Implications of DoE’s amendments to the Electricity Regulation Act
This article contains comments which were made during a speech given at a recent breakfast hosted by the South African Independent Power Producers Association (SAIPPA) in Johannesburg.
Mmamoloko Kubayi, in her position as Minister of Energy, signed an amendment to the Electricity Regulation Act, 2006 (ERA) into law, which was issued under Government Gazette No. 41237 of 10 November 2017. The effect is to amend Schedule 2 of the ERA which relates to exemptions of certain activities from having to obtain an electricity generation licence, in terms of section 7 of the ERA (the amended exemptions).
Some background to electricity generation by independent power producers, ministerial determinations, licensing requirements and exemptions
The minister has wide powers to determine new generation capacity (determination) in terms of section 34 of the Electricity Regulation Act of 2006 (the ERA). The minister exercises these powers through the determination process which has its basis in the then most recently promulgated Integrated Resource Plan for Electricity (IRP). This plan is the country’s plan for the allocation of technologies, timing and electrical generation capacity over the following 20-year period.
Although this plan is intended to be updated every two years, the last IRP in force to date is the IRP2010, which should have been updated in 2012. A draft IRP was circulated for comment in 2013, but was never finalised.
The draft assumptions for the proposed IRP 2016 were circulated for the purpose of public consultations which ended on 31 March 2017, and, according to news reports, the IRP 2016 will be published very soon.
Following a determination, independent power producers (IPPs) wishing to generate and sell electrical energy elect whether or not to take part in a national procurement process in terms of which bids are submitted for technologies qualifying in terms of the relevant determination and the bid documents issued pursuant thereto.
The bid documents specify a pricing cap, maximum number of MW to be bid, and other qualification criteria, including, but not limited to social and economic development criteria. Determinations thus far (excluding nuclear) have specified the Department of Energy (DoE) as the procurer of the electrical generation capacity and the resultant electrical energy, and Eskom as the buyer thereof.
Preferred bidders are selected from amongst those taking part in the particular procurement process, and, if all the necessary requirements are satisfied by financial/commercial close, the suite of documents bringing into effect, amongst other agreements, the power purchase agreement (PPA) between Eskom, the DoE and the IPP which has been allocated preferred bidder status, are signed and become effective.
The National Energy Regulator of South Africa (NERSA) is, amongst other things, tasked with issuing licences for certain activities, including generation and distribution, but, importantly must, in terms of the ERA, issue licences to preferred bidders who qualify as such under the relevant national procurement programme. These IPPs therefore do not have to undergo the onerous licensing process which applies to all other IPPs seeking licences for their generation and sale of electrical energy, effectively requiring consent from the minister to the grant of such licences.
There are various generation activities undertaken by IPPs, where IPPs, for one reason or another do not participate in a national procurement programme. This type of situation could arise where the IPP concerned, amongst other things:
- Uses generation technology which has not been provided for in the IRP, or
- Will not meet the qualification requirements of the relevant determination and ensuing Request for Proposal (RFP) or Request for Bid (RFB) issued by the DoE, or
- Elects not to participate in the RFP or RFB for financial or other reasons (including the significant upfront costs of preparing the bid, which are also at risk if the project does not come to fruition), or
- Was not granted preferred bidder status under the appropriate RFP or RFB.
In such case the IPP may wish to sell electrical energy, including but not limited, to:
- Eskom or a municipality, or
- A third-party purchaser, not being a State Owned Enterprise or a municipality (the “willing seller/willing buyer” or “bilateral”) scenario, or
- A member of its own group of companies, or
- A trader of electrical energy, or
- An off-taker in another country.
In all of the scenarios set out above, the ERA provides that the generator must apply to NERSA for a generation licence. It is necessary to bear in mind that, as set out above, NERSA is obliged to grant generation licences to generators who have been selected as preferred bidders in a national procurement programme.
However, in all other cases, NERSA is not bound to issue generation licences to applicants. Very importantly, the obligation for a generator to hold a generation licence is subject to the licence exemptions contained in Schedule 2 to the ERA.
A generator is not required to apply for a licence when the generation activity is exempt. IPPs, quite obviously, prefer to rely on the exemption provisions of Schedule 2 of the ERA rather than having to apply for a licence.
The previous exemptions (the Schedule 2 previously in existence which has just been amended by the amended exemptions) were:
- Exemption 1: Any generation plant constructed and operated for demonstration purposes only and not connected to an inter connected power supply.
