Public Energy: licensing and new generation capacity

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The Public Private Partnership Act No. 19 of 2010 (the Act) is the principal act made for the purpose of providing an institutional framework for the implementation of public private partnership (PPP) agreements. The Act outlines the rules and procedures of the procurement process and development of public and private sector partnerships.

The Act, like any other law, has undergone several amendments, the most recent one being the amendments of 2018 through the Public Private Partnership (Amendment) Act No. 9 of 2018.

Who needs a licence?

Section 7(1) of the Electricity Regulation Act No. 4 of 2006 (the Act) states that no person may, without a licence issued by the National Energy Regulator of South Africa (the Regulator), operate any generation, transmission or distribution facility, import or export any electricity, or be involved in trading. There are, however, exceptions to this licensing rule. As per section 7(2) of the Act, certain persons, depending on the scope of their activities, need not apply to the Regulator for a licence. These will be discussed in further detail below.

What must a licence application contain?

Those who intend to apply to the Regulator for a licence referred to in section 7(1) must ensure that their applications contain certain prescribed information. This information is found in section 10 of the Act. Notably, section 10(g) of the Act requires such an application to contain evidence of compliance with any integrated resource plan (IRP) applicable at that point in time or provide reasons for any deviation from the IRP for the approval of the Minister of Energy (the Minister). In light of this, Specialist Energy Consultant Sue Rohrs notes the following: “It has been [the Regulator’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.”

What is the IRP?

So, what is the IRP? The DoE promulgated its first IRP in 2011. The IRP essentially sets out information on the energy demand level in South Africa, how this demand is to be met and what costs are associated with the means of meeting the demand. The IRP is described as “a living plan that is expected to be continuously revised and updated as necessitated by changing circumstances”. At present, there has not been an official update to the IRP, but a draft update was published for comment in 2018 by the DoE. Since its promulgation, the IRP has been implemented primarily by means of Ministerial Determinations that allow for the procurement of energy from new independent power producers.

What is the relationship between Ministerial Determinations and IPPs?

The Electricity Regulations on New Generation Capacity (the Regulations) define Independent Power Producer (IPP) as any person in which the government or any organ of state does not hold a controlling ownership interest (whether direct or indirect), which undertakes or intends to undertake the development of new generation capacity pursuant to a determination made by the Minister in terms of section 34(1) of the Act. Section 34(1) of the Act permits the Minister, in consultation with the Regulator, to determine that new generation capacity is needed to ensure the continued uninterrupted supply of electricity. Once this determination is made, IPPs decide whether to participate in the national procurement process. The Regulations give the Minister the power to determine whether the new generation capacity will be established by Eskom, another organ of state or an IPP. If an IPP is chosen to establish the new generation capacity, the Regulations empower the Minister to determine the identities of the buyers and the procurers of the energy generated.

Which energy generators do not need a licence?

In November 2017, the Minister amended the list of activities that are exempt from the licensing requirements. The list of exempt activities is set out in Schedule 2 of the Act (Schedule). Before the amendments, the list of activities exempt from the licensing requirements comprised the following: generation plants constructed and operated for demonstration purposes only and not connected to an interconnected power supply; generation plants constructed and operated for own use; and a non-grid connected supply of electricity except for commercial use.

In terms of the Schedule, generators of energy are exempt from the licensing requirements in the following circumstances; however, generators would still be required to register with the Regulator:

  • those whose generation facilities have an installed capacity of no more than 1 megawatt (MW) who (i) are connected to the national grid, (ii) supply to a single customer, (iii) do not wheel electricity through the national grid, (iv) have entered into a connection and use-of-system agreement with the holder of the relevant distribution licence (such as your local municipality) and (v) at the date of entering into such agreement, the Minister has not published a notice stating that the amount of megawatts allocated in the integrated resource plan (which will be discussed in further detail below) has been reached;
  • those whose generation facilities have an installed capacity of no more than 1MW  who (i) are connected to the national grid, (ii) operate solely to supply a single customer or related customers, (iii) wheel electricity through the national grid, (iv) have entered into a connection and use-of-system agreement with the holder of the relevant distribution or transmission licence and (v) at the date of entering into such agreement, the Minister has not published a notice stating that the amount of megawatts allocated in the integrated resource plan has been reached;
  • those generation facilities that have an installed capacity of no more than 1MW but, unlike those in points 1 and 2 above, are not connected to the national grid or have an interconnection agreement, if engaged in any of the following activities: (i) operating solely to supply electricity to the owner of the generation facility, (ii) operating solely to supply electricity for consumption by a customer who is related to the generator or owner of the generation facility or (iii) supplying to a customer for consumption on the same property on which the generation facility is located;
  • those whose generation facilities operate for demonstration purposes only where (i) the electricity produced is not sold, (ii) if connected to the national grid, the generator has entered into a connection and use-of-system agreement with the holder of the relevant distribution or transmission licence and (iii) the facility will be in operation for not more than six months;
  • those whose generation facilities produce electricity from a co-product, by-product, waste product or residual product of an underlying industrial process where (i) the generation facility is operated solely to supply electricity to the owner of the generation facility in question, (ii) 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 within the meaning contemplated in section 2 of the Companies Act, 2008 or (iii) the electricity is supplied to a customer for consumption on the same property on which the generation facility is located;
  • the operation of a generation facility for the sole purpose of providing standby or backup electricity in the event of, and for a duration no longer than, an electricity supply interruption;
  • the continued operation of an existing generation facility which, immediately prior to the date of commencement of the Schedule, was exempt from the requirement to apply for and hold a licence under the Act; and
  • the continued operation of an existing generation facility which prior to the date of commencement of the Schedule was in operation, and within three months of the commencement of the Schedule had declared noncompliance with the Schedule to the Regulator and signed an agreement to comply within a time frame as specified by the Regulator.

How might the draft IRP update of 2018 affect licensing of generators?

One notable difference between the IRP currently in force and the draft IRP update of 2018 (Draft IRP Update) is that the latter makes provisions for embedded generation for own use, where facilities have an installed capacity higher than 1MW and not more than 10MW. The Draft IRP Update allocates 200MW per annum for embedded generation for own use of between 1MW and 10MW. The activities that constitute embedded generation for own use are set out in Appendix E of the Draft IRP Update.

Engagement in activities set out in Appendix E of the Draft IRP Update requires an IPP to apply for and hold a licence administered by the Regulator. However, until the Draft IRP Update is in force, a would-be generator of this kind would first have to obtain an exemption from the Minister of Energy from the obligation to comply with the IRP currently in force. This is due to, unlike in the Draft IRP Update, there not being any megawatt allocation for generation capacity of embedded generators for own use, hence embedded generation for own use of between 1MW and 10MW still constitutes a deviation from the IRP. Therefore, the acceptance of the Draft IRP Update into law would benefit those engaged in embedded generation for own use of between 1MW and 10MW.

Conclusion 

Generally, the amendments are likely to encourage more international investors to propose PPP projects as there will be more efficiency in the review process and obtaining approvals of PPP projects.


Dentons takes this opportunity to thank Minal Ramnath (Senior Associate) and Hugo Mclachlan (Candidate Attorney), at Dentons Cape Town, for their contribution to this month’s newsletter

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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