South Africa takes further steps to open up electricity market
In February, President Cyril Ramaphosa’s State of the Nation address outlined seven interventions in the energy sector, and action at the legislative and administrative levels showed the government is ready to continue with these changes.
The latest developments concern three areas: electrical regulations on new production capacities; an approval to deviate from the Integrated Resource Plan (IRP) 2019 when authorizing production facilities for own use; and a determination outlining the electricity to be procured from independent power producers (IPPs).
New regulation on production capacities
New generation regulations were issued under the Electricity Regulation Act to allow the acquisition of new generation capacity by state bodies. The regulations generally provide that procurement is to be carried out under IPP procurement programs in accordance with capacity allocations established in ministerial decisions under section 34 of the Act. The determinations themselves are intended to reflect the course set out in the IRP 2019, which is the government’s main planning document for future investments in the electricity sector.
Mineral Resources and Energy Minister Gwede Mantashe published draft regulatory amendments in May 2020 for public consultation in the Official Journal. These proposed that municipalities that could demonstrate good financial standing should be able to apply to establish new generation capacity as long as it complied with the IRP 2019 and did not need to be subject to a section determination. 34 or an IPP procurement program. The amendments give effect to one of the energy interventions promised by President Ramaphosa to allow municipal participation in the sector.
The final version of the amendments was published in the Official Journal on October 16 and they are now in force. The amended regulations remove the express “good financial standing” requirements, but instead allow municipalities to apply to the Minister for approval to establish new generation capacity through an internal mechanism – using its own departments or units. internal administrative bodies – or one such as municipal entities or private sector PPIs.
The changes also state that before a municipality can enter into a Power Purchase Agreement (PPA), it must comply with the Municipal Systems Act (MSA) and the Municipal Financial Management Act ( MFMA).
When an internal mechanism is used, the MSA requires the municipality to carry out a feasibility study and contract with an IPP to build the production 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 Regulation now provides that a municipality should seek approval under the PPP provisions of the MFMA and also comply with the Municipal PPP Regulation under this law – requiring essentially the establishment of new production capacity through a PPP agreement. .
From a practical point of view, the changes made to the New Generations Regulations are somewhat disappointing. Most municipalities do not have the balance sheet or budget to realize new production capacities through internal mechanisms. While this is a useful option for well-funded metropolitan municipalities, there is a significant lack of interest in involving PPIs in the power sector and supporting demand, technology and risk of the future. project.
On the side of external mechanisms, the compulsory use of PPP processes constrains municipalities and obliges them to go through an expensive process including in-depth feasibility work and public consultation.
The end result of the changes is therefore that the opportunity for an easy path to PPIs selling electricity to municipalities has been missed. If IPPs could, acting independently of the municipality, establish a generation facility and then simply enter into a PPA for the sale of electricity as an ordinary supply contract, this would have represented a significant opening of the market in South Africa.
The amendments include a positive change unrelated to municipal PPI procurement. Energy storage has been included in the list of technologies that can be purchased from PPIs, potentially opening this technology to private sector participation through batteries 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 October 30, South Africa’s National Energy Regulator (NERSA), which is responsible, among other things, for licensing power generation facilities, said it had received the minister’s approval to deal with license applications for self-generation facilities over 1 MW, even if they do not comply with IRP 2019.
This ministerial exemption approval meets the requirement of the Electricity Regulation Act that an applicant for a production license, including self-generation or own-use facilities connected to the grid, must demonstrate the compliance with the IRP 2019 or must provide the reasons for the deviation for approval by the Minister. As part of the IRP 2019, for own production, the allocation limit is equal to the short-term supply gap, i.e. 500 MW per year from 2023.
Deviation approval essentially provides blanket and preventative approval for all self-production facilities, meaning they do not have to demonstrate IRP 2019 compliance in order to obtain a production license – although ‘they will still have to comply with all other requirements. . Demonstrating compliance with IRP 2019, especially with technological limits imposed on an annual basis, is one of the most difficult aspects of any license application, and this approval goes some way to simplify the licensing process. .
The approval could therefore be a milestone for one aspect of President Ramaphosa’s interventions in the energy sector, who said NERSA would ensure that all demands from commercial and industrial users to generate electricity for their own use greater than 1 MW are processed within 120 days.
This should be good news for any IPP seeking to establish self-generation or own-use facilities which may involve transporting the production facility to another location on the national grid, which as connected facilities to the network, should apply for a production license. .
Ministerial Decision on Electricity Supply for PPIs
In September 2020, the second ministerial decision issued under Article 34 of the Electricity Regulation Act was issued by the Minister.
This belatedly corresponds to President Ramaphosa’s commitment that “a ministerial decision under Article 34 will be issued shortly to give effect to IRP 2019, allowing the development of additional grid capacities from renewable energies, natural gas, hydroelectricity, battery storage and coal “.
The determination was originally released in February and required NERSA approval before being finalized. It has now been received. The decision relates to the purchase of approximately 12,000 MW of new generation capacity from IPPs in accordance with IRP 2019, and follows the finalization of a short-term risk mitigation determination of approximately 2,000 MW. at the start of this year.
This second determination provides that the Ministry of Energy will purchase, and Eskom must purchase, the electricity produced from these PPIs. The determination reserves 6,800 MW to be produced from renewable solar and wind energy sources between 2022 and 2024; 513MW to be generated from storage in 2022; 3,000 MW to be produced from gas between 2024 and 2027; and 1,500 MW to be produced from coal between 2023 and 2027.
The determination sets a clear path for acquiring new production capacity from IPPs in the medium term, and should give developers confidence that the Department of Mineral Resources and Energy and Eskom will execute various IPP procurement programs in the near future. this time frame.
It remains to be seen whether these changes will be enough to further open up the electricity sector to allow greater participation of the private sector and municipalities, which have so far been largely blocked outside of structured IPP supply programs. with Eskom as the sole buyer.