- Exemption 2: Any generation plant constructed and operated for own use.
- Exemption 3: Non-grid connected supply of electricity except for commercial use.
The second exemption was often relied upon by IPPs who construct and operate generation plants for their own use. Such generation often runs into dozens, and perhaps more, of MW. Some further salient points to be taken into consideration with regard to the previous “own use” exemption are:
- There was no limitation on “own use” in the previous exemptions. Generators who generated electricity for their own use could rely on this exemption no matter how many MW they generated.
- “Own use” is not currently defined in the ERA (or any other relevant electricity legislation). Thus, the term has been open to wide interpretation.
- The use of this exemption by small solar rooftop photovoltaic generators has arguably created difficulty for NERSA and distributors, both from an administration perspective and because of the potential impact on human safety, sub-standard installations, potential impacts on the grid, and various other considerations. In addition to this, the DoE has not been able to obtain accurate figures on generators and generation capacity being used for “own use” due to the fact that, prior to the amended schedule being gazetted, there has been no requirement for those who have relied on this exemption to register their facilities.
The licensing process
The licensing process is difficult because:
- The application for a generation licence generally only happens at a fairly late stage in the development process relating to a proposed generation facility, once prefeasibility studies and then feasibility studies have been concluded, various agreements, permits and governmental approvals have been granted, prices determined and agreed, construction milestones (with appropriate penalties and damages provided for) have been set out in the relevant contract/s, equipment prices have been agreed (which will be escalated by the length of any delay in issuing the generation licence), a connection and use-of-system has been entered into and so forth;
- NERSA, in terms of Section 13 of the ERA, must decide on a licence application within 120 days. However, the period of 120 days is not fixed from the date of application for the licence. The period begins to run after the public participation process has been concluded, if no objections have been received, or after receiving any additional information NERSA has requested from the applicant which it deems necessary to consider the application properly. There is no time limit set out within the ERA which specifies when NERSA must have called for additional information, and therefore there is no definitive time period within which generation licences must be granted or declined. NERSA is also not required to advise the prospective licencee when it has received all outstanding information, nor to request all information in one batch;
- Section 10(2)(g) of the ERA provides that an application for a licence must include, amongst other things, evidence of compliance with any integrated resource plan applicable at that point in time or provide reasons for any deviation for the approval of the minister;
- It has been NERSA’s practice that it will not begin to consider a generation licence application unless the Minister has consented to a deviation from the IRP, it being assumed that any generation of electrical energy by a generator which is not in terms of a national procurement plan is a deviation from the IRP;
- It has been the case historically that it is extremely difficult in practice to obtain consent to deviation from the IRP from the Minister. This has the effect of potentially putting the proposed generation project at risk because of (1) the risk of failure by the minister to consent to the deviation at all, or (2) delay in this process, and/or (3) indeterminate time periods for the granting of the licence by NERSA.
- The project may not be considered to be bankable by the financiers because recoupment of the costs of the project and future return on investment may not be possible due to delays or due to the generator in question not being licensed to sell all or any of the electrical energy proposed to be generated.
- The consent required in terms of s10(2)(g) of the ERA (read in the context of the national procurement programmes given effect to by Determinations) effectively allows the minister to control the extent of private sector participation in the electricity supply industry. The only exception to this is the exempt activities in terms of Schedule 2 to the ERA.
The amended exemptions
The introductory paragraphs of the Government Gazette containing the amended exemptions provide:
- In the first paragraph what the legislative basis for the exemptions is, and indicates that the Schedule 2 to ERA is amended, and
- In the second paragraph, the legislative basis for registration, and that certain of the exempted activities contained in the Amended Exemptions are required to be registered with NERSA. However, there appears to be a mistake in this paragraph, exemptions 1 to 6 and 8 are referred to as requiring registration only. Exemption 8 refers to resellers, however this is Exemption 10 in the amended exemptions. The amended exemption schedule itself requires that all exempt activities must be registered, so there is a discrepancy in the documents.
The purpose of the amended exemptions is to exempt various categories of generation facilities and electricity resellers from the requirement to hold a licence under the ERA, and to require these activities to rather be registered with NERSA. It does so by amending the existing Schedule 2 to the ERA (exemptions) and requiring these exempt activities to be registered.
The amended exemptions exempt ten categories of generation facilities or activities from the licensing requirement, in certain circumstances: embedded generation where no wheeling takes place, facilities that wheel through the grid, off-grid generation, facilities used for demonstration purposes, co-generation, back-up generation, existing exempt facilities, “noncompliant” generation, private distribution networks and resellers.
