South Africa takes further steps to open up electricity market

Out-Law Analysis | 26 Nov 2020 | 11:10 am | 5 min. read

The South African government has been particularly active this year in making changes to energy regulation and have made three interventions in recent weeks.

In February president Cyril Ramaphosa’s state of the nation address outlined seven energy sector interventions, and action at both legislative and administrative level has shown that the government is willing to pursue these changes.

The latest developments affect three areas: electricity regulations on new generation capacity; an approval to deviate from the Integrated Resource Plan (IRP) 2019 when licensing own-use generation facilities; and a determination setting out the power to be procured from independent power producers (IPPs).

New generation capacity regulations

The New Generation Regulations were published under the Electricity Regulation Act to provide for the procurement of new generation capacity by organs of state. The regulations generally provide for procurement to be carried out in terms of IPP procurement programmes in accordance with capacity allocations set out in ministerial determinations under section 34 of the Act. The determinations themselves are intended to reflect the path set out in the IRP 2019, which is the government's primary planning document for future investment in the electricity sector.

The minister of mineral resources and energy, Gwede Mantashe, gazetted draft amendments to the regulations in May 2020 for public comment. These proposed that municipalities who could demonstrate sound financial standing should be able to apply to establish new generation capacity as long as this was in accordance with the IRP 2019, and did not need to fall under a section 34 determination or IPP procurement programme. The amendments give effect to one of president Ramaphosa's promised energy interventions to allow for municipal participation in the sector.

The final version of the amendments was gazetted on 16 October and they are now in force. The amended regulations do away with the express requirements for “good financial standing”, but instead allow municipalities to apply to the minister for approval to establish new generation capacity through either an internal mechanism – using its own departments or internal administrative units – or an external mechanism such as municipal entities or private sector IPPs.

The amendments also stipulate that before a municipality can conclude any power purchase agreement (PPA), it must comply with the Municipal Systems Act (MSA) and Municipal Finance Management Act (MFMA).

Where an internal mechanism is used, the MSA requires that the municipality must conduct a feasibility study, and would ultimately contract with an IPP to build the generation facility for the municipality, which the municipality will own and operate, with possible operational support provided under contract by the private sector.

Under an external mechanism, the New Generation Regulations now contemplate that a municipality would have to seek approval under the PPP provisions of the MFMA and also comply with the Municipal PPP Regulations under that Act – essentially necessitating the establishment of new generation capacity through a PPP agreement.

From a practical standpoint, the amendments to the New Generation Regulations are somewhat disappointing. Most municipalities are not equipped with the balance sheet or budget to realise new generation capacity through internal mechanisms. Although it is a useful option for well-funded metropolitan municipalities, it largely misses the point of having IPPs participate in the electricity sector and take on demand, technology and project risk.

On the side of external mechanisms, the mandatory use of PPP processes constrains municipalities and forces them to go through what is an onerous process including extensive feasibility work and public consultation.

The end result of the amendments is, therefore, is that opportunity for an easy path to IPPs selling electricity to municipalities has been missed. If IPPs could, acting independently of the municipality, establish a generation facility and then simply conclude a PPA for electricity sale as an ordinary supply contract, this would have represented a significant opening up of the market in South Africa.

The amendments feature one positive change unrelated to municipal IPP procurement. Energy storage has been included in the list of technologies which can be procured from IPPs, potentially opening this technology for private sector participation through battery or other storage technologies. The change also aligns with the addition of energy storage in the section 34 determination discussed below.

Deviation from IRP 2019

On 30 October the National Energy Regulator of South Africa (NERSA), which is responsible for granting licences for electricity generation facilities among other things, said it had received approval from the minister to process licence applications for self-generation facilities of above 1MW even if they are not in compliance with the IRP 2019.

This ministerial deviation approval addresses the Electricity Regulation Act's requirement that an applicant for a generation licence, including grid connected self-generation or own-use facilities, must demonstrate compliance with the IRP 2019 or must provide reasons for deviation for approval by the minister. Under the IRP 2019, for own-use generation the allocation limit is equal to the short-term supply gap, or 500MW annually from 2023 onwards.

The deviation approval essentially provides a blanket, pre-emptive approval for any self-generation facilities, meaning they do not have to demonstrate compliance with the IRP 2019 in order to obtain a generation licence – although they will still have to comply with all other requirements. Demonstrating IRP 2019 compliance, particularly with the technology limits imposed on an annual basis is one of the more difficult aspects of any licence application, and this approval goes some way to simplifying the licensing process.

The approval could, therefore, be an important step for one aspect of president Ramaphosa's energy sector interventions, which said NERSA would ensure that all applications by commercial and industrial users to produce electricity for own use above 1MW were processed within the prescribed 120 days.

This should come as welcome news for any IPPs looking to establish self-generation or own-use facilities that may involve wheeling from the generation facility to another location over the national grid, which as grid-connected facilities would need to apply for a generation licence.

Ministerial determination on IPP power procurement

In September 2020 the second ministerial determination issued under section 34 of the Electricity Regulation Act was gazetted by the minister.

It belatedly matches president Ramaphosa's undertaking that “a section 34 ministerial determination will be issued shortly to give effect to the IRP 2019, enabling the development of additional grid capacity from renewable energy, natural gas, hydro power, battery storage and coal”.

The determination was originally published in February and required approval from NERSA prior to being finalised. This has now been received. The determination relates to the procurement of around 12,000MW of new generation capacity from IPPs in line with the IRP 2019, and follows the finalisation of a short-term risk mitigation determination earlier this year of around 2000MW.

This second determination provides that the Department of Energy will procure, and Eskom must buy, the electricity produced from these IPPs. The determination sets aside 6,800MW to be generated from solar and wind renewable energy sources between 2022 and 2024; 513MW to be generated from storage in 2022; 3,000MW to be generated from gas between 2024 and 2027; and 1,500MW to be generated from coal between 2023 and 2027.

The determination charts a clear path for procurement of new generation capacity from IPPs in the medium term, and should lend certainty to developers that the Department of Mineral Resources and Energy and Eskom will be carrying out various IPP procurement programmes in this time frame.

What remains to be seen is whether these changes will be enough to open up the electricity sector further in order to allow greater participation by the private sector and municipalities, which have to date largely been stymied outside of structured IPP procurement programmes with Eskom as the single buyer.