Out-Law / Your Daily Need-To-Know

Putting South Africa's planned energy interventions into practice

Out-Law Analysis | 24 Feb 2020 | 11:39 am | 10 min. read

South African president Cyril Ramaphosa made addressing the country's critical electricity generation shortages one of the central issues of his recent State of the Nation address (SONA).

However, despite the president's stated desire to take practical steps to alleviate the enormous pressure on our national grid, the regulatory processes and procedures required to give effect to these aspirations remain absent, and continue to frustrate the policy objectives expressed by the president.

Giving effect to the Integrated Resource Plan

Ramaphosa said: "A section 34 ministerial determination will be issued shortly to give effect to the Integrated Resource Plan (IRP) 2019, enabling the development of additional grid capacity from renewable energy, natural gas, hydro power, battery storage and coal".

A section 34 determination is issued under the Electricity Regulation Act (ERA). It is the mechanism through which South Africa's minister of mineral resources and energy formally sets out:

  • the amount of energy and types of technology required to ensure uninterrupted electricity supply;
  • how such generation capacity must be procured;
  • who the procurer - usually the Department of Mineral Resources and Energy (DMRE) and purchaser - up to now, Eskom, the state-owned utility – of the procured electricity supply must be.

The section 34 determination will form the cornerstone of a number of the other measures to be brought into effect following the SONA. The last determination was the nuclear procurement determination issued in 2016, and the issuing of any further determinations was held back in order to ensure compliance with the October 2019 update of the South Africa Integrated Resources Plan (IRP).

Existing section 34 determinations, including the 2012 and 2015 renewable energy determinations on which the current Renewable Energy Independent Power Producer Procurement Programme (REIPPPP) is based, are technically in effect. However, it is important to note that when the National Energy Regulator (NERSA) makes a decision on approving a generation licence, the ERA states that it must evaluate compliance with the relevant IRP. This makes it difficult for NERSA to issue a new generation licence where the determinations do not match the IRP.

There is no express requirement in the ERA or New Generation Regulations requiring alignment between the 2019 IRP and any determinations. However, it is an important practical step for enabling the procurement of new generation capacity through many of the other interventions identified in the SONA. In addition, the DMRE has made it clear that it will not be carrying out further procurement processes until an aligned determination is issued.

Initiating procurement of emergency power

Ramaphosa said: "We will initiate the procurement of emergency power from projects that can deliver electricity into the grid within three to 12 months from approval".

The DMRE announced that it would issue an emergency power request for information (RFI) for projects that could be brought online in three to 12 months to alleviate critical supply shortages, alongside publication of the 2019 IRP. It did so in December 2019, meaning that meeting this commitment by the president has already begun.

The next step will be a report, which will be presented to the DMRE for further consideration, followed by the issuing of a request for quotation (RFQ) or request for proposal (RFP). Despite the 'emergency' instigating this process, by issuing an RFI to gather information the government has lost precious time, and it is doubtful that the envisaged timeframes will be met.

Again, the issue of an IRP-compliant section 34 determination will be needed here. However, the DMRE may wish to more fully evaluate the market before doing so, in which case an alternative course of action is to allow for deviations from compliance with the 2019 IRP for licensing of 'fast' projects. The ERA provides for such deviations with ministerial approval. Procurement by the DMRE would be based on the unused megawatt (MW) allocation from previous determinations.

Importantly, there is precedent for a "blanket deviation approval" being issued. In May 2019, then minister of energy Jeff Radebe wrote to NERSA permitting deviation from the 2019 IRP for any embedded generation projects between 1MW and 10MW when applying for a generation licence.

Continued registration of small scale embedded generation

Ramaphosa said: "[NERSA] will continue to register small scale distributed generation for own use of under 1MW, for which no licence is required".

Registration for small scale embedded generation (SSEG) facilities under 1MW by NERSA will continue. While licensing for generation facilities is generally required by the ERA, SSEG facilities of 1MW and below are exempt, although they must still be registered with NERSA.

Section 9 of the ERA provides that registration must follow a prescribed procedure, and section 35 specifically empowers NERSA to issue rules around the form and manner of registration. The benefits of not having to be licensed include a much simpler process with no need to show tariff structuring and technical capabilities; no public consultation being required; no need for compliance with the latest IRP; and no provision for licence conditions being imposed by NERSA - all of which can impact significantly on project cost and viability.

NERSA issued draft registration rules for comment in April 2018. However, these were withdrawn after widespread criticism, and no further rules have been issued despite minister Radebe's May 2019 letter instructing NERSA to register SSEG facilities. Accordingly, despite the president's good intentions, in the absence of a clear registration process being developed by NERSA the process is hamstrung and the ability of industries to self-generate and so alleviate the pressures on the national grid remains stymied.

There remains a need for NERSA to publish registration rules - whether for SSEG only, or for any facilities exempt from needing a licence - in order to generate certainty in the market and encourage the further uptake of SSEG by industrial users.

Ensuring applications for own use are processed within 120 days

Ramaphosa said: "[NERSA] will ensure that all applications by commercial and industrial users to produce electricity for own use above 1MW are processed within the prescribed 120 days. It should be noted that there is now no limit to installed capacity above 1MW".

The exact meaning of this commitment is not immediately clear. In particular, there is not much context for the statement that there will be "no limit to installed capacity over 1MW".

On its face, the commitment appears to relate to sections 11 to 13 of the ERA which deal with licence applications, including generation licences. This states that on receiving a licence application, NERSA may require the applicant to publish an advertisement and allow for public comment. NERSA must then give the applicant time to respond to any objections raised. Once this period has expired, NERSA must make its decision on the licence application within 120 days.