The first three categories of generation facilities are only exempt from the licensing requirement if their installed capacity is no more than 1 MW.
In the case of the first two categories, a facility will not be eligible for exemption if the minister has published a notice in the Gazette stating that the amount of MWs allocated in the IRP for embedded generation of this nature has been reached.
The intention was previously that the IRP would specify an allocation for embedded generation facilities of up to 10 MW in installed capacity. It was intended that this provision in the IRP would facilitate the licensing or registration of these facilities and do away with the need for the minister on a case by case basis to grant approval for deviations from the IRP in terms of section 10(2)(g) of the ERA for the relevant facilities. Unfortunately, this has not been carried through to the amended exemptions, but perhaps the IRP will still allocate capacity for embedded generation of up to 10 MW in installed capacity.
Exemption 1 applies to a national grid-connected generation facility with an installed capacity which is no more than 1 MW, where:
- Electricity is supplied to a single customer and there is no wheeling through the national grid;
- The generator or single customer has entered into a connection and use-of-system agreement, or obtained approval from the distributor, and
- When the connection and use of system agreement or approval is obtained the minister has not published a notice in the Government Gazette that the allocated amount of MW in the IRP for embedded generation of this nature has been reached.
- Under the previous exemptions, this exemption related to “any generation plant constructed and operated for demonstration purposes only and not connected to an inter connected power supply”.
- Previously, demonstration plants could not be connection to an interconnected power supply.
In terms of the amended exemptions they now may be:
- Previously there was no provision that the electricity generated by a demonstration plant could not be sold. The amended exemptions provide that this electricity cannot be sold
- Previously there was no cap on the number of years that the generation facility could be in operation.
- The amended exemptions provide a cap on duration of 36 months.
- Although there is national grid connection no wheeling is allowed
- There is no definition of “wheeling”
- Only a single customer may be supplied
- It is not clear what “embedded generation of this nature” is,
- Traditionally entering into a connection and use-of-system agreement with Eskom or municipalities has taken an extended amount of time. Eskom requires a Cost Estimate Letter (CEL) to have been accepted by the generator, then a budget quote and then the connection and use-of-system agreement is entered into. One of the difficulties with regard to an Eskom connection and use of system agreement is that it passes almost all risk to the generator, and a number of municipalities do not have connection and-use-of systems agreements in place. The Eskom connection and use-of-system agreement contains an annexure entitled Standard for the Interconnection of Embedded Generation, which ostensibly ensures compliance with the Distribution Code. Renewable generation facilities must also comply with the Renewable Generation Code, and it has been found that significant upgrades are sometimes required for facilities to comply with these codes. These codes are apparently in the process of being upgraded and consolidated so that any discrepancies are resolved. Otherwise, exemptions may be sought from NERSA and the Eskom exemption panel, and amendments negotiated with Eskom to the connection and use of system agreement, but these have proven to be very time consuming.
- According to an “Explanatory Memorandum” which is a document apparently prepared by the DoE with regard to the draft preceding the amended exemptions, and which may or may not be relevant (NB please take note of this caveat), this exemption:
- Exempts the operation of generation facilities with an installed capacity of no more than 1 MW which are connected to the grid at the same point as the load that they serve (i.e. which do not require wheeling).
- The exemption is intended, amongst other things, to provide a clearer legal basis for the already prevalent practice of rooftop solar installations of less than 1 MW which connect to distribution networks (i.e. small-scale embedded generation).
While these generators will be exempt from the requirement to hold a generation licence, it is nonetheless necessary that distribution licensees are aware of their existence and the extent of their proliferation, and that they in turn report this to NERSA, so that this is appropriately factored into generation planning. The procedure and requirements for the approval or connection agreement to be sought from the distributor or transmitter, and the requirements for furnishing relevant information to NERSA, will be dealt with in the relevant rules to be put in place by NERSA.
- It is envisaged that these NERSA rules would deal with any other operational requirements which are sought to be imposed on the operation of these exempted facilities. Importantly, the NERSA rules would also deal with the circumstances in which these generators will be allowed to bank the energy they feed into the grid which exceeds their own consumption and the relevant billing practices to be put in place by the distribution licensees. This could include a requirement that the generator must be a zero or negative nett effect consumer.
