Currently, South Africa has installed generation capacity of 45,000MW and, at peak times, approximately 32,000MW is consumed. However, only 60% of the country’s installed capacity is available at any given time due to scheduled maintenance and unplanned outages caused by inadequate maintenance, theft, corruption and mismanagement.
We have outlined Mr. Ramaphosa’s proposed reforms below.
Fixing Eskom
Over the last few years, the South African Government has attempted to address the electricity crisis through the revival of the country’s renewable energy independent power producer procurement (REIPPP) programme, the increase of the licensing threshold for new embedded generation projects from 1MW to 100MW, and allowing municipalities to procure power independently.
However, the REIPPP programme has experienced significant delays due to uncertainty over, amongst other things, tariff structures and local content requirements and, in this context, the energy crisis has only worsened. This has led the Government to announce the following measures designed to achieve long-term energy security:
- improving the existing fleet of power stations though an increase in critical maintenance;
- reducing red-tape currently applicable to the procurement of maintenance spares and equipment;
- recruiting skilled personnel, including former senior Eskom plant managers and private sector engineers;
- purchasing surplus capacity from existing independent power producers;
- purchasing additional energy from existing private generators such as mines, paper mills, shopping centres and other private entities with surplus power;
- importing power from South Africa’s neighbours (Botswana and Zambia) through the Southern African Power Pool arrangement;
- using mobile generators to supplement generation capacity for a limited period;
- climate funding provided through the Just Energy Transition Partnership will be used to invest in the grid and repurpose power stations that have reached end of life;
- constructing Eskom’s first solar and battery storage projects at Komati, Majuba, Lethabo power stations, which will result in a further 500MW being added to the system; and
- establishing a special task force by the South African Police Service to assist Eskom with confronting crime and corruption.
Eskom currently also has debt of close to ZAR400 billion. This represents a significant portion of South Africa’s national debt and is a massive burden on Eskom’s ability to operate. According to the President, the Minister of Finance will provide further details on how the Government will deal with this when the Medium-Term Budget Policy Statement is released in October.
Procurement
In addition to the measures set out above, the Government has also acknowledged the need to accelerate the procurement of new capacity from renewables, gas and battery storage. As a result, the relevant governmental departments have been instructed to work together to ensure that all projects awarded under Bid Window 5 of the REIPPP programme (the successful awards were announced in October 2021) can start construction on schedule. According to the President, this includes taking a pragmatic approach to the local content requirements applicable to these projects and prioritising the need to build new capacity as quickly as possible. The Department of Trade and Industry and the IPP Office are expected to provide details on this in the coming days.
Bid Window 6 of the REIPPP programme is currently open and the Government has announced that the generation capacity of wind and solar projects to be procured through this round will double from 2,600MW to 5,200MW. Round 6 bid submissions close on 11 August 2022. The Government further plans to release a request for proposals for battery storage solutions by September of this year, with a RfP for gas power following soon after.
Further, the Minister of Mineral Resources and Energy will issue a determination for the remaining allocations in the Integrated Resources Plan 2019 and will open additional bid windows on an expedited basis. To ensure effective planning, South Africa’s Integrated Resources Plan is being reviewed to reflect the need for additional generation capacity and to address South Africa’s climate commitments.
Private investment
Government’s announcement last year to increase the private generation licence threshold to 100MW was widely welcomed. This change has unlocked more than 80 private sector power projects with a combined capacity of 6,000MW.
The Government has now announced the complete removal of the licensing threshold for embedded generation. This means that private power projects will not require licences; however, these projects will still be required to register with the National Energy Regulator of South Africa (NERSA).
According to the President, the Government is also cognisant of the delays caused to energy generation projects by onerous regulatory and environmental requirements imposed on such projects. Currently, most projects take at least three years to reach commercial operation. As a result, the Government, hopefully with the support of opposition political parties, will table special legislation in the National Assembly on an expedited basis to address the legal and regulatory obstacles to new generation capacity for a limited period. Until this process is complete, existing regulatory requirements will be streamlined or waived, where possible, within the existing regulatory framework. This means, for example, that in areas of low and medium environmental sensitivity, solar projects can proceed with reduced regulatory impediments and, in appropriate circumstances, Eskom will be able to expand power lines and substations without obtaining prior environmental authorisations.
To further ease the regulatory burden on power producers and Eskom, the Government intends to establish a single point of entry for all energy project applications, to ensure the coordination of approval processes across Government departments.
Rooftop solar
To incentivise a greater uptake of household and business rooftop solar, Eskom will develop rules and a pricing structure (that is, a feed-in tariff) for all commercial and residential installations on its network. This means that those who can install, and have installed, solar panels in their homes or businesses will be able to sell surplus power to Eskom.
Transforming Eskom
The Government has previously announced its intention to restructure Eskom and last night confirmed these restructure plans. Once implemented, this will result in separate entities overseeing generation, transmission and distribution. Eskom has already established an independent transmission company and is on track to separate its generation and distribution businesses by the end of 2022.
A broader reform is also envisaged to establish a competitive electricity market that will enable the private sector to invest. This will be expedited through the Electricity Regulation Amendment Bill. The grid, however, will remain state-owned.
These proposed changes are far-reaching and it remains to be seen whether and, if so, how and how quickly the Government will implement all of these initiatives. However, the Government appears positive that these changes are workable and that, once implemented, they will alleviate the country’s energy crisis and eradicate rolling blackouts.
Hogan Lovells
Hogan Lovells has deep experience across the South African power sector. We are familiar with the risks affecting power projects in South Africa and the strategies employed to mitigate them. Our experience across power generation technologies in Africa includes nuclear, coal, HFO, gas, dual-fuel, hydropower, solar (PV and CSP), wind and hybrid technologies. We act for international and African project developers, governments, utilities, commercial lenders, and development financial institutions (DFIs).
We have advised on many of the largest and most high-profile, in-country, and cross-border power, oil and gas, mining and resources, infrastructure transport, corporate and finance projects, transactions and disputes in Africa. These include independent power producer projects (IPPs), multi-party PPPs, project and structured financings, complex Islamic financings, and private equity transactions. For every client and matter, we tailor our advice to respond to the unique needs of the mandate, offering commercially focused legal solutions.
Please contact a member of the team to discuss this article or issues pertaining to the power sector in South Africa more generally.
Authored by Marlene Murphy and Chris Green.