The president's statement therefore appears to be a commitment to align with the process that is already set out in the ERA, which would ordinarily be considered an absolute minimum given the energy crisis. The reference to 120 days does not mean that it will only take 120 days to obtain a licence, as public consultation procedures could take significantly longer to complete before the 120 day clock even begins to run.

The reference to "no limit to installed capacity over 1MW" for own use replaces the position initially established in the draft IRP update of 2018 - which referred to annual allocations of 200MW for own use between 1MW and 10MW - and the deviation granted to own use facilities between 1MW and 10MW in minister Radebe's May 2019 letter. Going forward, own use facilities can now make applications for own use irrespective of the generation capacity.

The president's statement can also be seen to clarify the 2019 IRP itself, which includes allocation for distributed generation "to the extent of the short term capacity and energy gap". Until the SONA, this was interpreted as relating only to projects of between 1MW and 10MW. This lifting of the 10MW cap on licensing of own use facilities by NERSA is of particular relevance to large industrial users with high energy requirements such as mines, and could see much larger own use generation becoming the norm. However, existing licences for own use plants would remain in place, including any relevant conditions on those licences. If any formal amendments are made to the ERA in respect of own use facilities, these should only apply to future projects for the sake of legal certainty.

It is also worth mentioning that another way to expedite bringing embedded generation into the mix would be by amending schedule 2 of the ERA, which lists the types of facilities that don't require a NERSA licence but can instead go through the registration process. This could free up, for example, own-use facilities sub-10MW from undergoing to more onerous licencing process.

Opening REIPPPP bid window 5 and accelerating window 4

Ramaphosa said: "We will open bid window 5 of the renewable energy IPP and work with producers to accelerate the completion of window 4".

The president has committed to proceed with the much-delayed bid windows (BWs) 4 and 5 of the REIPPPP. As the BW 4 projects have already been procured, there are no regulatory implications to what was stated in the SONA as the hurdle has generally been political unwillingness to sign the relevant power purchase agreements (PPAs). It is however heartening for IPPs that the president has made a clear statement which will go some way to removing these hurdles, albeit political ones.

Where BW 5 is concerned, in procuring this generation capacity DMRE would find itself in a situation where if it proceeds immediately, it would be doing so under outdated section 34 determinations. Although there may still be available MW allocations for various renewable energy technologies under the older determinations, these are not necessarily in line with the 2019 IRP - which would present issues when these projects apply for generation licences. Accordingly, despite the president's expressed desire to expedite the BW 5 process, this seems to be another area which is contingent on the section 34 determination being issued sooner rather than later.

Negotiating supplementary PPAs for wind and solar

Ramaphosa said: "We will negotiate supplementary power purchase agreements to acquire additional capacity from existing wind and solar plants".

The implication of the SONA was that existing PPAs with IPPs would be extended to provide for the purchase of additional MWs of generation capacity from existing wind and solar projects.

Although variations of contracts are permitted under the framework set out in the Public Finance Management Act, the National Treasury has placed a threshold of 20% of the original contract value on the permitted size of variations in order to combat abuse of supply chain management processes. This means that any supplementary PPAs negotiated with Eskom will require National Treasury approval where the value of the variation exceeds the 20% threshold.

More concerning is whether Eskom is in a position to extend its financial commitments under the existing PPAs. As things currently stand, this seems unlikely. National Treasury is therefore unlikely to permit these variations given the precarious state of Eskom's finances.

Enabling municipalities in good standing to procure their own power from IPPs

Ramaphosa said: "We will also put in place measures to enable municipalities in good financial standing to procure their own power from independent power producers".

The possibility of municipalities purchasing electricity directly from IPPs is an important mechanism for getting supply onto the grid as fast as possible. However, the concern rightfully made clear in the SONA is that many municipalities do not have the balance sheet, revenue or even technical capacity to enter into a long-term PPA. This means that there are some important factors to consider in respect of municipal purchase of electricity:

  • since any new generation capacity will be procured under a section 34 determination once issued, it is imperative that DMRE expressly identifies that municipalities in good standing - that is, those with an unqualified audit report - can be the purchaser in respect of the relevant generation capacity;
  • consideration must be given to how procurement will be coordinated. There are, for example, issues of grid stability to consider when procuring too much energy from non-dispatchable renewable resources, and the relevant determination will have to be clear on whether any specific municipality is limited in how much electricity it can purchase to ensure that all of the power being procured across all municipalities is ultimately in line with the 2019 IRP;
  • compliance with the relevant municipal legislation is also required. In particular, this would include section 33 of the Municipal Finance Management Act (MFMA), which requires the municipality to conduct a process of stakeholder consultation - including the National Treasury and other relevant government entities - before entering into long-term financial commitments (i.e. longer than the three year budgeting cycle); and
  • if required by the IPP – or, more likely,–its lender - how the payment obligations of the municipalities under the PPA will be secured. For example, section 50 of the MFMA allows a municipality to issue a guarantee for its obligations, but such guarantees must be within its approved budget and the comments and representations of the National Treasury and the relevant provincial treasury must be solicited - and, in certain instances, the municipality may have to maintain insurance or a cash-backed reserve for the period of the guarantee.

While the president's commitment is good news for municipalities, the complex and consultative nature of local government legislation – in particular, the notoriously lengthy time it takes to complete the section 33 process given the number of stakeholders to be consulted - may well slow down the pace at which municipalities can purchase their own power.

Another drawback is the accessibility of this solution, given the very low percentage of municipalities with unqualified audit reports. In practice, it is likely to be limited to a small group of municipalities and those that pay their Eskom bills. For example, in 2019, only 18 out of 257 municipalities received a clean audit report from the auditor general.

Additional reporting by Reuben Cronjé, a regulatory expert at Pinsent Masons, the law firm behind Out-Law.