- The requirement that the Minister has not published a notification that the MW allocation has been exceeded, has been introduced to address the concern that there needs to be some mechanism to ensure that consumers do not install their own facilities to such an extent that this undermines the ability of the DoE to plan generation supply.
The DoE’s thinking is that the IRP and Determination mechanism works well in the context of independent power producers and that a similar mechanism should be introduced for embedded generation so that only a specified amount of MW is available for the development of these type of facilities over any given period.
Exemption 2 applies to a national grid-connected generation facility with an installed capacity which is no more than 1 MW, where:
- The generation facility supplies a single customer or related customers (the definition in the Companies Act applies) by wheeling electricity through the national grid,
- The generator has entered into a connection and use-of-system agreement with the distributor or transmitter (note, this exemption doesn’t refer to approval from the distributor as the first exemption does, which is probably an omission and may be problematic), and
- When the connection and use-of-system agreement is entered into the minister has not published a notice in the Government Gazette that the allocated amount of MW in the IRP for embedded generation of this nature has been reached.
- This is a wheeling scenario,
- There is no definition of “wheeling”
- A single customer or customers related to this customer may be supplied
- “Related” refers to the definition of this term in the Companies Act (see the Companies Act definition under the definition of “related” earlier on in this memorandum)
- It is not clear what “embedded generation of this nature” is
- See note under Exemption 1 with regard to connection and use-of-system agreements
- According to the “Explanatory Memorandum” referred to in the note under Exemption 1 above (please see caveat there), this exemption is intended to enable or create a clearer regulatory regime for generation facilities which are essentially private and serve dedicated loads but which require wheeling. Importantly, the requirement that these facilities conclude a use-of-system agreement ensures that any possible impact of the operation of such facilities is appropriately factored in and dealt with by the distributor in question.
Exemption 3 applies to the operation of a generation facility with an installed capacity of no more than 1 MW which is not connected to the national grid or having an interconnection agreement, where:
- The generation facility is operated solely to supply electricity to its owner;
- The generation facility is operated solely to supply electricity for consumption by a customer who is related to the generator or owner of the generation facility; or
- The electricity is supplied to a customer on the same property on which the generation facility is located.
- This exemption replaces the 3rd of the Previous Exemptions which specified that non-grid connected supply of electricity except for commercial use was exempted
- The previous exemption was completely different to the third amended exemption in that:
- It related only to non-grid connected supply of electricity
- Commercial use was allowed
- The amended exemption allows an exempt situation where:
- The facility is operated to supply its owner (only), or
- The facility is operated solely to supply electricity to a customer (one) who is related to the generator or owner (“generator” is not defined, so is open to interpretation. This may be intended to apply to the operator of the facility)
- The electricity is supplied to a customer on the same property as the generation facility
- “Related” refers to the definition of this term in the Companies Act (see extended definition of “related” above, including the Companies Act definition).
- It is not clear what the relevance of “or having an interconnection agreement” or what an “interconnection agreement” is. “Interconnection agreement” is not defined, so is vague. It probably relates to a connection and use-of-system agreement, but this term is unclear. Because of the “or” the exemption may not be used in both the situation where the facility is connected to the national grid and where the facility has an interconnection agreement (presumably, because the wording of the latter provision is a bit clumsy).
- This exemption is worded in such a way that it would only apply to a facility which is completely “off grid” Exemption 4 applies to the operation of a generation facility for demonstration purposes only (not defined), whether or not the facility is connected to a transmission or distribution power system, where:
- The electricity is not sold; and
- If the facility is connected to the national grid, the generator has entered into a connection and use-of-system agreement with, or obtained approval from, the transmitter or distributor; and
- The facility will be in operation for not more than 36 months.
- The facility may be connected to a “transmission or distribution power system” (the term is not defined, but this is immaterial in the context of the provision), but does not have to be
- The electricity may not be sold
- See note regarding Exemption 1 with regard to connection and use-of-system agreements and the caveat contained in the note
- The facility may not be in operation for more than 36 months (it is not clear why this provision has been inserted, but this is possibly a major constraint)
- The “demonstration facility” exemption under the Previous Exemptions relates to facilities for demonstration purposes only and which are not connected to the national grid. It also provides that the electricity generated may be sold.
