Virtual wheeling platform to shake up South Africa’s renewable energy market

The VWP – a digital tool for tracking time of use data for energy generation and consumption – was developed by South Africa’s stated-owned utility company Eskom to collect, aggregate, process and report energy generation and consumption data into Eskom’s time-of-use periods (standard, peak, and off-peak) in hourly intervals. Traditionally, energy generation and consumption data has been aggregated at monthly intervals.

The VWP is designed to overcome some limitations of the current system which uses the ‘third-party wheeling’ approach. Under this traditional approach, bigger independent power producers (IPPs) and electricity buyers who are connected at medium and high voltages (above 1kV) need to sign power purchase agreements (PPAs) for the IPP to sell wheeled energy to the buyer. However, the relationship between the IPP and buyer is one-to-one, and the buyer’s customer bill would be credited for the consumption of the wheeled electricity.

The legal requirements for IPPs and buyers connected at voltages above 1kV include having to amend their existing electricity supply agreements with Eskom in order to participate in traditional third-party wheeling. This has also resulted in a restricted industry adoption of this particular type of wheeling. In addition, energy can only be wheeled to municipal grids which are linked to municipalities that have wheeling frameworks in place, and municipalities with wheeling frameworks are few in number.

Businesses, such as hotel groups, that operate low voltage sites across different locations are not able to use traditional third-party wheeling, because these sites were not linked to medium to high voltage networks. The shortfalls of the current system have contributed to the electricity shortage crisis, known as loadshedding, which South Africa has endured for a long time.

What changes will a virtual wheeling platform bring?

The VWP is set to provide much needed flexibility in South Africa’s electricity market, making it more attractive to investors, independent generators and buyers in the sector.

Buyers who undertake businesses in the commercial and industrial sectors will benefit the most from using the VWP since these buyers tend to have multiple offtake sites that are connected to both Eskom and municipal networks across different municipal jurisdictions. For instance, a large retailer who operates different sites across various locations and whose operations are spread apart in such a way that the sites are connected to distinct networks, with some embedded to Eskom and others to diverse municipal grids, will be able to access renewable energy to power all of its operations through virtual wheeling.

Commercial or industrial buyers will be able to use the VWP through entering into agreements such as a virtual wheeling agreement with Eskom, VWP agreement with an Eskom certified trader, or PPA with one or several IPPs. In addition, Eskom intends to refund the buyer for the energy wheeled to its grid at the end of each calendar month, and this refund will exceed what the buyer pays the IPP for energy per unit. Smart meters will be installed at both generation and consumption locations to collecting generation and time of use (TOU) data, and the trader will aggregate the TOU data and transfer it to Eskom’s VWP.

From the perspective of IPPs, through virtual wheeling, the trader will contract with diverse IPPs who will produce power and feed it to the grid in accordance with a negotiated pricing structure. The energy which is fed to the grid will be metered. Eskom will compensate the trader on a monthly basis and, in turn, the trader will pay the IPP.

The VWP will also facilitate access to wheeling for industry stakeholders who are connected at low and medium voltages. IPPs can conclude PPAs with several off-takers at the same time, no amendments to existing electricity supply agreements are required, and municipalities are not legally mandated to have wheeling frameworks.

Can a virtual wheeling platform transform the local electricity market?

There has been growing market demand for the VWP following a successful virtual wheeling pilot project between Vodacom and Eskom that proved the viability of virtual wheeling. Vodacom operates over 15,000 distributed low voltage sites which are connected to 168 municipalities. It is aiming to rely completely on renewable energy for the supply of power to all its operations by 2025, and the company is convinced that virtual wheeling will be imperative to the realisation of its objective.

Previously, the company did not qualify to use traditional third-party wheeling because its sites were not linked to medium to high voltage networks. However, the company said that virtual wheeling will assist in powering all of its sites with renewable energy as it will be in a position to contract with several IPPs who will wheel power to their sites.

The adaptation of VWP also comes with financial benefits. When powering its sites with fossil fuel-based energy, Vodacom stated in the past financial year it spent more than R4 billion (US$220 million) on backup power and R300 million on purchasing diesel for generators. Through the use of virtual wheeling, the company will be able to cut costs on power significantly.

Besides Vodacom, many other companies with ESG targets are looking to adopt virtual wheeling to guarantee access to renewable energy. Companies that can power their operations through virtual wheeling will be able to achieve their objective of attaining net zero carbon emissions.

In addition, since indebted municipalities are precluded from participating in the VWP, virtual wheeling is expected to incentivise municipalities which are indebted to Eskom to settle their debts, so that they can benefit from the access that off-takers linked to their municipal networks will have to the VWP arrangement.

Overall, the complete rollout of the VWP will help to expand access to varied off-takers which range from large, medium, and small-sized industrial, commercial, and manufacturing businesses, and expand the use of renewable energy which is key to helping companies with the reduction of their carbon footprint. It will also help to contain and diminish power cost increases and onboard greater and cleaner power to the grid which will be sufficient enough to end the country’s chronic power shortage crisis.

The Electricity Regulation Amendment Bill

The VWP is set to be rolled out to the rest of the market by the end of 2024. Further improvements to the platform still have to be made before it can be rolled next year. These enhancements include alleviating the trading, timing and settlement risks, the risk of Eskom payment defaults.

Alongside the development of the VWP, the introduction of the Electricity Regulation Amendment Bill will also play a fundamental role in transforming South Africa’s electricity market and unlocking the full benefits of virtual wheeling. The Bill envisages the creation of a competitive electricity market that is open to accommodating competitor IPPs and traders, an independent transmission system operator, and independent electricity market operator. Once the Bill becomes law, the activities of all the stakeholders will be regulated, which will provide legal certainty.

The VWP and the proposed regulatory framework could be key to attracting larger investments in the country’s renewable energy market due to the possibility that IPPs could improve their profit margins because they will be able to provide power to diverse off-takers that operate multiple sites which are spread across the country. It also has the potential to create a significant off-take market, as buyers will be able to save considerable costs through the VWP’s refund mechanism.

Co-written by Njabulo Gumede of Pinsent Masons.