Eskom told the Mail & Guardian it had only received a R9 billion World Bank loan to decommission its coal-fired Komati power station. (Waldo Swiegers/Bloomberg via Getty Images)
In July 2022, President Cyril Ramaphosa announced five actions and additional measures to achieve long-term energy security in the face of the country’s deepening energy crisis.
One of the biggest announcements was the complete removal of the 100 megawatt licensing exemption threshold for private generation. Another big announcement was the introduction of emergency programmes where Eskom would buy surplus capacity from existing independent power producers (IPPs) and existing private generators.
The government has now actioned these two initiatives through the publication of a proposed amendment to schedule 2 of the Electricity Regulation Act 4 of 2006 (ERA) removing the 100MW licensing exemption threshold. The changes were opened up for public comment on 2 September 2022 and last week the government also announced that Eskom would introduce a standard offer and emergency generation programme to give effect to the purchase by Eskom of surplus energy from private generators.
Let’s take a look at what we can take out of Eskom’s new measures to tackle the country’s energy crisis:
- Battery and energy storage facilities are treated differently in terms of the 100MW exemptions
It is important to note that a distinction is made between battery storage and energy storage in the proposed licensing exemption.
Facilities with an installed capacity of more than 100 kilowatts that need to be registered with the National Energy Regulator of South Africa (Nersa) may be stand-alone energy storage facilities or a combination of renewable technologies with energy storage. These are projects with a point of connection on the grid delivering energy either on a wheeling basis or through a direct connection into the off-taker’s system.
For facilities that are exempt from both licensing and registration with Nersa, such as backup energy, off-grid facilities and facilities with less than 100kW, schedule 2 provides that they can be facilities with or without battery storage.
It is still unclear whether this distinction is deliberate as the definition of “facility” makes reference to “energy battery storage”, which further confuses matters. It is unclear if the minister intended to use the broader concept of “energy storage” in relation to facilities requiring registration with Nersa. It is problematic that energy storage and battery storage remain undefined in schedule 2 of the ERA and this should be rectified by the minister.
- Eskom’s standard offer and emergency generation programmes allow it to buy more green power
Now that we are facing an urgent energy emergency, Eskom has received an exemption from compliance with its own supply chain policy and normal competitive procurement processes to implement the standard offer and emergency generation programmes.
In support of these initiatives, the minister of the department of mineral resources and energy issued a determination in terms of section 34 of the ERA for 1 000MW that will be applied across both the standard offer and emergency generation programmes.
This is referred to as “first determination”. The standard offer programme allows Eskom to purchase any excess energy generated by a facility that is not consumed or taken by a designated primary off-taker or off-takers (customers who take energy).
The standard offer programme will be in place until July 2028, but it is intended to be a rolling programme that will receive additional allocations once the allocation from the first determination is used up.
- Eskom can buy surplus energy from generators if their private off-takers can’t take it or don’t want it
Excess or surplus energy is the balance of energy that arises when a customer does not consume all the energy it was supplied with by a supplier. In a wheeling context, that might be the energy that is left over at the end of any month if an off-taker was unable to consume all the energy supplied to it by a generator in that month.
If there is a balance of leftover energy between the private generator and buyer, Eskom will be able to enter into a standard power purchase agreement (PPA) with the seller of the excess energy. In legal terms, we call this a standard offer PPA. It is important to note that if the seller of the excess energy has more energy to sell during the term of the standard offer PPA and there is still an allocation of megawatts available under the standard offer programme, Eskom will purchase this additional energy.
This means that if bilateral private PPAs terminate prematurely, the generator has the option to sell the electricity that it has available to Eskom instead of procuring another private off-taker or buyer.
The qualifying criteria for Eskom to purchase excess energy from a generation facility are that the facility is able to self-dispatch and has an installed capacity above 1MW, the facility is licenced or registered with Nersa in accordance with the requirements of the ERA, and that the facility is connected to the Eskom network or if connected to a municipal network, participation by the facility in the standard offer programme has been mutually agreed upon by Eskom and the municipality.
- Which entities will Eskom purchase the excess energy from?