Exemption 5 is a welcome provision and recent insertion relating to co-generation facilities. This is a watered-down version of the “own use” exemption (uncapped) which has been severely constrained, and now only relate to those exemptions contained in the amended exemptions. Co-generators have historically been large consumers of electricity, consuming their own electricity produced during the manufacturing process relating to their core business activity. The exemption relates to the operation of a generation facility where the electricity is produced from a co-product, by-product, waste product or residual product of an underlying industrial process, where:
- The generation facility is operated only to supply electricity to its owner;
- The generation facility is operated only to supply electricity to a customer who is related to the generator or owner of the generation facility; or
- The electricity is supplied to a customer on the same property as the generation facility.
- This a much-welcomed co-generation provision
- The facility is only be operated for the supply of electricity to its owner, or
- The facility is only operated to supply a customer which is related to the generator or owner. (“Generator” is not defined, but presumably means the operator of the facility. “Related” has the same meaning as the definition in the Companies Act), or
- The electricity is supplied to a customer on the same property
- Note the use of the word “only”. Only one of the three scenarios may be selected. This is not an “and” provision.
Exemption 6 relates to the operation of a generation facility for the sole purpose of providing standby or back-up electricity in the event of, and for a duration no longer than, an electricity supply interruption. Exemption 7 is for the continued operation of an existing generation facility which, immediately prior to the date of commencement of amended exemptions was exempt from licensing.
- It will be interesting to see whether or not rooftop solar PV facilities take the view that they were exempt from licensing under the Previous Exemptions or not. There may or may not be a risk in taking this position Exemption 8 is an interesting (new) exemption relating to the continued operation of an existing generation facility which:
- Was in operation before the amended exemptions
- Within 3 months of the amended exemptions declares non-compliance with the Schedule to NERSA, and
- Signs an agreement to comply within a time frame specified by NERSA.
- It is not clear under what situation non-compliance will be declared. It is also not clear which schedule is being referred to (i.e. the schedule relating to the previous exemptions or the schedule relating to the amended exemptions). It will be interesting to see how it is anticipated that compliance will be achieved if the facility was not compliant (perhaps licensing, but this presupposes that the facility complies with the IRP, or the minister will consent to deviation from the IRP). This exemption will apply to registration of certain previously non-compliant facilities Exemption 9 relates to the operation of a distribution facility connected to a generation facility contemplated in the first 6 exemptions and which is used exclusively for the wheeling of electricity from that facility to:
- The customer, if the electricity is not to be transported through the national grid; or
- The point of connection, if the electricity is to be transported through the national grid.
- This is a welcome new exemption which was not contained in the previous exemptions. It will add clarity for operators of private distribution networks who were not sure in the past whether or not they were required to licence their distribution network. This exemption only applies to the first six exemptions, but because the amended exemptions now provide for ten exemptions, and not eight as previously contemplated in the draft, the question arises as to whether or not this exemption was intended to provide for exemptions 1 to 8, and not 1 to 6 only exemption 10 is a new, welcome, exemption, which provides for the sale of electricity by resellers (who buy electricity from distribution licensees and on-sell to customers), where:
- The tariff or price charged by the reseller must not exceed the tariff or price that would have been charged if the customers had bought the electricity from a distributor, and/or an operator of a licensed distribution facility to which the bulk point is connected, or where the customers would have been connected.
- A service delivery agreement has been entered into with the distributor.
- The general conditions of the service delivery agreement must have been approved by NERSA.
- This probably doesn’t apply to sectional title complexes, unless the electricity is resold to the individual owners of the units. The service delivery agreement is a requirement for municipalities under the Local Government: Municipal Systems Act. Hopefully the conclusion of the service delivery agreement, and thereafter its approval by NERSA will not take a long time, as this could potentially delay the use of this exemption.
- Section 9(2) of the ERA stipulates that any person who has to register with the Regulator must do so in the form and in accordance with the prescribed procedure, and an application for registration must be accompanied by the prescribed registration fee: Provided that any person holding a valid licence at the date of a determination contemplated in section 8 must be issued with a registration certificate without complying with the prescribed procedure.
- It is very important that the “prescribed procedure” be finalised urgently. This especially given the fact that no registration procedure currently exists. It is also important that this procedure be “user friendly”, quick and easy to implement, registrations be processed quickly and that the registration fee is reasonable.
- Consideration must also be given to:
- The prescribed application period, the stage during the development of the project by when applicants must register – this impacts costing, timing and viability of the project; and
- A regularly updated technological interface with the public advising potential generators of the remaining MWs available for allocation.
Contact Sue Röhrs, Rohrslaw, Tel 082 876-7483, email@example.com
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