Legislative leniency toward private power production but at what cost?

Legislative leniency toward private power production but at what cost?
14 Sep 2021

Gwede Mantashe, the Minister of Mineral Resources and Energy, signed an amendment to schedule 2 (“the schedule”) to the Electricity Regulation Act No. 4 of 2006 (“the Act”) which was Gazetted and came into effect on Friday, 13 August 2021.

The schedule has been welcomed by many, being hailed as a step in the right direction towards allowing the private provision and generation of electricity in South Africa; an opportunity to break Eskom’s monopoly on power production and alleviating some of the nation’s power supply demands.

However, what does the schedule actually achieve? The essence of the amendment is to exempt power producers who produce up to 100 Megawatts (“MV”) of electricity from the obligation of having to obtain a licence in terms of Section 7 of the Act through the National Energy Regulator of South Africa (“NERSA”). When speaking about electricity production it is easy to get lost in the labyrinth of numbers and units of measurement involved. To put 100MV into context, Unit 4 at Medupi (at present unproductive due to an explosion) can produce 700MW, which is enough to supply a third of the electricity demand for the entire Eastern Cape. So, at a seventh of the Eastern Cape’s entire demand, 100MW is not the most, but actually quite a lot of electricity. Coupled with the prospect of not having to apply for, be granted and hold a licence in terms of the Act to supply, distribute and trade electricity, setting up generation facilities large enough to supply 100MW is indeed an enticing option for private sector entities. Aside from possibly providing an ability to freely generate and trade a substantial amount of electricity, the schedule of course also paves the way for cleaner energy production, an area that is of great importance and sorely underexploited in South Africa.

However, nothing is ever that straightforward and before one considers rigging up a field of solar panels or planting a few wind turbines, it is important to delve into the details of the schedule. Firstly, it is important to bear in mind what is meant by a licence. A licence is required to perform certain activities involved in the production of energy in South Africa and the Act prescribes those activities requiring a licence as follows:

  1. Activities requiring licensing.— (1)  No person may, without a licence issued by the Regulator in accordance with this Act—
    (a) operate any generation, transmission or distribution facility;
    (b) import or export any electricity; or
    (c) be involved in trading.

To be exempt from the requirement of having to obtain a licence is to be permitted to do all those things necessary to produce, supply, distribute and sell electricity, all presently the reserve of Eskom. It should not be surprising then that the schedule contains a number of qualifications to the promised licencing exemption.

In terms of Section 2 of the Schedule, all activities listed therein are exempt from the requirements of having to be licenced. This section deals with what one may do when loadshedding happens. It regulates generation facilities (with or without energy storage facilities) for the sole purpose of providing back-up or stand-by electricity in the event of a power outage (or “supply interruption”); home internal combustion engine generators, solar panels, battery walls and such. It also deals with generation facilities irrespective of capacity if they do not have a point of connection (defined as where a customer connects its “assets” to the licenced distributor’s assets – a plug point), as well as a facility with a point of connection, but with a capacity of under a 100 Kilowatts (for context, 100 Kilowatts is 0.01MW).

Facilities with points of connection and capacities under 100 kilowatts accordingly need not be licenced, but must comply with conditions for use thereof as set by the “distributor” (defined in the Act as a person who distributes electricity) and the distributor is required to keep a register of the facility in the manner prescribed by NERSA. In summary, section 2 allows us to have home generators of any size and capacity without needing a licence or compliance with any code set by NERSA so long as these generation units are solely for the purpose of “supply interruptions”, likewise a generation facility of any capacity so long as there is no point of connection (i.e. it is not plugged into the national grid). However, where one has a facility producing up to 100 Kilowatts, whilst not requiring a licence, the distributor must set conditions upon which the power generated can be used at a point of connection and a register of the facility in line with NERSA’s codes must be kept, although one might be hard pressed to think of an example of such a facility.

Section 3, however, is critical. It states that one is not required to obtain a licence to generate, distribute or trade electricity up to 100MW, subject to registration with NERSA and compliance with its relevant and/or applicable codes and authorisations and/or agreements as may be required. Effectively, this is the gateway to serious private power production. However, this where there is a catch. The exemption only applies to facilities of up to 100MW (with or without energy storage) with a point of connection on the transmission or distribution power system. The “transmission or distribution power system” is the national grid. Ergo, and straight out the blocks, the exemption is only available if the generation facility is connected to the national grid.

