On 10 June 2021, President Cyril Ramaphosa announced a significant step in further reforming South Africa's electricity sector to achieve a stable and secure supply of energy. Following an extensive public consultation process and a significant amount of technical work undertaken by the Department of Mineral Resources and Energy, Schedule 2 of the Electricity Regulation Act, No. 4 of 2006, will be amended to increase the National Energy Regulator of South Africa licensing threshold for embedded generation projects from 1 MW to 100 MW, whether or not they are connected to the grid.
The President said that this reform is expected to unlock significant investment in new generation capacity in the short and medium term, enabling companies to build their own generation facilities to supply their energy needs. This would in turn increase the available supply of energy and reduce the burden on Eskom, allowing it to proceed with its intensive maintenance programme and reduce its reliance on expensive gas and diesel turbines.
The President undertook that the final version of the amendment to Schedule 2 would be published by the Department within the next 60 days or sooner.
On 12 August 2021, Gwede Mantashe, the Minster of Mineral Resources and Energy (the Minister), published the amendment to Schedule 2 of ERA in Government Gazette No. 44989 under Government Notice No. 737.2
The details of the newly-amended Schedule 2 of ERA
In brief, the main amendment to Schedule 2 of ERA is in paragraph 3.1, which now provides that operating an electricity generation facility, with or without storage, with a point of connection to the transmission or distribution grid, with a capacity of no more than 100 MW, is exempt from licensing by NERSA but will require registration with NERSA.
This exemption will apply:
- where the generation facility is operated to supply electricity to an end-use customer and there is no wheeling of that electricity (conveyance of electricity from the point of connection to a point of consumption through a third-party transmission or distribution network);
- where the generation facility is operated to supply electricity to an end-use customer by wheeling, and the generator has entered into a connection agreement with the relevant grid provider; and
- where the generation facility does not import or export any electricity onto the transmission or distribution grids.
In practical terms, this means that the following facilities are now exempt:
- Non-wheeling facilities – generation facilities located close or adjacent to the end user customer or purchaser of the energy where there is import and export at the same point of supply (or on the same feeder) (otherwise known as net-metering) or that connect "behind the meter" (the generation facility connects to and feeds energy into the purchaser's connection infrastructure). There is no wheeling of energy, as the operator of the generation facility does not use the transmission or distribution systems to convey energy to the purchaser's system;
- Wheeling facilities – generation facilities that are situated away from the purchaser that have wheeling arrangements in place to convey the electricity generated by the facility to a purchaser through the transmission and or distribution system. The exemption is prescriptive about the fact that the generator or owner of the facility must have entered into a connection agreement with the relevant distributor or the transmission company. In reality, this is only one side of the contractual structure to complete a wheeling transaction. The purchaser will also be required to amend its electricity supply agreement with Eskom and/or the relevant municipal distributor to allow for the reconciliation of wheeled energy and the passing of a credit in respect of the wheeled energy on the purchaser's electricity account; and
- Other facilities – generation facilities that do not export or import electricity to or from transmission or distribution systems ("Other Facilities Exemption").
Additional exemptions apply under the new paragraph 2 of Schedule 2 of ERA:
- the operation of a generation facility with or without energy storage for the sole purpose of providing standby or back-up electricity in the event of, for a duration no longer than, an electricity supply interruption;
- the operation of any generation facility with or without energy storage provided irrespective of capacity, the facility does not have a point of connection;
- the operation of a facility with a capacity of no more than 100 kilowatts, which complies with the grid codes approved by NERSA (the "Codes") and has a point of connection in circumstances where the distributor has prescribed the conditions relating to the continued use of the point of connection and NERSA has prescribed the manner in which the distributor shall keep a register of each facility.
There are also other activities exempt from licensing and which require registration under paragraphs 3.2 to 3.5 of the amended Schedule 2 of ERA:
- the operation of a demonstration electricity generation facility with or without energy storage that is not intended to be in operation for more than 36 months;
- the continued operation of an existing generation facility with or without energy storage which, immediately prior to the date of commencement of the amended Schedule 2, was exempt from the requirement to apply for and hold a licence under ERA. However, these facilities must register with NERSA within six months of commencement of the Schedule 2 amendment and are subject to compliance with the Codes and there being an existing transmission or distribution grid connection;
- the operation of a distribution facility up to the point of connection that connects the exempted generation facility where there is wheeling (Distribution Licence Exemption).
This means that if a distribution line and other distribution infrastructure is required to connect the generation facility to a transmission or distribution system in respect of a wheeling facility, obtaining a distribution licence for operating the distribution facility is not necessary, but registration is required.
- the trading of electricity by a reseller of electricity in circumstances in which:
- the price charged by the reseller to customers does not exceed the tariff that customers would have been charged for the electricity if it had been purchased from the holder of a distribution licence for the area in which the electricity is supplied to the customer; and
- the reseller has entered into either a service delivery agreement with a municipality (where the licensed distributor is a municipality) or a similar agreement with the distributor (where the licensed distributor is not a municipality), ratified by NERSA (Trading Licence Exemption).
