What do the changes to energy regulations announced by the Presidency last month mean for the private sector?
Thanks to the recent amendments to energy regulations in South Africa, the opportunities to invest in renewable energy either for own consumption or to sell to others have increased substantially; but risks may also have increased.
In this article, we look at some of the immediate and longer-term ramifications, particularly, for our clients in the mining sector.
What’s changed legislatively?
No generation caps. To accelerate greater private investment in the generation of energy, the threshold for new-generation projects has been removed entirely to facilitate much larger, utility-scale projects in the private sector.
More capital. Companies are now not only free to build power plants of any size, they can also sell their surplus energy back to the national grid.
Less red tape. Special legislation will be tabled in Parliament shortly to address any legal and regulatory obstacles, but in the interim, the government has indicated that they will waive or streamline certain regulatory requirements within existing legislation. This includes reducing the regulatory requirements for solar projects in areas of low and medium environmental sensitivity.
Bigger bid windows. In an effort to accelerate the country’s shift from its dependence on coal, upcoming electricity supply tenders have doubled in size. The amount of new generation capacity procured through the so-called ‘Bid Window Six’ for wind and solar power will be doubled from 2,600 megawatts to 5,200 megawatts.
Standing in the gap
Additional steps the government has taken to immediately avert a national energy crisis include:
Over the next three months, Eskom will start to buy electricity from existing independent power producers and private generators such as mines, paper mills, shopping centres and other private entities that already have surplus power.
Eskom will also now import power from neighbouring countries in Southern Africa, including Botswana and Zambia, through the Southern African Power Pool arrangement.
Eskom recently made land available next to its power stations in Mpumalanga for renewable energy projects, forecasted to unlock a further 1,800 megawatts of new capacity.
Eskom will begin constructing its first solar and battery storage projects at Komati, Majuba, Lethabo and several other power stations. These will result in over 500 megawatts being added to the system.
For a limited period, Eskom will use interim power solutions, such as mobile generators, to supplement current generation capacity.
Eskom is actively recruiting more skilled personnel (including experienced previous employees).
SAPS has set up a special law enforcement team to help Eskom in confronting rampant crime and internal corruption plaguing the SOE.
A National Energy Crisis Committee, chaired by the director-general in the Presidency, has been established and brings together all the departments and entities involved in the provision of electricity.
The National Treasury is working to finalise a sustainable solution to Eskom’s debt. The Minister of Finance will outline how the government will deal with this matter when he presents the Medium-Term Budget Policy Statement in October.
What about the bigger picture?
Below the headlines, there are a number of uncertainties and challenges that remain:
Historically load shedding and load curtailment have peaked in October and November – it is unclear whether the proposed changes will flow through quickly enough to avoid what are potentially some challenging months ahead.
The timing and specifics of many of the announced changes still need to be fleshed out, for example in terms of the level and structure of feed-in tariffs proposed as well as proposals to reduce red tape.
Exchange rate changes as well as record global demand have put upward pressure on key inputs into overall renewable energy project costs with knock-on impacts on project economics and returns.
The high fixed cost structure within Eskom still needs to be funded – in all likelihood, this will result in a higher fixed component in Eskom’s pricing to customers with a corresponding impact on the financial attractiveness of grid-tied self-generation. Eskom’s recent tariff change proposals already reflect this intention.
Stepping back and looking at markets like Australia and the US where installed solar capacity has grown rapidly, the result has been an increasing mismatch between energy generation and demand through the day (the duck curve) with resultant impacts on the marginal value of energy at these times and the need to increase dispatchable elements within the overall energy mix.
Where does this leave the private sector?
The intensified focus on renewable energy and the opportunity for the private sector to play a greater role in solving the energy crisis are positive steps for our country and economy in the long term.
Private companies that take advantage of the opportunities inherent in this shift and place their bets carefully will enjoy a significant advantage, in terms of security of energy supply, cost competitiveness, profitability and GHG emission reductions.
As trusted partners on numerous energy projects in the mining sector, our team of experienced engineers, consultants and financial analysts are available to engage with companies and investors looking to identify renewable energy solutions that will deliver financial and non-financial results over the long term.
See the link to the President’s full speech here – READ: Ramaphosa’s full speech on SA’s energy crisis measures (citizen.co.za)