C&A Friedlander Attorneys

This brief article relates to renewable energy projects outside of the Renewable Energy Independent Power Producer Program (REIPPP) 

Research by the Council for Scientific and Industrial Research (CSIR) shows that renewable energy (RE) is the cheapest new build mix for South Africa’s power system, yet the department of energy is unwilling to increase the volume of RE in the future energy mix. Added to this, current legislation makes it difficult for an IPP to enter into power purchase agreements (PPA) directly with municipalities.

The Electricity Regulation Act (ERA) places limitations on who may apply for generation licenses, including power purchase agreements (PPA) and generation by municipalities. Section 34 of the ERA empowers the Minister of Energy in consultation with the National Energy Regulator (NERSA) to determine how, when and who may generate and purchase new electricity. In 2007, the Minister acting in terms of the Section 34 determined that ESKOM would be the sole purchaser of electricity. ESKOM Holdings Soc Limited is accordingly the sole entity empowered to purchase energy and enter into PPA with IPPs in terms of the REIPPP.

In the circumstances, municipalities are unable to purchase electricity from IPPs and if a municipality or an IPP were to produce its own electricity, it would have to do so for its own consumption. Furthermore, generation capacity over 1MW would require a license from NERSA. As a result, the City of Cape Town, together with a number of other municipalities, have applied for a Section 34 determination to allow them to procure renewable energy directly from IPPs.

The further challenge of an IPP selling RE directly to municipalities relates to the Municipal Finance and Management Act (MFMA). The MFMA does not make provision for contracts exceeding 3 years to be concluded between a municipality and a service provider. Typically an IPP or investor would want a PPA for at least 20 years to ensure an acceptable return on its investment.

It is arguable that there are ways around this, namely through acquiring Treasury approval to extend the 3 year period or invoking an act of parliament to establish a private company owned by a municipality to provide a municipal service i.e. to partner with an IPP. However, with the current reluctance of the DoE to increase the volume of RE in the future energy mix, it is questionable whether such approval would be given.

NERSA has however granted a license to one independent electricity reseller, PowerX, which licence allows PowerX to purchase RE power from IPPs and to thereafter sell the purchase RE power to municipalities or commercial consumers. A wheeling fee (for the use of the grid network) is paid to ESKOM and where a municipality grid is used, also to that municipality. The Nelson Mandela Bay Municipality has entered into PPA with Power X, however it is questionable as to why a middle entity is required, the utilisation of which only increases the cost to consumers. Municipalities should accordingly be entitled to a similar license. This would open the door for IPPs to contract directly with municipalities and local companies in order to invest in RE developments as the larger REIPP projects that sell to ESKOM are financed almost purely from foreign investment.

The most feasible option for an IPP is to enter into a PPA directly with a commercial enterprise, a good example of this would be the Bio2Watt plant in Bronkhorstspruit, which has concluded a power deal with BMW to buy 4.4 MW of electricity from its biogas plant. BMW purchases the power generated at the biogas plant and the energy is fed into the local grid owned and operated by ESKOM, which then connects to the auto plant via the city of Tshwane’s electricity distribution network.

Brett Cotterell
C & A Friedlander Inc.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)