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South African project shows wheeling power potential, expert says

Out-Law News | 15 Nov 2021 | 4:26 pm | 2 min. read

News that the first major energy wheeling project in South Africa is operational suggests the model could provide a solution to the country’s need for a reliable power supply, an expert has said.

The Mahlako Energy Fund announced in early November that its 10MW solar plant in the Northern Cape had reached commercial operation. The project will provide clean energy to Amazon Web Services via the Eskom grid.

Wheeling is when electricity is produced in one area and connected to a grid, but sold to an end user in a further remote area of the grid.

The project is the largest energy wheeling project in South Africa to date. Energy law expert Emma Dempster of Pinsent Masons, the law firm behind Out-Law, said it demonstrated the ability of South Africa to move towards an open-market model.

“This is a noteworthy achievement given the current challenges to implementing a wheeling transaction that would have to be overcome, particularly taking into account that the project was implemented prior to the recent licence relaxations,” Dempster said.

The South African government announced in June 2021 that it was changing the Electricity Regulation Act to extend a licensing exemption applicable to embedded generation projects. The change lifted the threshold for a licence exemption for generators operating an embedded generation facility from 1MW to 100MW, with the amendments coming into force on 13 August 2021.

Dempster said energy wheeling could help meet South Africa’s need for a reliable power supply by removing the need to have the generation facility co-located with a single offtaker’s premises. This, she said, would enable developers to take advantage of the ability to install larger generation facilities, at a location best suited to maximise the renewable energy source, and sell the energy to multiple offtakers.

“Although wheeling has, in principle, been permitted in South Africa for some time, the structure of the South African market remains mostly a single-buyer model given the practical and regulatory challenges that need to be overcome in order to implement a wheeling transaction,” Dempster said.

According to Dempster, despite the relaxation of the licensing requirements, there remain regulatory hurdles for developers to overcome to successfully implement a wheeling transaction.

“A developer still has to conclude the relevant grid access arrangements, which is challenging if the energy is intended to be wheeled across grids owned by different licensed distributors or transmitters, as there is no standardisation across policies governing wheeling, including the relevant tariff methodologies,” Dempster said.

“Another challenge is determining the actual cost of wheeling and the impact this has on the cost of energy to the offtaker. While the National Energy Regulator of South Africa has drawn up guidelines in this respect, the costing model is complex and there is a lack of transparency on the calculation of the costs associated with wheeling,” she said.

Dempster said there was still a need to improve the regulatory framework to standardise the approach taken by distributors and transmitters to wheeling, as well as the tariff methodologies employed, to truly open up the market.