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CUTTING THROUGH RED TAPE: A SHORTCUT TO SOLVING SOUTH AFRICA’S POWER CRISIS

CUTTING THROUGH RED TAPE: A SHORTCUT TO SOLVING SOUTH AFRICA’S POWER CRISIS

2020-11-23-Licence-Reforms-v1.0

Dr Grové Steyn Celeste Renaud

EXECUTIVE SUMMARY

South Africa is in urgent need of strategies to minimise power shortages and reduce the negative impacts of load-shedding. However, the quickest response to the power crisis – unlocking distributed generation projects in residential, commercial and industrial sectors to produce electricity for own use or for sale on to other customers – remains largely unavailable, bound up in regulatory red tape.

The form of South Africa’s electricity supply sector emerged in an era when large generation technologies dominated and centralised, monopolistic market structures were the norm. The current regulatory framework and associated roles and responsibilities of the National Energy Regulator of South Africa (NERSA) and Minister of Mineral Resources and Energy still reflect this paradigm.

Internationally, monopolistic electricity sector structures have long been acknowledged as an inefficient and expensive way of supplying power. South Africa’s own 1998 Energy Policy White Paper recommended the introduction of competition in electricity generation. The recent and highly disruptive change brought on by the dramatic cost decline in renewables and battery storage, coupled with innovations in smart grid technologies, has further rendered the megaproject monopoly paradigm that dominates South Africa’s electricity supply sector out-of-date. With disruptive changes in the techno-economic paradigm for power generation, the economic rationale for market access licensing has fallen away. Regulatory reforms to enable market access of decentralised power projects have become common across the world.

This note addresses one key aspect of South Africa’s current regulatory framework which it proposes is no longer fit-for-purpose: the regulation of market access for grid-connected projects. The requirement to obtain a NERSA generation licence to gain market access (which often includes the need for a prior Ministerial approval) has discouraged new investment in generation projects and protected the monopoly of the incumbents, thereby contributing to capacity shortages and load shedding. Grid-connected projects are separately regulated for environmental and technical purposes by the Department of Environment, Forestry and Fisheries and the relevant network service providers (Eskom, municipality or private distributor) respectively.

The current market access licensing regime is provided for by the Electricity Regulation Act (4 of 2006) (ERA) which concentrates almost all decisions around new generation capacity in the hands of the Minister of Mineral Resources and Energy through the need for determinations or approvals, embodying a paradigm of centralised control.

Currently, all grid-connected projects between 100kW and 1MW must be registered with NERSA to obtain market access. Those greater than 1MW must obtain a © Meridian Economics November 2020 2 generation licence from NERSA. For a licence application to be processed, the applicant must demonstrate evidence of compliance with the latest Integrated Resource Plan (IRP) (evidence that the project is catered for in the IRP’s technology capacity allocation and that this capacity allocation has not yet been reached), or obtain a Ministerial letter approving deviation from the IRP. The criteria for assessing IRP compliance or obtaining a Ministerial deviation are unclear, creating unnecessary risk for project developers.

These non-trivial requirements and project development risks have deterred many potential investors from progressing power generation projects that would have eased power shortages. Maintaining market access restrictions in South Africa has thus become counterproductive, exacerbating load shedding by increasing the difficulty of developing urgently required generation capacity.

To address this issue, this brief proposes easing market access registration and licensing requirements. The proposals contained in this brief do not imply changes to current environmental approvals, technical power system standards and grid access “permitting” (which remains important for power system stability). In particular, this brief proposes expanding the highly restricted categories of projects which are licenceexempt (but which still require registration); and addresses the need to streamline registration and licensing processes at NERSA.

Specifically, the following key reforms are proposed:

1. Define generation for “own use” in Schedule 2 of the ERA and exempt these projects from market access licensing even if grid-connected, regardless of their size. “Own use” generation should be defined as any project where the electricity offtaker has an equity stake in the generation facility, irrespective of whether the electricity is used on the same site as the generation facility, or whether the electricity is wheeled through the grid.  In a recent modest concession as of 30 October 2020, all gridconnected “self-generation” projects above 1MW supplying “single or related customers” (for on-site consumption or with power wheeled through the grid) have been granted Ministerial approval for deviation from the IRP (which implies that they were not originally catered for in the IRP).

2. Lift the licence exemption threshold for all other grid-connected projects from 1MW to at least 50MW (these projects will still require registration), to unlock additional urgently required pent up capacity options, irrespective of whether these projects:

• Supply electricity to a single or related customer with or without wheeling of that electricity,

• Sell electricity to multiple unrelated customers with or without wheeling of that electricity, or to an electricity trader,

• Sell excess electricity that is not consumed on site to a distribution entity, allowing generators in areas supplied by electricity distributors to be net producers of electricity (generators should be compensated at a tariff reflecting the economic value of that supply).

3. Simplify and fast track the registration of licence exempt projects (between 100kW and 50MW) by setting up an appropriate online portal to instantly process applications. Registration should serve merely to upload and record project information, supply agreements and grid connection approvals (obligatory for all electrical installations and obtained from the relevant network service provider – generally Eskom or the municipal distribution entity). The registration system should provide a transparent record of all projects being implemented, enabling an understanding of the distributed generation market size, but should not be subject to NERSA discretion.

4. For all projects greater than 50MW, establish an efficient online process for the submission of relevant documents and approvals for generation licence applications. The information required in the current NERSA generation licence application form is geared to large projects (especially coal-based projects) with complex contractual and fuel supply agreements. There is a need to simplify and update the submission documents required to be more relevant to generation projects which are much smaller, do not involve complex contractual arrangements or major future decommissioning costs and can be installed quickly utilising space which would be otherwise unused. This will streamline the processing of licence applications.

5. Require NERSA to publish a register of all licences issued on their website adding all new applications within a week of receipt, updating the status of these applications as received, awarded or refused and providing reason for refusal.

6. Exempt battery storage projects from market access registration or licensing, to bring clarity to the regulatory requirements for battery storage. The ERA does not contemplate battery storage projects. NERSA appears to treat battery storage investments as generation projects, subjecting them to the same regulatory complexities as other generation projects. However, battery storage is a technology that provides grid services by storing excess energy and dispatching it flexibly, rather than a generation option. It should only need to demonstrate compliance with the necessary technical standards and requirements of the grid operator. No economic rationale exists to subject it to NERSA market access regulation.

These changes do not require new primary legislation and can be implemented within a few months by gazetting new regulations as allowed for in the Electricity Regulation Act 4 of 2006 and streamlining rules and processes at NERSA.

This brief only focusses on South Africa’s market access licensing regime, which is one component of the broader regulatory system. In line with international experience, further comprehensive reforms will be required to grow a competitive and adaptable electricity sector that best serves the urgent need for economic recovery, growth and jobs in South Africa.

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