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

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

2. Introduction • Industrial Demand Side Management (DSM) projects reduced demand by 576 MW from 2003 to 2012 • 32% 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

3. 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

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

5. 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

6. 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%

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

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

9. 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.

10. 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

11. 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

12. 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)

13. 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

14. 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

15. Manage Client Perceptions (1/2)

16. Manage Client Perceptions (2/2)

17. 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