Key takeaways from the proposed Electricity Regulation Act amendment bill and how it will transform the South African electricity market
25 February 2022
On 10 February 2022, the Minister of Mineral Resources and Energy (the Minister) published the 2nd Amendment Bill (the Amendment Bill) of the Electricity Regulation Act, 2006 (the Act) for public comment, inviting interested and affected parties to submit written representations on the draft within a period of 30 days.
The Amendment Bill signifies the Government’s support to transition our vertically integrated, Eskom-dependent electricity market to a multilateral and competitive one, managed by a transmission system operator (TSO). The Amendment Bill seeks to establish a national regulatory framework for the electricity supply industry, making the National Energy Regulator of South Africa (NERSA) the custodian and enforcer of that regulatory framework, provide for the establishment of the TSO as well as to provide a competitive multi-market structure for the electricity industry.
What does this mean from a practical perspective? Simply that there will be three ways in which electricity can be bought and sold, which will foster competition and, in the medium term, drive down electricity prices. These are:
- trading, through a non-discriminatory trading platform on which market participants may trade with each other on an hourly and daily basis;
- private power purchase agreements in terms of which licensed or registered generators enter into power purchase arrangements with direct customers and traders; and
- regulated power purchase agreements by generators with the single buyer office of the TSO, or the buyers determined by the Minister
Within this framework, the key takeaways from the proposed Amendment Bill are as follows:
- The Schedule 2 Exemptions and registration requirements for trading, generation, transmission and distribution are in the same form as those published by the Department of Mineral Resources and Energy (DMRE) in October 2021. As such, the 100MW exemption for private power purchasing arrangements, for example, remain in place.
- The “construction” of generation facilities has been added as a licenced activity alongside operation and maintenance. This is unlikely to have much practical impact, as the licence or registration of a facility would typically have been required before construction can commence in any event, but it should be borne in mind that a generator now would not be able to commence early works prior to registration or licencing.
- Publication of a licence application via appropriate media is now mandatory (this was previously in NERSA’s discretion).
- NERSA is now treated as the ultimate arbitrator in the determination of recourse for contravention of licence conditions (in place of a tribunal), noting that the same process and penalties which applied previously remain in place.
- In addition to being the arbitrator, NERSA now also has further items it may regulate through attaching conditions to a licence, namely:
- Penalties for delay in achieving COD, even in circumstances of private generation (which, we assume, is included in order to ensure accurate energy planning). This must be borne in mind when sizing delay liquidated damages by contractors (in addition to any penalties payable under power purchasing arrangements or debt service obligations); and
- NERSA may stipulate conditions around the subcontracting of licensed functions (an arena which was not regulated previously). How NERSA will apply this is uncertain, and could lead to onerous or cumbersome obligations if NERSA wishes to approve construction or operation contractors for example.
- The Minister’s powers of determination are expanded to include additional generation and electricity infrastructure. The Amendment Bill has included clarification language around the procurement of new generation capacity, expressly including capacity derived from new generation facilities, an expansion of existing facilities or existing facilities not previously connected to the grid, but expressly excluding capacity from direct supply agreements or generation facilities for own use. This means that a facility that supplies electricity to a private customer may not also supply electricity to the buyer designated under a regulated IPP procurement programme, but facilities supplying electricity to Eskom, municipalities, the central purchasing agency or the trading platform may participate in future IPP procurement programmes. In addition, the Minister may determine procurements for electricity infrastructure. This will result in the private sector being able to bid, own, finance and operate transmission and distribution infrastructure through DMRE-regulated procurement programmes.
- The Minister, by virtue of the proposed amendments, has the right to request NERSA to determine maximum or guideline tariffs (or the tariffs themselves) for a particular technology under an IPP procurement programme. This is not hugely different from the first few rounds of REIPPPP in terms of which tariff caps for each technology were included in the bid documentation. We doubt that maximum tariffs would be set for established and proven technologies such as solar PV and wind, but maximum tariffs may be applicable in respect of energy storage and gas-fired generation.
- In respect of trading we note that the Amendment Bill clarifies that trading includes the wholesale or retail buying and selling of electricity (which need no longer be a commercial activity). As such a trading licence may be required whether or not the buying and selling of electricity is conducted as a means of commercially generating revenue. This is relevant for buyers of electricity that seek to buy electricity and on-sell it to their affiliated entities on a pass-through cost basis. In addition to this relatively wide definition of trading, the Amendment Bill proposes that the Minister be entitled to determine further categories of trading which require licencing.
- The Amendment Bill proposes the establishment and outlines the functions of the TSO, including accommodating an open market and allowing for a non-discriminatory competitive trading platform. It is anticipated that the TSO will initially be the transmission subsidiary of Eskom, for a maximum of five years. Thereafter, on the basis that system operation constitutes one of the licenced activities of the Act, we assume it is intended that private participants could undertake system operation, however more clarity would need to be provided about how this may be implemented in practice.
There are several salient provisions that both IPPs and funders should take cognisance of in the Amendment Bill. The far-reaching proposed amendments made to trading, the role of the TSO and the inception of a market structure, while offering new and welcome opportunities in the electricity industry, simultaneously demand new conditions and regulations that need to be borne in mind when participating in the nascent competitive multi-market structure that will be the South African electricity industry.