South Africa: Renewable Energy Regulation And Policy In South Africa

Last Updated: 5 December 2010
Article by Happy Masondo

The National Energy Regulator of South Africa ("the NERSA") is a statutory entity established in terms of Section 3 of the National Energy Regulator Act 40 of 2004 whose functions include, but are not limited to:

  • intensifying the necessary steps to diversify South Africa's energy sources;
  • increasing power capacity; and
  • reducing carbon emissions in South Africa.

To this end the NERSA has declared that in approving Eskom's 24.8% tariff increase during March 2010, it has designated specific amounts for investment in renewable-energy sources (i.e. naturally occurring non-depletable sources of energy) to produce electricity, gaseous and liquid fuels, heat or a combination of these. The designated amounts are: R2.3 billion for 2010/2011; R4.3 billion 2011/2012 and R5,8 billion for 2012/2013.

The NERSA has also published its Renewable Energy Feed–in Tariffs1 ("REFITs"), which are the prices guaranteed to the producers of renewable energy as a mechanism to promote its deployment in South Africa.

It also appears poised to implement the necessary regulatory and legal frameworks established under REFIT.2 Key amongst these is the current draft of the Power Purchase Agreement ("PPA")3 to be concluded by Independent Power Producers ("IPPs") and the Renewable Energy Purchasing Agency ("REPA"). The PPA contemplates that IPPs will sell the electricity they generate to the REPA at the stipulated rates under REFIT. The Regulator has sought to incentivise IPPs generating renewable energy by ensuring that there is:

  • guaranteed access to the national electricity grid;
  • set and certain rates payable to the IPPs; and
  • the term of the PPA is for a certain period, currently 20 years.

These incentives are imperative for potential investors to find the renewable energy sector as investor friendly as possible. In addition, investors would want the assurance that the cost of renewable energy is competitive with conventional energy.

Single buyer model

While the South African legal and regulatory landscape appears geared for advancing the renewable energy sector, there may well be inadvertent disincentives as well. In terms of the PPA, the REPA is currently established under Eskom as the single buyer office ("SBO") of the energy generated by renewable energy IPPs.

Historically the single buyer model has proved to be popular in developing countries seeking to encourage IPPs to generate energy and sell it to the national utility. In terms of the Eskom SBO model, the SBO will purchase the energy produced by the IPPs from renewable sources of energy and will sell it on to Eskom customers. In the current draft of the PPA4 , the volume of the energy generated and sold to the REPA shall not exceed the contracted capacity. While the phrase "contracted capacity" is used as a defined term, it is not defined in the PPA.

Notwithstanding the absence of the definition there is a clear intention on the part of the Regulator to limit the volumes of the electricity to be purchased by the SBO from the renewable energy IPPs. In a market, or willing-buyer-willing-seller model, the IPPs would be in a position to sell their net capacity not contracted for by the SBO to any willing buyer. In clause 6(2) of the current draft of the PPA, IPPs are precluded from selling their excess energy to any other buyers except with the prior written consent of the SBO.

It is also difficult to see how the SBO can promote and facilitate competition in the renewable energy sector when Eskom itself is proactively seeking to generate electricity from renewable energy sources itself. The adoption of the single buyer model appears to be yet another attempt by the national utility to hold onto its position as a monopoly in the electricity sector.

A tendency to hold on to and perpetuate monopolistic elements would serve as a disincentive for some of the potential investors in renewable energy technologies. With so much else stacked against the rapid development and advancement of the renewable energy technologies, the Regulator should be on guard against inadvertent disincentives.

Striking the energy balance

Approximately eighty five percent (85%) of Eskom's power plants are coal fired and the rest are nuclear, open-gas turbines or hydro-power plants. Many of these plants (about a quarter) are at least 50 years old and will need to be replaced between 2021 and 2028. It could be argued that the state of Eskom's current infrastructure offers an opportunity for renewable energy technology to replace all the coal-fired power stations.

However, it will not and cannot happen. South Africa's large coal reserves and its failure to make investments in renewable energy technologies several years ago mean that both development and advancement of renewable energy technologies will always lag behind coal-fired technology. The two types of energy sources are generations apart. If the renewable energy technologies were put into the race, they would be set to fail from the outset.

Given the lack of advancement of the renewable energy technology, an uncomfortable balance has to be struck between the coal-fired energy traditionally relied on by the South African power utility and alternative renewable energy sources and technologies.

Earlier this year, the World Bank approved a loan of US$3.75 billion ("the World Bank loan") to Eskom for the construction of one of the world's largest coal-fired power plants, the Medupi power station ("Medupi"), in Lephalale, in the Limpopo Province.

Currently, in South Africa, renewable energy technology is not sufficiently advanced to produce the 4800MW of electricity to be generated at Medupi when it is eventually commissioned in 2013. Fundamentally, as a country we simply have to keep the lights on, yet it will be a while still before we can do so solely through the supply of cleaner renewable energy.

However, the Medupi will, for the first time on the African continent, be using super-critical technology in the form of cleaner coal in six 800MW boilers. This will improve the efficiency of the power plant because super-critical technology boilers operate at higher pressure than traditional coal-fired power plants, which reduces fuel consumption and carbon emissions.

US$260 million of the World Bank loan will be for piloting a 100MW wind power project in Sere, Vredendal and a 100MW concentrated solar power project with storage in Upington, Northern Cape. An additional, US$485 million is allocated to low-carbon energy efficiency components, including a railway to transport coal with fewer greenhouse gas emissions.

These apparent contradictions have to be accepted for what they are, an uncomfortable balance between the coal-fired energy traditionally relied on by Eskom and the alternative cleaner renewable energy sources in an effort to minimise the potential for the repeat of the energy shortage experienced in 2007/2008 with its attendant severe economic consequences.

Nevertheless, no sooner had Eskom obtained the World Bank loan for the completion of Medupi, it was scouring the market for funding for yet another 4800 MW coal-fired power station, the Kusile power station ("Kusile") in the Mpumalanga Province.

With all this focus on the construction of new coal-fired power stations we would be excused for believing that South Africa, the Regulator and Eskom have no interest in shoring up support for the development of renewable energy technologies. Cynics cannot help but wonder how far along the environmentally-friendly technologies would be if they were receiving equal or more funding than the traditional coal-fired super-critical technologies are currently receiving.

Conclusion

There is limited scope to allow or encourage rapid development and expansion of renewable energy sources and technologies. This is against the backdrop of intensive remediation of moth-balled coal-fired power stations; replacement of more than half of the old coal-fired power stations; and construction of new coal-fired power stations.

The logical approach would be to replace the old/moth-balled coal-fired technologies with renewable energy power stations within a legal and regulatory framework open to rapid development and advancement of renewable energy technologies. However, the sad reality is that the renewable energy technologies are too far behind to catch up and Eskom has to keep the lights on.

Footnotes

1. See the Guidelines, GN382 OF 17 April 2009 to the National Energy Regulator Act 40 of 2004 for FERIT I and the NERSA Consultation Paper, July 2009 for REFIT II.

2. Ibid

3. See the NERSA REFIT PPA on the NERSA website www.nersa.org.za

4. See definition of "Commercial Energy", under the definitions and interpretation of NERSA REFIT PPA, p4

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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