In this article, Webber Wentzel partners Jason van der Poel, Mzukisi Kota and Alexandra Felekis outline when it is, and when it is not, permissible for mining firms to proceed to produce their own power without a license.
On 3 February 2020, subsequent to the Minister of Mineral Resources and Energy, Gwede Mantashe's, address at the 26th Investing in Africa Mining Indaba, a series of headlines appeared proclaiming that "mining companies can generate own power without licenses". Several clients picked up the phone to our firm to ask: "Is this true?".
The relevant paragraph of the official written text of the Minster's speech says: "Following concurrence by energy regulator, or the National Energy Regulator of South Africa (NERSA), we are in the process of gazetting a revised Schedule 2 of the Electricity Regulation Act; which will enable self-generation; and facilitate municipal generation options under ‘Distributed Generation’. This will help close the energy gap caused by deteriorating Eskom plant performance. Depending on the circumstances, the generation plant may only require registration and not licensing".
The current regulatory context
The central piece of legislation regulating electricity in South Africa is the Electricity Regulation Act, 4 of 2006 (the ERA). Section 4 of the ERA grants NERSA various powers and duties in respect of the electricity regulation framework, including the consideration and issuance of generation, transmission, distribution and trading licences, and the regulation of tariffs.
Schedule 2 of the ERA sets out activities which are exempt from the obligation to apply for and hold a license. These activities must still be registered with NERSA. These activities currently are, in summary, the operation of a generation facility:
- of no more than 1MW that is connected to the national grid, where there is a single customer, no wheeling of electricity through the national grid and the Minister has not published a notice in the Gazette stating that the amount of megawatts allocated in the Integrated Resource Plan (IRP) for embedded generation of this nature has been reached;
- of no more than 1MW that is connected to the national grid, where there is a single customer, wheeling through the national grid and there is an allocation for that electricity in the IRP;
- of no more than 1MW that is not connected to the national grid, where the operation is solely to supply the owner of the generation facility in question or for consumption by a customer related to the generator or owner of the generation facility on the same property where the generation facility is located (this category currently seems the most applicable to mines, except that mines would generally look to procure electricity generation capacity way in excess of 1MW, for example, some mining companies are looking to procure between 40 and 60MW of private generation capacity);
- for demonstration purposes only, where the electricity produced is not sold and the facility will be in operation for less than 3 years; and
- where the electricity is produced from a co-product, by-product, waste product or residual product of an underlying industrial process and where the operation is solely to supply the owner of the generation facility or for consumption by a customer related to the generator on the same property where the generation facility is located.
Section 34 of the ERA provides that the Minister may determine that new generation capacity is needed, the types of energy sources to be used, to whom the electricity may be sold and the manner in which the electricity is to be procured, for example through a competitive tender process and whether or not involving the private sector.
The Electricity Regulations on New Generation Capacity (New Generation regulations) were published in May 2011 (and amended in November 2016) apply to new generation capacity procured by organs of state only – so do not apply to self-generation by privately owned mines or industry.
The IRP Gazetted in October 2019 is South Africa's plan for the procurement of generation capacity up to 2030. The last such plan was the IRP 2010 promulgated in March 2011, and such plans are intended to be updated every two years.
Section 10(2)(g) of the ERA allows the Minister of Mineral Resources and Energy to grant deviations from the Integrated Resource Plan. In May 2019, Jeff Radebe, the previous Minister of Energy, wrote a letter to NERSA granting a deviation from the then extant IRP 2010-2030 for licensing the operation of generation facilities between 1 and 10MW.
Now, the current IRP does not cap the amount of distributed generation that may be produced up to 2022. From 2022 to 2030, it is capped at 500 MW per year. Distributed generation in the current IRP refers specifically to projects between 1 MW and 10 MW.
Can mining companies generate own power without licenses?
- if mining companies wish to generate own power less than 1 MW, then they will need to register with NERSA;
- if mining companies wish to generate own power greater than or equal to 1 MW but less than 10 MW, they can do so under the current IRP, but need to get licensed by NERSA;
- if mining companies wish to generate own power greater than or equal to 10 MW, they will need a Ministerial deviation from the IRP and to be licensed by NERSA. This could also be enabled through an amendment of Schedule 2 of the ERA to exempt their intended generation facilities from the licensing requirement.
The Minister has now said that together with NERSA, his Department is in a process to gazette a revised schedule 2 of the ERA to enable self-generation and facilitate municipal generation options under "Distributed Generation", as defined in the current IRP.
Miners and industry can derive some encouragement from the Minister’s comments, but should examine the detail of any legislative amendment that comes into being as a consequence of the Minister's comments in order to be certain.