South Africa’s energy action plan has potential to deliver energy security

The plan was outlined by South Africa’s president Cyril Ramaphosa last week and has been cautiously welcomed by energy sector stakeholders. Further detail of the plan was subsequently shared by government ministers on Monday.

The energy action plan in brief

By president Ramaphosa’s own admission, there is an energy crisis in South Africa. The country is struggling to generate enough electricity to meet demand, and power companies routinely cut off power to customers to ease pressures on generators in a process known as load-shedding.

The energy action plan announced by Ramaphosa on 25 July 2022 is multi-faceted. It is aimed at ensuring energy security in South Africa by making improvements to Eskom, the country’s state-owned public utility, curbing loadshedding and transforming the energy framework. A role is envisaged for South Africans to be part of the solution.

The action plan includes measures to:

• improve the performance of the existing generation plants of Eskom;
• as second priority, accelerate the procurement of new capacity;
• enable and increase private sector investment in generation of energy;
• enable businesses and households to invest in rooftop solar and contribute to the grid, including through the development of a feed-in tariff for small-scale embedded generators, and potential fresh incentives for residential and commercial installations;
• improve and transform the electricity landscape, in particular through the lifting of the embedded generation licencing threshold, and position the sector for future sustainability.

Addressing Eskom’s problems

Substantial debt has, to-date, constrained the ability of Eskom to invest in existing and new power generation assets. A number of initiatives are set out in the energy action plan to address this issue and ensure existing capacity is operational and maximised.

While Eskom’s debt is currently sitting at around R400 billion ($24.3bn), Ramaphosa announced that Eskom intends to increase its critical maintenance budget to safeguard the reliability of its generation plants. To further support Eskom, new skilled staff are to be recruited, while procurement policies are also to be eased in respect of maintenance spare parts as well as equipment to enable timely repairs to existing power infrastructure.

The manner in which Eskom’s debt will be managed will be addressed by the minister of finance’s medium-term budget policy statement in October, but we understand that the South African treasury is in the process of completing a plan to take over a portion of such debt.

Short-term improvements

To bolster supply in the short-term, the action plan envisages that surplus generation capacity will be procured by Eskom from existing projects of independent power producers (IPPs) and retailers as well as industrial buyers, or offtakers, including neighbouring countries, of power.

In a media briefing on Monday 1 August, minister of public enterprises Pravin Gordhan confirmed that the South African government will seek to ensure that up to 1000MW of surplus power expected to be generated by IPPs in the next three months is available to the national grid. He said the government will explore exemptions to public procurement and public finance rules to unlock up to 600MW of additional power, and that talks are ongoing with Southern Africa Power Pool with a view to adding between 100MW and 200MW of capacity within the next month or so. Gordhan said the government is also looking at securing 150MW of gas-fired electricity from Mozambique within the next three months.

Adding capacity

Ramaphosa announced several measures to procure new generation capacity. These should be viewed as being medium to long-term goals given the complexities involved in achieving those measures, such as the collaboration needed across government bodies.

The initiatives include government plans to address the local procurement requirements under ‘Bid Window 5’ – the fifth in a series of auctions aimed at adding capacity to South Africa’s energy system – to ensure progression and that construction on these projects commences. Greater flexibility is anticipated in relation to localisation requirements under Bid Window 5. Bid Window 5 requires certain components to be manufactured locally and to be incorporated into the construction of wind and solar plants.

Ebrahim Patel, South Africa’s minister of trade, industry and competition, said that, in respect of solar plants, the current requirement for 100% of solar PV modules to be produced in South Africa will be relaxed to 35%. There are currently only two South African producers of solar PV modules in the market, and Patel said the government does not want localisation targets to hinder the speed at which IPPs and Eskom are able to get new solar capacity connected to the grid. To further support this aim, exemptions to the 35% localisation production requirement will be available in the event of delays or challenges in supply, Patel said.

Patel further confirmed that future Bid Windows will see the localisation targets increased to scale up the local production, create jobs and strengthen supply chain security. He indicated that special emphasis will be placed on the location of component producers with the aim being to locate those manufacturers closer to areas that will likely be affected by the energy transition.

The procurement of solar and wind energy under Bid Window 6 is also to be increased to 5200MW. Minister of mineral resources Gwede Mantashe said that, in the interest of fairness, the registration process for prospective bidders will be re-opened and the bid submission deadline extended by approximately 45 to 60 days – formal communication will be issued on this in due course.

In our experience, it is likely to take between 18 and 24 months for energy from the winning bids to come to the national grid, subject to any delays.

The government also intends to invite bids for battery storage by September and for gas power at a later stage.

A determination in respect of the remaining allocations in the Integrated Resources Plan 2019 is also to be issued. However, Ramaphosa announced that that plan is being reviewed in light of the nation’s need for additional generation capacity and climate commitments. No indication has been provided as to when the results of the review will be published, but Mantashe confirmed that the team is reexamining the assumptions made in 2019.

Easing of licensing requirements

On 13 August 2021,  the threshold for which a licence was required for embedded power generation was raised from 1MW to 100MW. This served as a catalyst for industry to explore new embedded power generation projects.

In his announcement, Ramaphosa said that it is the government’s intention now to lift the licensing threshold in its entirety. However, no timeframe has been indicated for this yet.

We expect this move to further stimulate private sector participation in the generation of energy, though projects will still be required to register the applicable activity with the South African energy regulator, NERSA, and obtain the requisite environmental permits and other approvals. In this context, the environmental landscape is also undergoing ongoing reform with a view to enable new capacity to be brought online faster – change which has been welcomed by the market. Alongside this, Eskom has endeavoured to finalise the release of land next to its power stations in Mpumalanga to accelerate and catalyse investment of the private sector in renewable energy projects.

In the 1 August media briefing, Barbara Creecy, South Africa’s minister of environment, forestry and fisheries, said that her department has been working on an environmental screening tool to help environmental practitioners identify areas of low, medium and high environmental sensitivity to streamline environmental impact assessments.

Alongside this, the department has been developing a standard for the development and expansion of powerlines, including substations, and have identified geographic areas of low and medium sensitivity within which an EIA will not be required to be carried out for network infrastructure development. Creecy said that there will be a registration process that involves an on-site inspection by an environmental practitioner to confirm that the area is of low and medium sensitivity. The geographic areas are to be published in the South African government’s gazette in due course.

Creecy also confirmed that the government, together with Eskom, have identified five electricity transmission corridors. If the network infrastructure is developed within the transmission corridors then an EIA would not be required, provided that the areas are of low and medium sensitivity.

The role for feed-in-tariffs

The reforms the South African government is pursuing are intended to encourage investment in the generation of energy in the commercial and industry sector. However, there are currently no mandatory feed-in-tariffs in place to help encourage the uptake of renewable energy solutions.

Under the energy action plan, Eskom has been tasked with developing a feed-in tariff for small-scale embedded generators. We would expect such a tariff to be subject to approval by NERSA. This development comes after the City of Cape Town introduced feed-in tariffs, subsequently approved by NERSA, which are designed to incentivise customers to adopt renewable energy solutions by offering them scope to save money on utility bills, depending on the structure of the feed-in tariff policy.

Our view

The removal of regulatory hurdles should encourage a number of businesses to procure energy from independent power producers and in turn stimulate growth in the energy market. The plan appears to resonate with South Africa’s energy issues and, if implemented accurately, should enable South Africa to achieve energy security.

We await the removal of various red tape in respect of Eskom’s procurement policies within the confines of the law and the necessary legislative changes required to facilitate the implementation of the energy action plan.

Co-written by Konani Rasengane of Pinsent Masons.