Posted in: Energy Wheeling

What the 100 MW license cap lift means for your business

In June, amid much celebration, Cyril Ramaphosa announced that the amendment of Schedule 2 in the Electricity Regulation Act – a clause that has long had both producers and consumers of energy at loggerheads with government – was imminent. Today, the amendment was officially gazetted. However, what exactly does this amendment mean, and will it affect your business?

The Electricity Regulation Act of 2006 is an important piece of legislation that governs how electricity is generated and distributed in South Africa, and the roles of the various stakeholders involved. Schedule 2 used to specify that any electricity generation activity over 1 MW requires a generation licence. Essentially, this implied the same amount of paperwork for a huge coal-fired power plant as a rooftop solar system! The amendment to schedule 2 of the ERA means that this cap has now been lifted – which is great news for large energy consumers in South Africa.

What does the new Electricity Regulation Act Schedule 2 Amendment say?

In short, this amendment exempts certain activities from licencing and registration with the electricity regulator (Nersa). Such exemptions include:

  • Any generation facility without a connection to the grid
  • Any generation facility below 100 kW in size (provided it complies with standard connection codes);
  • Any generation facility with/without energy storage under 100 MW and either:
    • No wheeling;
    • A wheeling agreement (provided there’s a connection agreement between the generator and the transmitter of the power); or
    • No import or export on to the grid
  • Generation facilities that are used for demonstration purposes and will not be in operation for over 36 months
  • Existing generation facilities that were exempted from the requirement before the gazette need to register within 6 months, if it is compliant with the grid-code and connected to the grid.

This means that, essentially, electricity generation projects under 100 MW, whilst still needing to meet requisite grid-code compliance and normal permitting procedures, will not require a generation licence from Nersa.

This will mean that projects that have historically taken years to complete will now be able to be built much more quickly, thus providing private consumers of energy with power and alleviating South Africa’s electricity crisis. 

Are there still other permits required for electricity generation?

Yes, the relevant regulatory approvals are still required for self-generation. The main change under the new legislation is that projects between 1 – 100 MW will not require a Nersa generation licence, which are substantial and very complex licences to obtain. Historically, this meant that a project of 2 MW would require the same amount of paperwork as a large coal-generation facility (oven GW in size), and thus slowed the uptake of renewable energy quite dramatically. 

It’s important to note that the projects must still be registered with Nersa, in which the relevant grid approval documents and environmental approvals, amongst other documents, will be submitted. Nersa will review the documents over 60 business days before granting registration to the relevant projects.

If the client is part of the municipal grid network, they would still need to obtain the relevant permissions in order to self-generate. This is standard practice for all solar PV plants and is necessary to make sure that the municipality has oversight of how much their grid is likely to be loaded at a specific time. The capacity of the grid needs to be taken into consideration, and so weak grid areas are likely to remain constrained, regardless of legislation.

The gazetting of this ERA Schedule 2 amendment is incredibly positive and will make a big impact on the sentiment toward the Renewable Energy sector – both for the companies that supply renewable energy, as well as the large energy consumers.

What does the amendment say about energy storage? 

Whilst many large energy consumers choose to remain connected to the grid, as it allows the use of the cheapest form of energy at various times of the day (eg., solar during mid day, grid-supply during off-peak hours), there are increasing numbers of energy consumers that are using battery systems to supply them with power 24/7, which also prevents load shedding. The amendment includes energy storage provision – meaning that the licencing exemption applies to energy storage systems as well. 

Hybrid, “islandable” systems which act like on-grid systems, but automatically “island” during load-shedding, are also included in the provision. The opening of the self-generation threshold means that these islandable systems will be increasingly cost-effective, because larger solar PV systems can be built and their cheap power stored in batteries for dispatching during load shedding or the evenings. 

What is wheeling?

Wheeling is the transfer of energy from an independent power producer to a client via the grid. For our clients, this means that electricity can be generated in an area with lots of space and great solar resource, in order to supply an energy consumer that may not have the space or the solar resource available (such as our Amazon Wheeling project). Wheeling requires quite a few different licences, but the advantage of the generation threshold increase would mean that a Nersa generation licence would be one less piece of permitting required. 

