Cape Town electricity plan no blueprint for all South Africa

From June 2023, Cape Town will start paying cash to commercial and industrial customers to feed excess power generated from small-scale embedded generators (SSEGs) back into its municipal grid. The move reflects the fact that an increasing number of South Africans are investing in rooftop solar panels, diesel generators and other means of electricity generation as a substantial rise in load-shedding deprives users of power for more than 11 hours each day on average. However, while Cape Town’s approach is certainly innovative, it remains a ‘developed-world’ solution that is likely only to benefit more affluent municipal jurisdictions. It is not a blueprint for all municipalities in South Africa.

Uncertainty over private generators

Cape Town’s announcement was made after the National Treasury authorised the city to deviate from prescribed procurement requirements in purchasing electricity from SSEG generators, allowing officials to directly enter into purchase agreements with such generators.

The announcement comes despite lingering uncertainty over whether excess power produced from SSEGs can be fed back into the national grid, which would usually require connection to the municipal distribution network. The uncertainty has persisted since the abandonment of the proposed renewable energy feed-in tariff (REFIT) in favour of the renewable energy independent power producer procurement programme more than a decade ago.

Regulatory hurdles have included the need for municipalities to comply with procurement regulation under the 2003 Municipal Finance Management Act (MFMA) to purchase electricity and the belief in certain portions of the public sector that electricity which is “new generation capacity” can only be purchased by Eskom under the Electricity Regulation Act (ERA). Alongside this, the Preferential Procurement Policy Framework Act (PPPFA) requires bodies to implement Black Economic Empower (BEE) when carrying out public procurement.

The National Energy Regulator of South Africa (NERSA) will allow the city to pay power sellers at a feed-in tariff rate of 78.98c/kWh, with the city adding a 25c/kWh incentive tariff. However, although NERSA has previously granted feed-in tariff approval to municipalities in the Western Cape, Eastern Cape, Gauteng and KwaZulu-Natal, the administrative burden surrounding NERSA approval and registration for connections has resulted in limited uptake. Cape Town hopes to buck that trend.

The regulatory challenge facing Cape Town

Currently there is no legislation that directly regulates SSEG in South Africa. However, Chapter 11 of the MFMA does contain procurement obligations that municipalities are required to comply with when contracting for goods and services. As such, each municipality is required to design and implement a supply chain management policy (SCM policy) which gives effect to the MFMA. Chapter 11 of the MFMA sits alongside the Municipal Supply Chain Management Regulations (SCM Regulations), which prescribes the regulatory framework for municipal supply chain management.

In addition to the requirements of the MFMA, the PPPFA requires an organ of state to have a preferential procurement policy – usually forming part of its SCM policy. This must incorporate a preference points system to ensure that contracting with historically disadvantaged persons is promoted, typically though the use of BEE scores.

According to the Municipal SCM Regulations, municipalities including Cape Town are not required to apply their SCM policies when procuring electricity from Eskom or another public entity. In other words, municipalities purchase electricity from Eskom directly and without following a competitive tender process. This dispensation, however, does not apply to private sector parties such as SSEG. The purchase of electricity by Cape Town from SSEG generators requires the city to do so in compliance with its SCM policy and the PPPFA and associated PPPFA Regulations.

These frameworks would require the city to embark on a competitive tender process in line with its SCM policy and apply the prescriptions of preferential procurement under the PPPFA and the PPPFA Regulations by implementing a preference points system to, among other things, promote contracting with historically disadvantaged persons. To do so, however, would defeat the objective of purchasing electricity directly from SSEG generators and make it impractical to do so. The city had to consider how it could bypass these statutory requirements instead.

Cape Town’s SSEG solution

Although the MFMA, the SCM Regulations and the PPPFA all contain exemption provisions which allow the minister of finance to exempt municipalities from the application of all or some of their relevant provisions, officials in Cape Town sought to obtain an exemption from only the PPPFA. It is likely that the city did not apply for an exemption from Chapter 11 of the MFMA because the MFMA Regulations already cater for instances where a municipal accounting officer may dispense with official procurement processes established by its SCM policy.

In such circumstances, the officer can procure any required goods, such as electricity, through any convenient process – including direct negotiations. The instances in which a municipality may do so are tightly circumscribed and include instances of an emergency, or in any other exceptional case “where it is impractical or impossible to follow the official procurement processes”. The effect of load-shedding on the functioning of Cape Town, including the provision of basic municipal services like water provision and wastewater treatment, could realistically represent an emergency as contemplated in the MFMA Regulations.

On top of this, it would have been impractical for the city to embark on a competitive tender process in procuring electricity from SSEGs, since NERSA has set the feed-in tariff, which applies to all electricity purchases, equally. Because of this, there is no utility in introducing pricing competition, which is a core driver for competitive procurement.

The city was therefore likely able to justify contracting directly with SSEG generators and to dispense with a competitive tender process under Municipal SCM Regulation 36. National Treasury approval is not required to invoke Municipal SCM Regulation 36, which instead requires the city’s municipal manager to record the reasons for any deviations and to report them to the municipal council and include them in the city’s annual financial statements.

In contrast to the dispensation under the Municipal SCM Regulations, the PPPFA and the PPPFA Regulations do not have any provisions allowing for instances when the requirement to implement a preference points system when carrying out procurement can be relaxed. The only remedy is to apply to the minister of finance for an exemption under section 3 of the PPPFA.

An application can only be made in three prescribed circumstances – the mostly likely of which to succeed is that the exemption is in the public interest. Cape Town officials probably argued in the city’s request that it would be in the public interest to try mitigating the effects of load-shedding by allowing SSEGs to feed into the distribution network, and that the cost of setting up the required infrastructure would be minimal in comparison to the benefits it will provide.

What the exemption means

Amid the energy crisis facing South Africa, the minister of finance would be hard-pressed to disagree with such a public interest argument. However, while there is no requirement for the exemption to be published, it is likely that the minister was careful to craft it so that it only related to the very narrow issue of how the city will dispense with the requirements of the PPPFA for electricity purchases from SSEG generators. It is also possible that the exemption has a time limit, meaning that it can only serve as an interim measure while the government takes steps to introduce more capacity into the national grid.

After Cape Town’s announcement, other municipalities could follow a similar approach, which might result in numerous exemption applications being made to the minister. However, exemptions are likely to be limited to those municipalities that can demonstrate strong systems of governance and collection controls, and those that are in good financial standing. This would ensure that the feed-in system does not have the opposite effect of placing municipal finances under strain. At best, however, only a handful of municipalities would meet this threshold.

While Cape Town’s exemption from the PPPFA, together with its NERSA feed-in tariff approval, provides a precedent for other municipalities to counter the severe social and economic effects of load-shedding and to significantly reduce the effects of the energy crisis, as is so often the case in South Africa, this is unlikely to become a blueprint for other, less affluent municipalities to follow in future. The search for a long-term solution that works for all regions of the country continues.

Co-written by Reuben Cronje, Thandeka Mashonganyika and Jazquelyn Govender of Pinsent Masons.