Schedule 2 of the Electricity Regulation Act, 2006 (ERA) regulates categories of generation facilities and electricity resellers who are exempt from the requirement to hold a generation license. On 10 November 2017, the Minister of Energy published the amendments to Schedule 2, which may have a far reaching impact on South Africa’s growing corporate PPA market.

Previous Position

The activities exempted from licensing as per the ERA were as follows:

a. any generation plant constructed and operated for demonstration purposes only and not connected to an inter connected power supply;
b. any generation plant constructed and operated for own use;
c. non-grid connected supply of electricity except for commercial use.

Amendments to Schedule 2

The new Schedule 2 now exempts eight categories of generation facilities from the licensing requirement:

(i) operation of generation facilities of no more than 1 MW that are connected to the grid who:

a. supply to a single customer (irrespective of whether or not wheeling takes place);
b. has entered into a connection agreement with (or obtained approval from in the case of no wheeling) the holder of the relevant distribution licence; and
c. at the date on which the connection use-of-system agreement is entered into, or approval is obtained, the Minister of Energy has not published a notice in the Government Gazette stating that the amount of megawatts allocated in the integrated resource plan for embedded generation of this nature has been reached;

(ii) operation of generation facilities of no more than 1 MW which are not connected to the grid, that supply to a single customer:

a. who is either a related customer of the generator or owner of the generation facility; or
b. for consumption on the same property on which the generation facility is located;

(iii) facilities used for demonstration purposes where the electricity produced is not sold and the generation facility will not be in operation for more than 36 months;

(iv) generation facilities where electricity is produced from a co-product, by-product, waste product or residual product of an industrial process and supplied to a single customer:

a. who is either a related customer of the generator or owner of the generation facility; or
b. for consumption on the same property on which the generation facility is located.

(v) back-up generation in the event of and for the duration of any electricity supply interruption;

(vi) the continued operation of existing generation facilities which:

a. prior to the amendment of Schedule 2 of the ERA were exempt from requiring a licence; or
b. prior to the amendment of Schedule 2 of the ERA was in operation, and within 3 months of the commencement of this Schedule 2 has declared non-compliance with the Schedule to the National Energy Regulator (NERSA) and signed an agreement to comply within a time frame as specified by NERSA.

(vii) distribution facilities used exclusively for the wheeling of electricity (irrespective if transported through the national grid); and

(viii) electricity resellers in circumstances where:

a. the tariff or price charged by the reseller does not exceed the normal tariff or price charged by a registered licensee;
b. there is an agreement with the holder of the distribution license; and
c. NERSA has granted approval of the service delivery agreement.

Notwithstanding the above exemptions, these activities must still be registered with NERSA.

Notable Amendments

Developers within the South African corporate PPA market are often reluctant to expose themselves to the protracted process of obtaining a license, and the risks associated therein. They therefore would often seek to qualify projects for one of the exemptions under Schedule 2 of the ERA.

In this regard, the “own-use” exemption as contemplated in the previous Schedule 2 (taking into account the exemptions in (ii) and (iv) above) is now limited to an off-grid and sub 1 MW generation facility or a by-product generation facility. Further, when the proposed amendments to Schedule 2 were published for public comment, they were accompanied by an explanatory notice. The notice purported to distinguish between thresholds of generation capacity in respect of licencing and exemptions (1MW or less and from 1MW-10MW). The amended Schedule 2 does not include such an explanatory notice, and as such, the capacity of any contemplated generation facility is no longer a criteria when considering a project and its related licensing regime and business model (save in instances where the generation facility is less than 1MW).

It is also important to note that the amended Schedule 2 now refers to “megawatts allocated in the integrated resource plan for embedded generation”. In essence this implies that all licensing for embedded generation facilities will be subject to the integrated resource plan which is currently being revised by the Department of Energy with, according to the Minister of Energy, a view of concluding the plan “with immediate effect”. At this stage however, it is unclear as to how many megawatts will be allocated to embedded generation facilities, how the allocation process will work on a practical level (i.e. will it be a “first come first serve” basis) and what the anticipated timing will be, given that the draft integrated resource plan only anticipates the embedded generation allowance coming on stream in approximately 2023.

In addition the requirement and process to register operational “non-compliant” projects within a three month period (as referred to in (iv) above) is not clear.

Conclusion

Given the growing popularity of corporate PPAs in South Africa, it is imperative, despite the amended Schedule 2, that the Department of Energy and NERSA actively engage with stakeholders in an effort to fully clarify the position of corporate PPA’s in South Africa’s energy mix. With some of the largest companies in the world signing up to the RE100 initiative, South Africa must develop its regulatory environment in order to facilitate both domestic and international investment in the renewables arena.

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