Renewable energy investors need greater clarity on hybrid solutions

As South Africa takes its first steps towards a just transition and as decarbonisation becomes a strategic imperative for heavy electricity users, the role of energy storage and hybrid technologies is becoming more relevant.

Electricity storage paired with renewable energy generation can contribute to many of the challenges faced by the country’s electricity infrastructure. It has the potential to:

• speed the integration of low carbon generation by delinking renewable energy production from low consumption periods
• increase security of supply
• reduce reliance on the grid
• potentially defer or avoid network reinforcement costs.

In addition, the decreasing cost of storage technologies, especially batteries, has the potential to incentivise large-scale storage projects under bi-lateral private supply arrangements between heavy electricity users and independent power producers.

In October 2021, the Minister for Mineral Resources and Energy published amended Schedule 2 of the Electricity Regulation Act (ERA) 2006 in respect of exemptions from licensing certain generation activities.

It is clear from section 3.1 of Schedule 2 of ERA, that if a generation facility includes energy storage, and the installed capacity of the generation facility is under 100MW, then such a hybrid facility will only need to be registered with NERSA, the national regulator, rather than be fully licensed by the regulator.

However, it is not clear if the operation of a stand-alone energy storage facility will require a licence in the same way that operating a generation facility above 100MW does. ERA is currently silent on this and so is the ERA Amendment Bill. This leaves a major question on how South Africa will proceed.

The UK precedent?

We expect South Africa will follow the approach taken by the UK’s Office of Gas and Electricity Markets (Ofgem). You can find a detailed description of Ofgem’s approach here.

But the important takeout is that the UK regulator treats electricity storage as a form of electricity generation because it has determined that generation and electricity storage share similar characteristics and perform similar functions in terms of generating and exporting electricity to the grid.

As such, Ofgem treats storage as a subset of generation (rather than creating an entirely new licensable activity) and it has proposed modifications to the existing generation licence to introduce specific conditions that just apply to storage providers.

Ofgem has defined electricity storage in very specific terms as:

• the conversion of electricity into a form of energy that can be stored
• the storing of that energy, and
• the subsequent reconversion of that energy back into electrical energy.

The use of this definition potentially excludes some key technologies and solutions.

Notably, this definition excludes transformers, inductors and thermal energy storage solutions where the stored energy is used directly as heat rather than being re-converted to electricity before being used.

Power-gas-power systems, such as those based on electrolysis to create hydrogen, are also excluded under this definition (unless the system involves the creation of gas from electricity, and the subsequent storage and reconversion of that gas into electricity on-site).

But there is a concern that if South Africa follows the UK in defining storage in this way, investors may be deterred from financing these valuable storage assets due to an obvious confusion about how exactly NERSA will treat them.

We believe the South African Government needs to create an environment where the market can recognise and reward storage and the critical role it can play in decarbonisation.

But this can only be done if it provides real and clear certainty around the treatment of electricity storage under the ERA licensing framework.