South Africa: What Light Is At The End Of The Renewable Energy Tunnel?:

Last Updated: 29 July 2011
Article by Happy Masondo

Originally published June 2011

On 6 May 2011, the Minister of Energy (the Minister), Dipuo Peters, promulgated1 the Electricity Regulations (the Regulations) on the Integrated Resource Plan 2010-2030 (IRP 2010), under and in terms of section 34 of the Electricity Regulation Act No. 4 of 2006 (Electricity Regulation Act).

In terms of section 34(1) of the Electricity Regulation Act, the Minister, in consultation with the National Energy Regulator (the Regulator) may, amongst other things, determine:

  • that new generation capacity is needed to ensure the continued uninterrupted supply of electricity;
  • the types of energy sources from which electricity must be generated; and
  • the percentages of electricity that must be generated from such energy sources.

Increasing reliance on renewables

One of the significant changes in the IRP 2010 is that in ensuring security of supply of energy from 2010 to 2030 it contemplates that forty two percent (42%) of the supply of energy will be from renewable energy sources. This is a twelve percent (12%) increase from the thirty percent (30%) originally provided for in the first IRP of January 2010. In terms of the IRP 2010, the forty two percent (42%) of new capacity allocated to renewables, "is dependent on the assumed learning rates and resulting cost reductions for renewable option"2. In contrast to the first IRP, South Africa's reliance on coal as a source of energy will be reduced from the current almost hundred percent (100%) to fifteen percent (15%) for the period from 2010 until 2030 Based on these statistics, the Department of Energy (DOE) together with the Regulator appear poised to ultimately significantly reduce South Africa's dependence on coal while scaling up reliance on renewable energy sources.

Nothing is cast in stone as the IRP 2010 is intended to be a, "living plan that is expected to be continuously revised and updated as necessitated by changing circumstances"3. At the very least, it is expected that the IRP should be revised by the DOE every two years, resulting in a revision in 2012. Given the highly ambitious projections contained in the IRP 2010 particularly with respect to the great extent to which renewable energy sources will be relied upon, it may be prudent to heed the warning sounded in the World Economic Forum (WEF) April 2011 Report4 (the Report):

"Unless governments address early-stage changes, there is the risk that market development [of renewable energy sources] will remain uncoordinated and small scale, and thus fundamentally constrained".

Early stage risks

The WEF Report supports the laudable ideals of greater reliance on renewable energy sources in South Africa, but warns that both financial and non-financial constraints may obstruct and ultimately prevent the realisation of these ideals. The Report gives the following list of five items as being the greatest risks that could preclude the DOE and the Regulator from realising the ideals of greater reliance on renewable energy:

absence of long-term planning, which results in a lack of policy clarity and consistency over the long-term, hampering investment in and development of renewable energy;

  • lack of coordination resulting in long lead times and delays in project approval, which in turn will affect the financial viability of the project;
  • lack of experience among decision-makers who may not be fully aware of the characteristics, intricacies and benefits of renewable energy resulting in significant delays in the development and expansion of renewable energy projects;
  • electricity market structure with one dominant player which can disadvantage new entrants in competing fairly in the market; and
  • insufficient grid infrastructure which can present a current and future barrier to increased generation, particularly in the areas where renewable energy resources are most abundant.

Much progress has been made in the legislative and regulatory developments in South Africa. However, the implementation of legislation and regulations may be impeded by some of the greatest risks listed above. This paper canvasses three of these risks as they could hamper the implementation of the IRP 2010 policy document.

Cracks in long-term planning

While the South African Government has undertaken sufficient long-term planning in the IRP 2010 up to and including 2030 and in keeping with the WEF renewable energy life cycle model, there are already cracks appearing in this long-term plan.

There have been delays by the Regulator in issuing the updated renewable energy feed-in-tariff (REFIT). REFIT is the financial mechanism designed to encourage producers of renewable power to produce such power by granting them guaranteed prices for their electricity. The renewable energy industry was anticipating an announcement on the new tariffs on 25 May 2011. The Regulator has now postponed this announcement to some time in the middle of June 2011. These delays mean that the renewable energy industry must wait longer before having some certainty on the extent to which the Regulator will reduce the applicable tariffs.

