The government has taken the decision to considerably free up South Africa’s electricity generation market in an effort to resolve the country’s recovery-dampening energy crisis.
Addressing the nation on Thursday, 10 June, President Cyril Ramaphosa announced the decision to amend the Electricity Regulation Act to lift the threshold for companies to produce their own electricity without a licence to 100 megawatts. This comes after a tussle to get the limit increased to 50 megawatts shortly after a government announcement in April that the limit would be increased from 1MW to 10MW.
The amendment will be published within the next 60 days “or sooner”.
Once the amendment is finalised, generators will be allowed to wheel electricity through the transmission grid, subject to wheeling charges and connection agreements with Eskom and relevant municipalities.
The surprise decision is expected to unlock significant investment in new generation capacity, Ramaphosa said. “This in turn will increase the availability of supply of energy and reduce the burden on Eskom, allowing Eskom to proceed with its intensive maintenance programme.”
However, the president noted, electricity generation projects will still need to obtain grid connection permits.
“This will ensure that we are able to bring online as much new capacity as possible without compromising the integrity and stability of our energy system.”
Generation projects will also need to have their registration approved by the National Energy Regulator of South Africa to verify that they have met these requirements and to receive authorisation to operate.
An orderly development of the energy system
Municipalities will have the discretion to approve grid connection applications and will have to undertake environmental impact assessments. “This will ensure that while we enable as much new generation capacity as possible to come online, we also ensure the orderly development of the energy system.”
The president said the decision “reflects our determination to take the necessary action to achieve energy security and to reduce the impact of load-shedding on businesses and households across the country”.
“There is evidence of our intention that we are putting forward today to tackle this economic crisis head on by implementing major economic reforms that will transform our economy moving forward,” he said.
Ramaphosa made the unexpected announcement after Eskom implemented stage four load-shedding on Wednesday due to breakdowns at the Medupi and Duvha power stations.
South Africa’s energy crisis has been flagged by ratings agencies and the South African Reserve Bank as a major impediment to the country’s economic recovery.
Commenting on recently released GDP numbers, Ramaphosa said the country is starting to emerge from the doldrums of the Covid-induced economic downturn. “We are already seeing the results of our efforts to recover and rebuild … we are indeed seeing the green shoots that are emerging after a devastating fire.”
This week GDP figures were higher than expected, with an annualised growth rate of 4.6%. The first-quarter growth marks the third consecutive quarterly increase in real GDP, though the economy is still 2.7% smaller than it was in the first quarter of 2020. The reserve bank also recently revised its growth outlook to 4.2% in 2021, up from 3.8%
Ramaphosa conceded that South Africa’s economic distress predates the pandemic. “We have experienced low economic growth and high levels of unemployment for many years. This has been due to the structural constraints that hold our economy back,” he said.
Government has identified energy security as a priority in its economic recovery plan. “There’s no doubt that the prospect of a continued energy shortfall and further load shedding presents a massive risk to our economy.”
Addressing the energy crisis swiftly and comprehensively will determine the pace of economic recovery, Ramaphosa said. “There is no economy that can really grow substantially without energy security,” he added.
The president said government has in recent months made important progress in addressing the energy crisis. This includes the announcement of 11 successful bidders for the Risk Mitigation Independent Power Producer Power Procurement Programme and the opening of bid window five of the renewable energy programme to procure 2 600 MW of new generation capacity from wind and solar photovoltaic projects.
Eskom is working hard to improve the performance of its existing fleet of power stations, reduce its debt burden and complete its restructuring process, Ramaphosa added.
Last month, Public Enterprises Minister Pravin Gordhan revealed in his budget speech that Eskom has managed to reduce its debt by R83-billion in the 2021 financial year, taking it to R401-billion.
Eskom’s unbundling into three separate entities — generation, transmission and distribution — will be concluded in December 2022, according to the department of public enterprises. The legal separation of the transmission company will be completed by the end of this year.
The devil is in the details
Responding to the decision, energy expert Ted Blom said: “I think it’s very significant. It is also indicative of how serious the trouble is that Eskom is in. But the proof of the pudding is in the eating …. we will have to see.”
Blom said the decision has the potential to release Eskom’s stranglehold on industry. “It should certainly provide a lot of relief,” he said.
Clyde Mallinson, a geologist who focuses on the energy sector, agreed that the decision is “a massive relief”. But, he added, “the devil will be in the details”.
Because the announcement relates to self-generation, there are currently no clear-cut rules on how power projects will be allowed to sell energy to other companies, Mallinson said.
“Ideally as well, we would like to see that they would be allowed to sell it to multiple customers. If a company is able to build a solar farm, it would be great if they could sell 20% to Company A, 20% to Company B etcetera,” he said.
“That would be the major breakthrough. At the moment it looks as if Company A can’t even sell to Company B, nevermind to Company B, C and D.”
While the amendment is in “a fluid state of change, we must make sure that all of the necessary details get put in,” Mallinson said.
“It’s a massive relief that it’s been lifted. But when the rules are amended, they need to look at some of the details on the wheeling rules around ownership and who is allowed to be wheeled to.”