Practical Problems Experienced with Industrial DSM Projects Marius Kleingeld 15 August 2012

Introduction Industrial Demand Side Management (DSM) projects reduced demand by 576 MW from 2003 to % of Eskom Integrated Demand Management (IDM) expenditure in 2011 incurred in industrial sector Industrial DSM projects present unique challenges Specific problems of industrial ESCOs not widely known Hamper new entrants, inexperienced ESCOs, reduce savings

Phases: Industrial DSM Project Phase 1: DSM Investigation  ESCO markets DSM, obtains letter of intent  Detail investigation, measurements, designs, costing  ESCO drafts proposal, submits to client & Eskom Phase 2: Proposal Approval  Internal client funding application  Process proposal through Eskom-IDM PEC, CIC and Procurement  Sign Eskom and client contracts, baseline reports Phase 3: Implementation  ESCO & client scope, tenders, orders, manage installations  Various milestones such as equipment delivery, factory acceptance testing (FAT), cold/hot commissioning Phase 4: Performance Assessment  Performance of project is assessed over three months  Measurement and Verification (M&V) issues savings reports Phase 5: Maintenance  Project handed over to client  Client maintains project to continue savings

Client PEC CIC Procurement ESCO M&V Client + ESCO Implementation Project Approval Process  Can it work?  Will it be sustainable?  Costs?  MW reduction targets  Capital  Payback  Risk  Profit  Safety & health  Production  Maintenance  Independent measurements  Savings reporting  Costs & commercial issues  Discounts  SD&L  Risk  Capital Investment required

DSM Investigation Establish correct baseline  Use metering or portable power loggers  Verify measured energy readings: simulated results / alternatives e.g. log sheets  Always use safety margins Confirm that planned results are viable  Not submit new technologies – experiment first  ESCO must familiarise itself with client operations and requirements  Verify: simulations, calculations and tests  Client cooperation essential Other risks  DSM interventions often seen as threat to job security e.g. pump attendants  Highlight additional benefits to counter resistance e.g. increased safety

Secure Financing Funding approvals  Timing of client & Eskom funds  Delay - client budget problems  Delay - Eskom contract variances  Stacks of paperwork - assist client  Additional requirements e.g. SD&L  Process: up to 24+ months Funding availability  Present scenario (MYPD2) ends March 2013  Previously (MYPD1) Eskom-money ran out – ESCOs without new projects for more than 12 months  Clients also experience reductions in capital spend  Difficult to plan ESCO business with such interruptions and uncertainty Be prepared for “hit rate” <100%

Measure Analysis Cost Proposal Risk R&D technology Client (e.g. safety) DSM proposals do not allow for red “investments” ESCO Process

ESCO skills requirements Multi-disciplinary skills needed May be problematic for small ESCOs – contract experts

Implementation: Client Document trail  Client signs scope document, specifying preferred suppliers, equipment, procedures, etc.  Ensure site personnel and head-office personnel communicate with each other, and agree with all aspects of project  Ensures continuity with personnel changes  Prevent scope creep and cost escalations  Allow for scope changes e.g. new head office standard etc.

Implement: Safety & Access Safety and health not negotiable  Client induction requirements may change  Unforeseen incidents e.g. accidents and site closures  Additional costing must be absorbed Limited access  Project work areas may be restricted  Some work e.g. mine shaft work limited to client personnel  Limitations due to operation, maintenance schedules Solution  Resource planning  Risk assessments

Implement: Subcontractors Sub-contractor issues  Aim for contract extensions e.g. delay tactics  Limited communication and feedback, not attending meetings  Failure to adhere to safety measures Client issues  Unnecessary holdups  Placing additional orders on same sub-contractor Solution: performance-based contracts with penalties

Performance Assessment #1/2 Savings targets: Performance Assessment (PA)  Test evaluation conditions before official start of PA  ESCO representatives to be present semi-permanently on-site during PA Manage PA process  Feedback and corrective actions  Beware of sabotage (Client held to minimum of PA performance or proposal)

Performance Assessment #2/2 System changes between proposal submission and implementation e.g. production increases Duplicate measurements – do not rely exclusively on Eskom M&V

Maintaining Savings Projects often underperform quickly after ESCO hands- over to client  Client personnel have other focus e.g. safety, production  Savings not linked to personnel performance indicators  Personnel have limited knowledge of savings technologies  Shortage of skilled maintenance personnel Solution: Maintenance  ESCO contract  Performance-based  Continuous training

Manage Client Perceptions (1/2)

Manage Client Perceptions (2/2)

Conclusion Cost comparison  Modern power plant: ± R26 million/MW  Industrial DSM projects: ± R5 million/MW => 5 times less Increase industrial DSM activities  More ESCOs involved  Additional MW-savings  Save Eskom and client costs