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South Africa: 100MW threshold confirmed – A new era for industrial and mining power consumers

16 August 2021
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Our previous newsflash dated 18 June, available here, refers.

On 12 August 2021 Minister Mantashe, Minister of Mineral Resources and Energy released the much-awaited exemption which raises the registration threshold for self-generation facilities from 1MW to 100MW. This has been widely heralded as unlocking significant opportunities for the private sector and should assist in introducing additional generation capacity into the stressed South African grid.

We have received a number of questions regarding this change from clients and we respond to some of them below:

What type of generation facilities and customers will this benefit?

The amendment will allow a generation facility including an Independent Power Producer (IPP) of up to 100MW, to sell electricity to ‘an end-use customer’. This is a customer who consumes the power itself.

‘End-use customer’ is used in the exemption notice in the singular, however there is no reason why this should not be interpreted as allowing delivery and sales to more than one ‘end-use customer’ from a generation facility.

An important beneficiary of this change will be large industrial and mining companies who will be able to purchase electricity from an IPP for all of the power needs within their groups and have the power ‘wheeled’ through the grid to facilities throughout the country. This would allow them to lock in a long-term price for electricity from an IPP under a Power Purchase Agreement (PPA) and obtain certainty on price increases over a long-term horizon.

Will this allow private generation facilities to sell to Eskom or municipalities?

The exemption is specific to sales to a consumer of the electricity and not an intermediary. This means there is no exemption from the licencing obligation for a generator selling to a ‘trading’ entity for further on sale, sale to a ‘distributor’ (such as a municipality) or a ‘transmission company’ (such as the Eskom transmission company which is being spun off from Eskom).

Generators selling to Eskom, distributors (such as municipalities) or traders for on-sale, exporters and importers will continue to require a licence under the Electricity Regulation Act (ERA)and Ministerial deviation under the Integrated Resource Plan (IRP).

The Department of Mineral Resources and Energy (DMRE) considers that ‘organs of state’ such as Eskom and municipalities also need a Ministerial determination issued under section 34 of ERA and the New Generation Regulations to enter into a PPA with an IPP.

Sales to Eskom or a municipal distributor would also have to follow a procurement process within Eskom or the municipality.

Previously the IPP Office of the DMRE has been used to procure long term PPAs for Eskom through IPP bid processes and indications are that this will continue to be used. A fifth round of the Renewable Energy IPP process is presently underway by the IPP Office. The IPP Office REIPP page can be accessed here.

In future electricity sales to ‘Eskom’ will made directly to the National Transmission Company which it has been announced will be unbundled from Eskom by the end of the year.

Various municipalities have recently announced an intention to procure new generation capacity from IPPs. The Western Cape government has recently released a Request for Information regarding supply of renewable energy to municipalities in the province. The Western Cape RFI can be accessed here.

What is the timing on implementing this?

The exemption has been gazetted and is effective immediately. However, two things appear to be outstanding:

  • NERSA still needs to release an updated registration procedure as the current procedure is specifically directed at ‘small-scale’ embedded generators up to 1MW. These are likely to be similar for 100MW facilities. The existing rules can be accessed here.
  • The wheeling framework and charges that Eskom will apply need to be clearly accessible and should be capable to implementation without lengthy one-on-one negotiations with Eskom. The Eskom webpage regarding wheeling of energy (eskom.co.za) indicates that bilateral engagements are presently required for wheeling and also that NERSA is still developing a national framework for use of system charges.

What is registration likely to require?

Schedule 2 of ERA effectively guarantees registration to 100MW facilities that meet the Grid Code requirements and have an arrangement with the relevant grid provider regarding the connection of the facility (a connection agreement).

It is expected that the registration requirements for private generators producing up to100MW under Schedule 2 will be similar. If wheeling will be required evidence of the agreement regarding it is also needed for registration.

Is there anything else outstanding for the implementation of the exemption?

While the publication of the 100MW exemption has been widely welcomed, a number of commentators have highlighted that the exemption notice, as published, seems to have been hastily put together and has contradictions in the defined terms used. Certain commentators have pointed out that an opportunity has been lost to set out a lasting clear framework. See, for example, an article published by the Sunday Times titled ‘Green energy boost looming’.

In this regard, there remain opportunities for the DMRE and NERSA to clarify the following:

  • Why has the term ‘related customer’ been removed from the previous exemption – is it correct to assume (as we do) that ‘end-use customer’ could refer to multiple end users?
  • The use of the term ‘embedded generation’ in the context of the 100MW threshold is unclear, in the IRP this term is used to refer to generation facilities embedded in a distribution network with a 1MW to 10MW capacity.
  • The IRP and the South African Electricity Supply Policy in general are now in need of an overhaul as many of the assumptions appear to have been by-passed. This will make licencing decisions for those facilities that do still need licences difficult and uncertain.
  • It is unclear how IRP exemption applications will be considered for those facilities that will still need licences, particularly smaller facilities intended to supply municipalities as truly ‘embedded generators’. The exemption also creates uncertainty regarding Small Scale Embedded Generators (SSEG) which had been specifically catered for under the previous exemption and registration process.

The framework for licencing facilities that supply for export, supply municipalities, Eskom or traders and the import approval process will need to be adapted to cater for this significant change in the electricity supply industry.