New 100MW licensing threshold for embedded generation creates opportunities for self-generation

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On 10 June 2021, the South African Presidency announced an amendment to Schedule 2 of the Electricity Regulation Act 4 of 2006 (“ERA”), potentially enabling a new era of electricity self-generation to mitigate the effects of the country’s electricity generation capacity constraints and the impact load-shedding to balance demand is having on the economy.

Introduction

South Africa has experienced 15 years of intermittent blackouts as a result of challenges faced by South Africa’s national utility company in generating sufficient electricity to meet demand from increasingly aging generation infrastructure. Subject to specified exemptions set out in Schedule 2 of the ERA, no person may operate any generation, transmission or distribution facility in South Africa without a license issued by the National Energy Regulator (“NERSA”). On 10 June 2021, President Ramaphosa announced the government’s approval of an increase in the threshold for generation license exemptions for embedded generation projects from 1MW to 100MW. It is currently anticipated that these changes will be published within 60 days of the announcement by the Presidency.

What does this change mean?

The existing threshold for license exemptions for generators operating a generation facility connected to the distribution system is 1 MW. Off-grid generation facilities (projects without a “point of connection” to the national grid) are exempted from NERSA’s licensing and registration requirements regardless of their capacity.

Following the changes, grid-tied generators with a capacity of up to 100 MW will be able to generate and supply electricity to a customer or related customer, provided that they have registered with NERSA, comply with the relevant grid code(s) and, in the case of wheeling arrangements, have obtained connection approvals in respect of the power system over which energy is to be wheeled.

The existing 1 MW threshold has resulted in a bottleneck of NERSA applications for generation licenses, with a waiting period of several years without any guarantee of approval creating an extensive barrier for applicants.

What is the significance of this change?

Allowing independent power producers (“IPPs”) to increase the amount of power they can generate without a license further promises to reduce generation demands on the national grid and to alleviate residential, commercial and industrial electricity supply constraints. Private companies and industries will now have the opportunity to develop their own generation capacity and to participate more freely in the limited transmission, distribution and sale of electricity – including opportunities for producers to wheel energy. It is hoped that there is similar urgency to update and finalise the wheeling use-of-system charges to make wheeling more feasible.

Ultimately, not only is this evidence of the government’s commitment to resolving the country’s energy crisis, it also represents its increasing willingness to embrace deregulation. The increased threshold will allow new IPPs to enter into the energy market, ultimately lowering the costs of generating power in the medium term.

Rhulani Matsimbi (White & Case, Trainee Lawyer, Johannesburg) contributed to the development of this publication.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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