Lawyer Andreas M Klees argues that, in a rapidly changing electricity sector that shifts from large-scale conventional power plants to low-carbon distributed generation, it makes sense for municipalities to play a more prominent role in the generation space

In 2015, the City of Cape Town sought approval from the Minister of Energy to procure solar and wind energy from independent power producers (IPPs). As neither the then Minister nor her successors acceded to the request, the city approached the courts. Judgment has been reserved and the implications are potentially significant.

What Is It About?

According to Section 7(1) of the Electricity Regulation Act 4 of 2006 (ERA), no generation facility may be operated without a generation licence issued by the National Energy Regulator of South Africa (Nersa), apart from some exemptions as stipulated in the recently amended Schedule 2. Nersa insisted that, to issue a licence to an IPP that intends to establish new generation capacity, either a Section 34 determination or Ministerial approval in terms of Section 10(2)(g) of the ERA would be required.

This interpretation was always debatable. According to Section 10(2)(g), the applicant must provide “evidence of compliance with any integrated resource plan (notably not a Ministerial determination) applicable at that point in time or . . . reasons for any deviation for the approval of the Minister”. Thus, one could argue that no Ministerial blessing is required to obtain a generation licence where the IPP can demonstrate that the plant “fits into the plan”. It is also noteworthy that the draft Electricity Regulation Second Amendment Bill (GG 34870 of December 19, 2011) sought to replace Section 10(2)(g) with a much stricter framework, including a new Clause 34(4), which stated: “No new generation capacity may be established or procured otherwise than pursuant to and in accordance with a determination made by the Minister in terms of this section” (see also clause 13A ‘Ministerial Approval’). Even though the draft Bill did not become law, Nersa and the Minister seem to read these proposed provisions into the existing Act.

In a rapidly changing electricity sector that shifts from large-scale conventional power plants to low-carbon distributed generation, it makes sense for municipalities to play (again) a more prominent role in the generation space. Recent and forthcoming Eskom tariff increases will spur the trend to behind-the-meter installations and the culture of nonpayment for services provided. The re-emergence of rolling blackouts has put additional pressure on municipalities. Consequently, the ‘business model’ for municipalities of buying electricity from Eskom and selling it on to their customers has come under scrutiny. For municipalities, to look for cheaper energy sources becomes a question of staying financially sustainable. While many municipalities will not be willing or able to contract with IPPs, those that could should not be prevented from doing so from the outset. Other safeguards (such as Section 33 of the Municipal Finance Management Act) are in place but should be looked at separately, if necessary. On the other hand, it can hardly be denied that there is a need for the orderly development of the electricity sector as a whole and for a coordinated approach to implementing the Integrated Resource Plan 2019. This should not be a contradiction, provided the green economy and the carbon emission reduction targets of municipalities are adequately reflected in the national plans for the energy sector.

What Comes Next?

There is a good chance that, eventually, the Constitutional Court may have to decide what municipalities can and cannot do in the generation space.

The debate took a surprising turn when President Cyril Ramaphosa announced in his 2020 State of the Nation Address that government “will also put in place measures to enable municipalities in good financial standing to procure their own power from IPPs”. In the Government Gazette of May 5, Mineral Resources and Energy Gwede Mantashe published draft amendments to the Regulations on New Generation Capacity for comment that would “permit a municipality [in sound financial standing] to apply to the Minister to establish new generation capacity”. While the City of Cape Town has already indicated that this falls short from a municipal perspective, it is nonetheless a positive development. It would mark the official end of the single-buyer model in South Africa, where Eskom is the sole offtaker of power from new generation capacity established by IPPs. To allow qualifying municipalities to choose their supplier for a portion of their power requirements would also foster competition in the electricity sector. The need for increased competition in the generation sector was highlighted in the National Development Plan and more recently in the 2019 Roadmap for Eskom in a Reformed Electricity Supply Industry. The ERA supports this as well, at least in principle, as one of its objects is to “promote competitiveness and customer and end-user choice”.

The two determinations that were sent to Nersa for concurrence earlier this year still conform to the traditional way of procuring power from IPPs, with the Department of Mineral Resources and Energy as the procurer and Eskom as the (sole) buyer. This would have to change. There is also increasing appetite from corporates to procure power from IPPs. With more potential players, more flexibility is required with respect to how the IRP 2019 is implemented. Nondiscriminatory access to the grid for all generators and a functioning wheeling mechanism, including cost transparency for wheeling charges, are also prerequisites for bilateral trading.

Even if the draft amendments to the NewGenRegs were to be adopted any time soon, significant preparatory work must be undertaken before municipalities can apply for a Section 34 determination and embark on competitive IPP procurement. Irrespective of what the outcome of the case between the City of Cape Town and Nersa/the Minister will be and whether we will see an evolution or a revolution of the way new generation capacity is procured in South Africa, municipalities that are interested in procuring power directly from IPPs should get ready.