by Greg Nott and Lizel Oberholzer, Norton Rose Fulbright –
Energy is the engine which drives a nation’s economic growth. It’s the foundation to enabling the creation of jobs and attracting foreign and local investment. Eskom’s energy woes have been a major contributing factor to South Africa’s economy hobbling along. We need to focus on unlocking growth by pressing ahead with the structural change that the World Bank keeps talking about by transitioning our energy sector to meet the demands of the economy.
In his Medium-Term Parliamentary Budget Speech, Finance Minister Tito Mboweni announced that the “the way has been opened for the procurement for almost 12 MW of new electricity to be provided by IPPs and the unbundling of Eskom continues”, indicating that government has Eskom’s transformation on its radar.
Our energy investor clients have been watching developments in the energy sector with anticipation and although they will be proceeding with caution, the announcement of the amendment to the New Generation Capacity Regulations (in terms of the Electricity Regulation Act), published on 16 October 2020 is another trickle of good news for future renewable sector investment.
What does it mean?
The amendment is a legislative victory insofar as it is the first indicator of a move away from the single buyer model of electricity, which is in line with international trends. It is also in keeping with President Cyril Ramphosa’s 2020 State of the Nation address during which he announced that Government would put measures in place to allow municipalities to procure their own power generation from independent power producers.
The amendment allows municipalities to apply to the Minister of Mineral Resources, Gwede Mantashe, to procure or buy new generation capacity in accordance with the Integrated Resources Plan. In making the application, municipalities are expected to submit a feasibility study and proof that they have complied with the provisions of section 120 of the Municipal Finance Management Act and the Municipal Public-Private Partnership Regulations.
Municipalities will also be required to enter into power purchase agreements with IPPs to regulate the sale, purchase, and delivery of electricity. Before concluding such a power purchase agreement, municipalities will need to ensure that they comply with the Public Finance Management Act, Municipal Finance Management Act and the Municipal Systems Act.
Some experts have criticised the amendment for being vague and not making provision for municipalities to generate their own capacity. However, it is possible that this is still in the works because on 5 May 2020, the Minister of Mineral Resources and Energy, Gwede Mantashe published another set of draft regulations seeking to amend the Electricity Regulations on New Generation Capacity enabling municipalities to apply to the Minister to establish a new generation capacity independent from Eskom. It is not clear why this was not included in the October amendment. In addition, the May proposed amendment provides that only municipalities in “sound financial standing” can apply for new generation capacity. The October 2020 amendment does not have an equivalent provision.
A long time coming
When South Africa’s Renewable Energy Power Producer’s Procurement Programme (REIPPPP) was launched by the Department of Energy in 2011, it was good news for the diversification of the country’s energy supply, which was almost exclusively reliant on Eskom’s coal-fired power stations. The private sector had been beating the drum about Eskom’s monopoly stifling economic growth and the 1998 White Paper on Energy recommended a move away from the Apartheid energy model where the nation was entirely dependent on Eskom’s electricity generation capabilities.
Over 6,4 GW of electricity has been procured from renewable energy sources since the launch of the REIPPP Programme. Of this, just under 4 GW is already connected to the national electricity grid, with the balance expected to be connected by 2020/21. The cost of renewable energy projects continues to decrease, which in the long-term will be good news for consumers.
South Africa learned through the Gupta Leaks, former Public Protector Thuli Madonsela’s State Capture Report, and the Zondo Commission that Eskom had become the focus of the largest scale of looting ever undertaken in South Africa’s democratic history. This, alongside other challenges created an electricity supply crisis with the introduction of load shedding, poor security of supply and increasing electricity costs that have since cost the South African economy billions in revenue losses and hampered economic growth and business investment.
As lawyers specialising in energy projects, we are excited about a new vista of real, game-changing opportunities. The amendment to the New Generation Capacity Regulations is reflective of the just transition which is envisaged in the Integrated Resources Plan (IRP) and demonstrates that there is political will to see it come to fruition.
The procurement of electricity from non-Eskom generators will further promote IPP participation in South Africa as well as a more diversified and sustainable energy mix, provided that municipalities can prove that they have good “financial standing”.
Green deals and their concomitant investment will increase as the private sector engages in an improving regulatory environment. Investment by private sector companies has not necessarily been because of the unwillingness of the private sector to invest but rather because of slow changes to South Africa’s regulatory environment. As the regulatory landscape changes to become more enabling, investments in green deals will follow naturally.
Ready and waiting
The single buyer model was already challenged by the City of Cape Town in a court application which sought a declaration that ministerial consent is not required for a municipality to acquire electricity from an independent power producer (IPP). The High Court did not rule on the merits of the case but referred the matter back in term of section 41(3) of the Constitution, which, requires all spheres of government to strive to adhere to the principle of cooperative governance.
Should the parties’ efforts to settle the dispute fail any party may apply to this court for leave to re-enrol this application for hearing on the same papers and on such conditions as the court may determine. We trust that in the light of the amendment of the New Capacity Generation Regulations this will not be necessary
The amendment to the New Generation Capacity Regulations is certainly a step in the right direction. It will create greater competition and secure energy security within South Africa. The private sector will be ready to invest in green deals that help South Africa emerge from our Covid-19 depression.