The lay of the land: Eskom, Embedded generation and renewable energy

Several important developments in the Energy sector this past year will set the scene for 2022. 

In October 2021, Eskom initiated proceedings in the South Gauteng High Court in Johannesburg to review the decision by the National Energy Regulator of South Africa (NERSA) to set aside Eskom’s Multi Year Price Determination (MYPD) 5 application. Eskom attempted to increase its revenue against the background of governance, operational and financial challenges, submitting its revenue application in June 2021 for April 2022 implementation. NERSA, in September, rejected the new price application by Eskom for the coming financial year. Eskom argued that the judicial process was the only option available to prevent what it characterised as serious negative consequences for it and by implication National Treasury. 

Eskom stated that the “revenue application was made in accordance with the prevailing methodology, as approved by NERSA. This methodology remains valid, until replaced by an alternate. On 30 September 2021, NERSA rejected the Eskom MYPD 5 revenue application and requires Eskom to make a new application based on a methodology yet to be developed.” 

As such, ESKOM contends that NERSA’s rejection of the MYPD 5 application creates a regulatory vacuum for electricity supply and that even if it could adapt to the new methodology, it will not be possible to implement a new price application by 1 April 2022 as full statutory compliance, legislative consultation and due process have to be fulfilled.

NERSA uses various regulatory methodologies to ensure that the allowed revenues, charges and tariffs comply with the requirements of the Electricity Regulation Act (ERA). Following Eskom’s application to the High Court, NERSA confirmed in November 2021 that it will oppose the High Court bid. NERSA stated that it had considered the impact of the court application on the future exercise of regulatory powers on tariff determination and the ability to achieve the objectives of the ERA, noting that: “In arriving at the decision to oppose the application, NERSA considered the factual matrix, applicable regulatory and legal principles involved and whether we have a defendable case against the allegations.”

In its High Court application, ESKOM is seeking to press for a determination on the 2022 application process for continuity, stating that it is necessary to allow for stability of South Africa’s economy and the electricity industry.

Against this background, the amendments of schedule 2 of the ERA that allows for the freeing up of self-generation power projects is a welcomed development to achieve national energy security. In previous reflections on the amendments, LNP Chief Executive Nikita Lalla has said that “the announcement is a massive relief for the energy and mining sectors as well as the entire country.  In order to ensure that this momentum is maintained, Eskom and municipalities must ensure the required agreements are in place and can easily be concluded.”

The announcement was followed by extensive consultation processes and a significant amount of technical work by the Department of Mineral Resources and Energy. The amendment regulations will exempt generation projects up to 100 MW in size from the NERSA licensing requirement, whether or not connected to the grid, thereby removing considerable obstacles to investment in embedded generation projects. On 5 October 2021, the Minister of Mineral Resources and Energy published a notice further amending schedule 2, thereby clarifying certain formal defects that were present in the last notice, including providing definitions for “point of connection” and “property”, listing exempt activities from licensing and stating that these activities must comply with code and be duly registered as well as providing the circumstances under which a reseller can trade electricity.

In an effort to address the country’s electricity crisis, generators will also be allowed to wheel electricity through the transmission grid, subject to wheeling charges and connection agreements with Eskom and relevant municipalities. Read more on these developments here. We will be providing more analysis on self-generation project compliance in the new year as well as the necessary regulatory contracts to ensure your successful project.  

The CEO of the Minerals Council of South Africa, Roger Baxter, indicated that the mining industry gave extensive inputs during the consultation process and that the raising of the licensing threshold for generating facilities to 100 MW is a game changer for South Africa moving forward. Members of the Minerals council plan to invest in 2 GW of supplementary renewable energy. The mining industry is also experimenting with alternative energy fuels such as hydrogen to power operations. Further, the green energy industry represents many opportunities for the mining industry as minerals required for green technologies include platinum, lithium and manganese. These are welcomed developments against the background of government’s Nationally Determined Contributions (NDCs) to introduce new reduced targets for South Africa’s emissions. 

There is no doubt that developments linked to green transformation will lead to growth in the renewable energy and related sectors. The newly established Green Fund managed by the well-placed Development Bank of South Africa on behalf of the Department of Environmental Affairs is one example of governmental efforts towards sustainability. The national fund seeks to support green initiatives to assist South Africa’s transition to a low carbon, resource efficient and climate resilient development path, aiming to deliver high impact economic, environmental and social benefits. The recent COP26 Climate Conference resulted in EU member states striking a deal with South Africa to help move the country away from coal power and towards green energy resources. 

South Africa’s coal-powered energy has long been criticised for its lack of sustainability. President Cyril Ramaphosa said in a statement that the deal is “proof that we can take ambitious climate action while increasing our energy security, creating jobs, and harnessing new opportunities for investment, with support from developed economies.” The partnership between South Africa and developed nations will involve the disbursement of R131 billion over the next three to five years to help the country shift towards a low-carbon economy. The funding is meant to establish renewable energy resources, repurpose coal power stations, make the country’s economy less reliant on fossil fuels, and investment in new sustainable energy sectors including green hydrogen.

The amendment as well as the efforts towards green transformation and sustainability represent a new era for energy security in South Africa. These developments also underscore the need, once again, to adhere to necessary environmental regulations. LNP is proud to be a leader in this regard. Ten lawyers are currently dedicated to the renewable energy sector, demonstrating our vast experience in renewable energy projects that are in high demand across the continent, as well as nuclear and fossil fuel energy.