme targets the ESCOs and investors to replace inefficient technologies and increase energy efficiency with financial incentives.
Standards and label support this development by setting an upper limit for the allowed energy consumption of a building. Energy performance certification informs buyers or tenants about the level of energy efficiency.

The utility company Eskom has integrated an innovation programme into the EEDSM and invites technology and equipment suppliers to develop new or innovative ideas under the Performance Contracting Program (International Bank for Reconstruction and Development & World Bank 2013).
The Standard Offer Programme (SOP) is an innovative programme. The policy has been put in place as a mechanism to acquire demand-side resources by offering a predetermined rate for electrical demand savings (kW) and annual energy savings (kWh).The SOP provides a fixe rate for delivered energy savings. The mechanism of this programme is comparable to the feed-in-tariffs which are used to promote the increased implementation of renewable energy resources (International Bank for Reconstruction and Development & World Bank 2014).

Energy savings have focused on lighting, general industrial process optimisation, compressed air systems as well as on industrial and commercial HVAC. A further improvement would be a focus on technology improvement in the residential sector (LBNL 2013).

The following pre-conditions are necessary to implement the EEDSM programme:
Agencies or other actors responsible for implementation
Eskom launched the Energy Efficiency and Demand Side Management incentive programme. It is the largest state-owned utility company in South Africa and generates approximately 95% of electricity used in the country, equalling to about 45% of electricity used in entire Africa (Eskom 2014). Eskom has set up the “Group Customer Services for
Integrated demand management” to implement the programme.
Other responsible agencies are the National Energy Regulator of South Africa (NER), and the Department of Minerals and Energy (Institute for Industrial Productivity 2014).

Funding
The National Energy Regulator of South Africa (NER) has provided approximately R6 billion for Eskom (to fund ESCOs) and electricity distributors to apply to the Demand Side Management (DSM) programme. These funds are available via a number of programs to electricity customers to assist them in reducing electricity usage.
The funding will also be obtained from a tariff levy approved by the National Energy Regulator (International Bank for Reconstruction and Development & World Bank 2011).

The National Electricity Regulator (NER) calculates the potentials and then plans and implements the policy and defines the responsibilities and obligations. Eskom, the largest utility company of South Africa is responsible for the implementation of the policy. The NER established the following rules for the EEDSM:

• Eskom implements the programme as a condition for the approval of the price increase 
• Eskom establishes a fund and recovers the programme costs from the tariffs of all customers
• The utility company evaluates the projects submitted by ESCOs
• The NER sets a license condition for the Major Distributors to develop demand side management plans. Then the Major Distributors screen EEDSM projects from ESCOs and customers
• ESCOs investigate feasible projects with customers and send a proposal to Eskom or the Major Distributor
• An independent Monitoring and verification body verifies the energy saving per project and sends a report to the NER, Eskom, Major Distributor and to the customers
• The participating customers are required to contribute 50% of the capital costs of a project
• ESCOs are required to have a contract with the customer

The next figure illustrates the Eskom Energy Efficiency and Demand Side Management Fund Funding Mechanism.

According to the International Bank for Reconstruction and Development & World Bank (2011), the major steps for the operation of the standard offer programme are:

1. “Eskom issues Request for Application under the SOP
2. Project Developer identifies Project and negotiates with the customer
3. Project Developer submits initial application to Eskom
4. Eskom reviews the application, approves the EE/DSM measures
5. Eskom requests final application
6. Project Developer finalizes the measures and develops M&V plan
7. Project Developer submits final application
8. Eskom approves or rejects the application
9. If approved, Eskom signs the Standard Offer Agreement with the Project Developer
10. Project Developer implements Project
11. Project Developer submits Installation Report (IR) and requests for Installation Payment
12. Eskom reviews IR and requests for Installation Payment
13. Eskom disburses the Installation Payment upon acceptance of the IR
14. M&V organization verifies savings and submits report to Project Developer
15. Project Developer submits Savings Report (SR) and request for Performance Payment along with M&V report
16. Eskom reviews the M&V report and requests for Performance Payment and disburses funds upon acceptance”

Quantified target
The concrete target of the EEDSM was to deliver 1037 MW demand savings and 4055 GWh energy savings from 2011-2013 (with a load factor of 45%) (Institute for Industrial Productivity 2014; LBNL 2013).
The National Energy Efficiency Strategy of 2008 sets a final energy demand reduction of 12% by 2015. This will be achieved by implementation of different initiatives including the implementation of demand side management rules.

Actors responsible for design
Responsible for the design of the policy are the Department of Energy (government) and Eskom (national utility).