This means that a reseller of electricity will not be required to obtain a trading licence in order to buy electricity from an entity and resell it, as long as the price paid by the customer is not higher than the price that would have been charged by a municipal distributor or Eskom in that distribution area. This introduces a cap on the price that can be charged by the reseller but still allows the reseller to earn a margin on the electricity that is resold.
Paragraphs 4 to 6 of the amended Schedule 2 make provision for revocation and deregistration, as follows:
- NERSA may vary, suspend or remove any registration on receipt of an application by a registrant or on application by a third party or upon violation of the regulatory requirements to comply with the Codes and any other authorisations and/or agreements as may be required;
- NERSA may revoke a registration on application by a registrant or the facility is no longer required or when the conditions of registration are not met; and
- a registrant must, in the circumstances contemplated in the point immediately above, give NERSA at least six months' notice in writing of its intention to cease activities, unless NERSA determines otherwise.
Key legal considerations
The following key legal considerations should be borne in mind:
- Can an exempted electricity generator sell electricity to multiple end-use customers? The language in paragraphs 3.1.1 and 3.1.2 of the amended Schedule 2 provide for the exemption where the generation facility is operated to supply electricity to "an end-user customer". The Interpretation Act, No. 33 of 1957, provides that "in every law, unless the contrary intention appears words in the singular number include the plural, and words in the plural number include the singular". In the absence of any contrary intention being evident, in our view, an exempted generator is empowered to sell electricity to multiple end-use customers. We would, however, recommend that clarity be sought on this from the Department.
- Generation facilities that are commonly referred to as off-grid facilities seem to be covered by the exemption that provides "the operation of any generation Facility with or without energy storage provided irrespective of capacity, the facility does not have a point of connection". If this is the case, what is the intention of the Other Facilities Exemption? Is this intended to cover "behind the meter" connections?
- Is the reference to "where there is conveyancing of electricity through the transmission or distribution power system" in the Distribution Licence Exemption intended to exclude the operation of distribution lines that connect behind the meter? In this instance, the electricity exported to the purchaser's system would not be conveyed through a distribution power system.
- In respect of the Trading Licence Exemption, "reseller" is defined as a person who purchases electricity from a trading entity in order to sell such electricity to a customer, but “trading entity” is not defined. It is not clear which sellers of electricity would qualify as trading entities.
- Has the amendment to Schedule 2 of ERA taken effect? The expectation has been that the final law which will come into effect would be published, but the use of the phrases "intend to amend" and "intend to determine" in paragraphs (a) and (b) of Government Notice No. 737 suggest that this notice may merely indicate an intention to amend Schedule 2 of ERA, as if the Government Notice and its Annexure do not yet constitute the amendment and that an amendment will follow at a future date. While on balance it seems that the amendment to Schedule 2 of ERA in the Government Notice and its annexure are in fact intended to take legal effect on the date of publication, the uncertainty caused by the "intent" language is less than optimal for such a significant development in the energy sector. We would recommend that clarity be sought on this language from the Department and a correction notice be published.
- Will the operator of an exempted generation facility be required to obtain a trading licence in order to sell electricity to an end-use customer? In our view, under paragraph 3.1 of the amended Schedule 2 of ERA, the answer is no.
The Registration Requirements
The licensing exemption will only have real import for the electricity sector once the registration requirements are issued by NERSA. The current registration requirements for facilities with an installed capacity of 1 MW may provide some insight into what the market can expect. The current registration requirements are set out below:
- the company registration certificate/ copy of identity document;
- shareholding structure;
- a consent letter from the licensed Network Service Provider (NSP) with confirmation, among others, that there is network capacity to accommodate the proposed embedded generator and that the generator meets the requirements of the NSP;
- technical feasibility studies and technical models;
- a Power Purchase Agreement between the generator and the consumer, if the generator and the buyer are not owned by the same entity;
- the wheeling agreement with the NSP, if applicable; and
- an Environmental Impact Assessment (EIA) and Record of Decision, where applicable.
We expect that these requirements will apply to 100 MW facilities as a minimum, as well as evidence that the connection agreement is in agreed form in respect of wheeling facilities. It is an open question whether applicants will have to demonstrate some level of Broad-Based Black Economic Empowerment and whether the applicants will be required to submit a cost estimate letter or budget quote in respect of the connection works required for the generation facility.
This amendment of Schedule 2 of the ERA will be of interest to the many intensive energy users looking to generate their own electricity quickly, for security of supply, to contain the rising costs of Eskom-generated electricity and to reduce their carbon footprint in light of the significant global decarbonisation drive. It will also be of interest to South African people and businesses for whom this change will herald an eventual reduction in load-shedding and reliance on Eskom, and bring about energy security.
Read the original publication at Webber Wentzel.