Eskom may enter into a standard offer PPA with either the generator of the energy or the off-taker. This is an important aspect of the programme for off-takers in a wheeling context, especially if they only have one site or point of consumption and can’t re-allocate energy to other sites if they find themselves in a situation where they can’t consume all the energy due to force majeure or system events.
Eskom has confirmed that if wheeling arrangements are in place with an off-taker and that off-taker has entered into a standard offer PPA with Eskom, Eskom will automatically purchase any excess energy that appears on the off-taker’s electricity account subject to any limits agreed upon in the standard offer PPA.
- There are questions around how Eskom’s purchase of excess energy will work
A key question that requires clarity from Nersa is whether this sale of energy by the off-taker to Eskom will constitute trading and, if so, whether this activity will be exempt from the requirement to hold a trading licence.
Allocation of megawatts and corresponding standard offer PPAs will be made on a first-in-time basis to applicants, subject to compliance with the qualifying criteria. The applicant will have to provide an estimate of the excess energy that will be available for purchase by Eskom over the three-year term of the standard offer PPA.
A project does not have to be operational when an application is made to Eskom, but then the question that arises is: which arrangements have to be in place as a minimum to satisfy the qualifying criteria?
There are various wheeling projects in development that don’t currently satisfy all of the qualifying criteria but that would want to apply now so can benefit from the standard offer programme once they are operational.
Confirmation from Eskom is required in this regard, but our view is that if the project has been registered with Nersa and the wheeling arrangements have been finalised (meaning the connection and use of system agreement has been entered into) then an application could be made under the standard offer programme, with the caveat that the term of the standard offer PPA would only commence upon the commercial operation date of the facility in question.
Each standard offer PPA will have a term of three years but could be extended or renewed through an application to Eskom. Eskom will not have a take-or-pay obligation under the standard offer PPA and the seller of the energy will, in turn, not be penalised for failing to deliver the exact amount of energy estimated in any contract year.
- What will Eskom pay for excess energy under the standard offer PPA?
There are two options available to the seller of energy. The first option is the static price option, where the price is established based on Nersa’s approved cost of recovery for Eskom, taking into account the variable cost of energy production. The price is structured on a time-of-use basis which is determined on an annual basis before 28 February for the subsequent contract year of the standard offer PPA.
The second option is the dynamic price option where the price is established on a day-head basis in the internal energy market as set for marginal generators and will be limited to a price cap of R1 093.20/MWh.
- What does the emergency generation programme entail?
The emergency generation programme permits independent generators to provide energy daily to compete with the Eskom generators in the internal market. This means the facilities do not have to be operated on a self-dispatch basis and dispatchable facilities may be more suited to this programme. The generators could be existing Eskom customers that have their own generation facilities or they can be IPPs.
The emergency generation programme is a short-term measure that will stay in place until March 2025.
Independent generators can participate in two ways – the independent generator can either be a price taker or a price setter. As a price taker, the independent generator offers a volume of energy that is available for delivery to Eskom and is paid at the price determined by the market. The price is established a day ahead in the internal market as set by marginal generators and limited to a negotiated price cap.
As a price setter, the independent generator offers a price for the energy that it has available for sale to Eskom and the volume of energy that is actually taken by Eskom is determined by the market. If the independent generator offers a price below the price cap of R1 093.20/MWh then the price is set by the marginal generator in each hour. If the price offered by the independent generator is above the price cap, then the price is set at the price offered by the independent generator.
Conclusion
There are a few matters that require further consideration or confirmation by the government related to these initiatives to alleviate our electricity constraints and promote private sector investment in the energy sector.
If the Eskom programmes are implemented, they will have an impact on the terms agreed upon by both generators and off-takers when entering into bilateral private arrangements and on heavy electricity users when they formulate their energy strategies in the short to medium term. Eskom has confirmed that the application forms for these short-term programmes will be available to all interested parties by the end of this month.
Alexandra Felekis, counsel and energy law expert at Allen & Overy, focuses on project finance and infrastructure finance, particularly as it relates to concessions, procurement programmes, public-private partnerships and financing in the mining and energy sectors.
The views expressed are those of the author and do not necessarily reflect the official policy or position of the Mail & Guardian.