Actors responsible for implementation
Eskom is responsible for the different programmes, the criteria for funding and the evaluation process.

Monitoring

• Perform an energy audit with an identification of eligible energy efficiency measures
• Develop a monitoring and verification plan
• Submit a report on achieved savings that is verified by an independent verifier 

Eskom prepares a list of independent organisations to carry out the evaluation. According to International Bank for Reconstruction and Development & World Bank (2011), a number of university-based groups organise the M&V process for Eskom. The monitoring process is funded from the EEDSM fund (M&V costs are allowed up to 8% of the total project costs) and collected through the electricity tariffs (2 cents per kWh are paid for monitoring activities) (Xia 2012; LBNL 2013)

The next figure illustrates the EEDSM process including the monitoring and verification stages.

• Dynamic market transformation and/or innovation: The EEDSM programme can foster a growth in the market of energy efficiency products and services and attract substantial investment. The aim of the programme is to increase the energy efficiency of technologies and to support innovative ideas.
• Avoiding lost opportunities: The EEDSM programme has the incentive to improve energy efficiency significantly. It avoids the loss of opportunities of energy saving for those buildings or systems and components that would otherwise just meet the energy efficiency level specified in the building codes.
• Minimising snap-back effects: Snap-back effects in the market and in the long-run for individual projects can be minimised through continuation of the programme to support mainstream energy-efficiency technologies and solutions. According to Hertzog (2014) the funding by Eskom has been cancelled or stopped till further notice. However, it is expected that the EEDSM programme will be moved to the DOE or a similar organisation.
• Minimising free-rider effects: There is no measure in place to minimise free-rider effects, e.g. by requiring additionality. All energy efficiency programmes and funding is there to support any initiative that contributes to energy efficiency (with proof of quantified savings by M&V professional) and has its defined rules & criteria.
• Creating Spill-over effects: An innovation programme was introduced with the EEDSM to target very energy efficient technologies. This helps the market transformation and enhances the spill-over effect.

Co-benefits

• Development of the ESCO market
• The installation of solar water heaters as result of the EEDSM programme has resulted in poor communities having sustainable hot water supply for the first time (community development)
• Capacity development and job opportunities creation, e.g. related to auditing, manufacturing, installation and maintenance.
• Mitigation of greenhouse gas emissions and the resulting climate change impacts

The following barriers have been experienced during the implementation of the policy

• The responsible actors of Eskom were understaffed and overburdened
• Eskom used a complex, non-transparent and time-consuming project evaluation process
• The project approval criteria were unclear and inconsistently applied. The proposal process suffered from misunderstandings, insufficient feedback and poor communication
• The contract negotiation process was complex, time consuming and adversarial 
• Most of the projects have been developed by a small number of large ESCOs

These uncertainties led to considerable risks and it was difficult to finance and implement all projects.

The following measures have been undertaken to overcome the barriers

• Simplify the contracts
• Reduce the burdens on utility staff for project evaluation
• Provide transparency on payment for delivered savings 

The overall saving target is to save 1037 MW demand savings and 4055 GWh energy savings over 3 years (2013-2015) (Unlimited Energy 2013).

Standard Product Program:
By March 2012 a total of 572 projects were registered. Demand savings equalled to 19.7 MW and energy savings to 86.9 GWh.

Standard Offer Program:
By the end of 2011, a total of 61 projects were registered. Demand savings equalled 31.4 MW and energy savings 148.1 GWh

ESCO Program:
By 2004 there were 80 ESCOs registered. By the end of 2011, more than 400 projects were registered. Demand savings equalled 793 MW and energy savings 2347 GWh.

Performance Contracting:
By the end of 2011, a total of 16 projects were registered and contracted 131 MW as well as energy savings of 2076 GWh.

Solar Water Heating:
By the end of 2011, 104,978 solar water heater were installed. In January 2012, already 172,784 solar water heaters were installed (Skinner 2013).

Cumulative total savings are:

Source: Institute for Industrial Productivity (2014)

According to Eskom (cited in LBNL 2013) the EEDSM programme has reduced peak electricity demand by 3072MW for the combined years 2005-2012.

The project costs are partially funded by the government. From 1 April 2011 the government allocated a budget of R5.4 billion over 3 years to support the policy (R5.4 billion to deliver 1,037MW demand savings over 3 years or R5.2m/MW). The National Energy Regulator of South Africa is only responsible for approving the budget allocated by Eskom (Institute for Industrial Productivity 2014).
These funds will be applied for project implementation and administrative costs for EEDSM and demand-reduction programmes, including a portion of the solar water heating initiative by the Department of Energy (cited in: International Bank for reconstruction and Development & World Bank 2013)”.