Independent power generation in South Africa to get boost

Emma Dempster of Pinsent Masons, the law firm behind Out-Law, was commenting after South African president Cyril Ramaphosa confirmed that the government will change the law to extend an existing licensing exemption that applies to embedded generation projects.

Currently, under the Electricity Regulation Act (ERA) in South Africa, persons seeking to generate electricity require a licence from the the National Energy Regulator of South Africa (NERSA), unless they qualify for one of the exemptions to the licensing requirement listed under Schedule 2 of the ERA.

Generators operating an embedded generation facility with a capacity of no more than 1MW in circumstances in which the electricity is supplied to a customer or related customers through onsite generation or wheeling, are eligible for a licensing exemption, provided that the various connection and wheeling approvals have been obtained.

Earlier this year, the Department of Mineral Resources and Energy (DMRE) consulted on proposed amendments to Schedule 2. Under its plans, the licensing exemption threshold for embedded generation facilities would have been extended from 1 MW to 10MW. However, Ramaphosa has now confirmed that the threshold for exemption will be extended further to 100MW instead.

Dempster said: “This reform should unblock the delays we have seen in the development of larger scale embedded generation projects. We have seen substantial growth in the commercial and industrial (C&I) solar market in South Africa for small scale generation facilities with a capacity of no more than 1MW given the current exemption under Schedule 2, and the increase in the capacity threshold for the exemption from 1MW to 100MW will encourage the same growth in the market for larger scale embedded generation projects.”

“Independent power producers (IPPs) will likely have more confidence in investing in larger scale C&I projects as the risk of not obtaining a generation licence following the investment of significant development upfront is largely removed,” she said.

Dempster said this development would be particularly welcomed in South Africa’s mining sector where businesses have been pursuing larger scale IPP projects since 2016. She said obtaining a generation licence from NERSA has been a barrier to the development of such projects and an obstacle to investment.

Dempster said. “Given the electricity supply challenges faced by South Africa since 2008, there has been a growing demand for self-generation solutions, and commentators have called for the regulatory framework to be amended to make it easier for electricity generators to generate electricity for their own use. While the government took steps last year to remove the requirement that embedded generation facilities used for self-generation with a capacity above 1MW must comply with South Africa’s national electricity plan, known as the integrated resource plan, IPP projects are still facing challenges in progressing the development of projects due to the time required to obtain a generation licence as a result of the other requirements that still need to be met in terms of the ERA.”

Dempster said that, in some cases, it can take in excess of 200 days to obtain a generation licence after a power purchase agreement is signed. South Africa currently has an energy shortfall and experiences intermittent power cuts, and president Cyril Ramaphosa has acknowledged that the ability to bring new power sources on-line quickly is vital to South Africa’s economic recovery and growth.

Even though a generation licence will not be required, the activity will still need to be registered with NERSA. 

“There are currently no guidelines or rules governing the registration process and these will need to be put in place by NERSA to facilitate the development of an enabling regulatory environment,” Dempster said.

Ramaphosa advised that the final version of the amendment to Schedule 2 will be published by the Department of Mineral Resources and Energy within the next 60 days.