Furthermore, in order to be exempted from the licensing requirement, the private producer has to either provide its power without “wheeling” or in terms of a “wheeling” agreement. “Wheeling” is where electricity is taken from a point of connection and transmitted via a third party distribution or transmission network which, as explained above, in South Africa means the national grid. The schedule therefore restricts distribution of privately produced power to off-grid, direct to end-user supply, unless the generator of the electricity enters into a connection agreement with the holder of the distribution licence for the network over which the electricity is to be “wheeled” – i.e. Eskom. So whilst there is an exemption from 100MW producers requiring licences (by definition to produce or indeed operate a transmission or distribution facility), unless they engage in direct supply to an end-use customer, they will have to enter into an agreement with Eskom in order to transmit their electricity. So, confusingly, if a 100MW user wishes to avoid having to enter into an agreement with a licenced distributor (Eskom), it will have to apply for a licence itself, therefore defeating the whole point of the exemption in the first place. Moreover, a 100MW producer is not allowed to export or import any electricity onto or from the distribution power system (the national grid). Importing and exporting electricity from the national grid would occur where excess power produced by private producers is present in the grid and essentially would become Eskom’s power. Eskom would either have to store it for the private producer to reclaim later, or compensate the private producer for this excess power the State has acquired. Prohibiting importing and exporting electricity by private producers makes it clear that State wants to incur as little responsibility or financial exposure for the private production of power and that private producers will be forced to supply to a market guaranteed to make use of the full 100MV; i.e. municipalities.

Section 3 goes on to exempt generation facilities that operate for demonstration purposes (provided they do not do so for more than 36 months) as well as any existing exempt facility so long as such facility is in operation, registers with NERSA within 6 months of the commencement of the schedule and has complied with NERSA’s codes and is, also, connected to the distribution power system (mirroring the requirement for any new exempt producer).

The operation of a distribution facility up to the point of connection (so before any wheeling) that connects a 100MW producer or existing exempted facility is also exempt in terms of the schedule. This envisages a distribution system that merely takes power from the generation facility to the point of connection and not general distribution.

Finally, the trading by a reseller of electricity is exempt from the licensing requirement (but must still be registered with NERSA). This is provided the price charged by the reseller does not exceed the applicable tariff that would have been charged by a licenced producer (Eskom) and the reseller has entered into a service delivery agreement. Such agreement must regulate the relationship between the reseller and the holder of the distribution licence and the obligations of the reseller toward customers. This essentially allows the selling by private entities of privately produced electricity and seems a fair requirement to ensure that private sellers are bound to adhere to service delivery requirements and ensure a constant and quality supply of electricity. Coupled with the restriction on importing and exporting electricity to the grid and wheeling, means that private suppliers wishing to supply electricity to ordinary consumers will only be able to do so by providing it, via the national grid, to a municipality or such other licenced distributor, which is already engaged in the provisions of electricity.

In effect, the schedule has created a mechanism for private suppliers to lighten the load for the national power producer at the rate of 100MW at a time, which electricity will merely arrive in one’s plug point indiscriminately mixed with State supplied power, for which one will still pay one’s local municipality who would then in terms of the mandatory service delivery agreement compensate the private producer at the exact same rate it has just charged for the power. This situation is a win-win in some ways; the private producer will still get paid for its power and the State will have the demand on its power production reduced for free. A question that still needs answering will be whether by being locked into the State’s pricing tariffs and into essentially only being able to sell to municipalities, private production will represent a profitable exercise or not for private producers.

All in all, the schedule appears to be a welcome breakthrough in the private production, supply and sale of electricity in South Africa. On closer inspection, it is a cleverly crafted device through which the private producer can in effect only enjoy an exemption from having to obtain a licence if it agrees to supply its power to the State for a fixed price. This is effectively achieved by requiring all private producers to be connected to the national grid, conclude “wheeling agreements” to then make (mandatory) use of the national grid and prohibiting the importing and exporting of power to and from the national grid. The restriction on importation and exportation of power from the national grid is the real kicker, as practicably the only way to ensure all 100MW are used and one’s exemption remains intact is to supply power to a municipality with a large enough guaranteed demand to consume all 100 of your Megawatts. It is also clear that at this stage private producers will not be allowed to set up their own distribution networks (unless applying for a licence to do so, an approval entirely at the discretion of the Government via NERSA). The amendment thus lays a framework within which the private producer becomes Eskom’s subsidiser; ensuring they are selling not directly to ordinary consumers but rather to municipalities. As the ordinary consumer, one will have no idea who produced the power and one will still pay the same for electricity. So a breakthrough for competition in the electricity market this most certainly is not.

It is perhaps naive to expect the State to relinquish total control of energy production and distribution, but these are nonetheless important developments in paving the way for serious private sector power production in South Africa.

Written by by Jonathon Beard, Fluxmans Attorneys.

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(This article is provided for informational purposes only and not for the purpose of providing legal advice. For more information on the topic, please contact the author/s or the relevant provider.)
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