The revision and reduction of REFIT dims the bright prospects of significant investment in renewable energy as was originally anticipated in 2009 when the first tariffs were announced. This poses a great risk of disinvestment from the sector and therefore a disincentive to potential investors and producers of renewable energy in South Africa.

Following this proposal, the Regulator has decided to hold public hearings on the revised REFIT, a process which may take a period beyond the next scheduled revision of IRP 2010 in 2012. Ironically REFIT as a policy mechanism is in the main intended to incentivise investors and producers alike, when REFIT is tinkered with and not indexed to inflation it may turn into a disincentive. The certainty and optimism that the 2009 inflation indexed REFIT brought about have been dulled. This crack in the long-term plan will dim the bright prospects of potential investments in the renewable energy industry and the environment will no longer be as conducive to investors as a REFIT is meant to be.

Energy authorities abound

A producer of renewable energy has to comply with a plethora of legislative requirements and make application to a number of Government departments, agencies and authorities to eventually obtain approval to produce energy. The relevant pieces of legislation include:

  • The Electricity Regulation Act No. 4 of 2006 and all regulations issued thereunder;
  • The National Environmental Management Act No. 107 of 1998 (NEMA) and all regulations issued thereunder;
  • The National Energy Regulator Act No. 40 of 2004;
  • Guideline GN 382 of 17 April 2009 to the National Energy Regulator Act No. 40 of 2004 (REFIT I);
  • NERSA Consultation Paper: Renewable Energy Feed-In-Tariff Phase 2 July 2009 (REFIT II); and
  • National Environmental Management: Waste Act No. 59 of 2008 (the Waste Act).

Some coordination and an appearance of some method to the madness would be useful.

There is no real coordination or cooperation amongst the different authorities and regulators in order to ease the burden of applicants. It is precisely such lack of coordination, amongst other things, against which the WEF Report sounds a warning. A failure to address early stage challenges as a means of preventing a constrained renewable energy market could spell a failure of the plan for the sector even before its implementation.

Independent system and market operator (ISMO)

Numerous investors and Independent Power Producers (IPPs) have long been advocating for a move away from the Single Buyer Office (SBO) originally contemplated by Government authorities to be the sole purchaser of electricity from renewable energy producers. The IPPs and investors will now sound a collective sigh of relief in the knowledge that there was a Bill5 in circulation for public comment by no later than 13 June 2011.

The Bill provides for the establishment of an ISMO as a national public entity with a view to minimise the overall costs of electricity to South African consumers. Once it is established, the ISMO will be responsible for:

  • the planning of electricity supply by generators;
  • electricity dispatch and aggregation in respect of the sale of electricity;
  • acting as the buyer of electricity from generators for South Africa; and
  • selling electricity to the ISMO customers.

Public comments on the Bill together with the promulgation will determine whether there are any risks to the establishment of an ISMO.

Conclusion

It is a laudable ideal for South Africa to significantly reduce reliance on coal while scaling up reliance on renewable energy. However, the bright light that appeared in 2009 for IPPs emanating from a favourable REFIT have been dimmed by delays in announcing the new tariffs. The act of revising the tariffs in itself erodes the confidence of IPPs and investors in the sector.

A plethora of regulatory authorities equally detracts from the incentives that ought to be in place to stimulate greater participation in the industry by investors and producers alike. The ISMO Bill is a glimmer of hope that there may well be levelling of the playing fields in the industry.

Footnotes

1. See Regulation Gazette No. 9531 Volume 551, Government Notice R 400, Government Gazette No. 34263, 6 May 2011

2. Ibid 1 at p15

3. Ibid 1 at p7

4. "Scalling up renewables – developing renewable energy capacity, addressing regulatory and infrastructure challenges in emerging markets" World Economic Forum Report, April 2011

5. Independent System and Market Operator Establishment Bill, General Notice 290 of 2011, Government Gazette No. 34289, 13 May 2011.

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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