Because of its affordability there is likely to be a great uptake of renewable energy with the ERA 2 amendment. We look forward to working with all relevant stakeholders to make this happen.

The definitive guide to solar PPAs

There’s been growing interest in solar PPAs over the past few years, and they are now much more mainstream. However, you may still have some questions about PPAs and solar finance. What are PPAs, and how can they benefit your business? We’ve put together a definitive guide to help. 

What is a solar PPA?

The term “PPA” is swung around quite a lot in the solar industry. PPA stands for “Power Purchase Agreement”, and it signifies a type of contract between an electricity generator (or Independent Power Producer – IPP) and an electricity consumer (or offtaker) – such as a commercial operation. A solar PPA is therefore a contract between a solar generator and an offtaker, stating that the generator will provide solar power and the offtaker will buy the solar power from them.

As a form of electricity, Solar PV is an easily-deployable, very safe option without any moving parts that produces electricity during light hours of the day, and therefore it often makes sense to embed the solar PV system directly into the factory, retail centre, warehouse, etc. where it will be consumed. As such, many commercial and industrial solar PPAs include the construction of an embedded generation solar facility on the site where the power will be used. In this instance, a solar PPA is a way for the customer to procure clean electricity and save on their electricity bills without deploying any CapEx, and only paying for the electricity that the system generates.

However, PPAs can also be entered into for clients where there is either too little space or too much energy demand to generate solar electricity directly on the site. In these situations, solar wheeling agreements can be entered into, which allow the purchase of solar power from a remote solar facility, such as a large solar farm, to be “wheeled” through the electricity grid and to the customer. Wheeling typically suits energy-intensive operations such as mines, smelters, data centres, and other large commercial operations.

Typically, the larger the size of the PV system, the lower the tariff. This is why solar PPAs are best suited to energy-intensive operations, where there is little chance of exporting excess energy. The most suitable size of the PV system depends on the client and type of operation, and is typically determined during a detailed feasibility process between the generator and offtaker. 

What are the benefits of a solar PPA?

There are several benefits of entering into a solar PPA, but they can be summarised into four main points:

  1. Cost saving

The major reason for entering into a solar PPA is the significant cost saving that customers tend to encounter. While grid tariffs have been increasing, the cost of solar PV components has reduced dramatically over the past 10 years, meaning that the cost per kWh of solar electricity tends to be much cheaper than power from the grid and other forms of onsite generation (diesel genset etc.). In addition, the solar PPA tariff includes all expenses relating to the solar system: upfront installation costs, part replacement, comprehensive asset insurance and ongoing operations and maintenance, meaning that the client will not have any hidden or unexpected costs over the life of the PPA.

  1. Carbon emissions reduction

Solar PV systems generate energy by converting the sun’s rays directly into electricity, forming a low-carbon, renewable energy source. A solar PPA is an easily accessible way for businesses to decrease their carbon footprint and meet their sustainability targets. 

  1. No outlay of CapEx or ongoing maintenance costs

If a customer wishes to procure their embedded solar PV facility outright, they will need to pay a supplier for the engineering, procurement and construction (EPC) of the project, which will have a large capital outlay. This is not always the best option for a business whose core operations are completely different to electricity generation, as the ongoing maintenance and performance of the plant will be their responsibility to manage. Whilst most EPC companies provide additional Operations and Maintenance services, it will be the responsibility of the client to ensure that those contracts are fully up to date and to log any issues with the service provider. 

  1. Future electricity cost perspective

Typically PPAs will have fixed tariff increases baked into the contract, ensuring that the future costs of electricity will be predictable and manageable. Historically, Eskom tariffs have risen an average of over 11% annually over the last 20 years, with a 15% increase announced in 2021. A solar PPA will have an escalation that is fixed and typically well below Eskom’s average and can be set in consultation with the client. 

How long is a solar PPA?

The main component of solar PV systems are the solar panels, with a market standard performance warranty of minimum 25 years. As such, typical PPAs range from 10 – 25 years. Although the length of the PPA is adaptable, the longer the PPA is, the lower the starting tariff will be. 

If your business is looking to procure sustainable power quickly, then the time of procurement should also be taken into consideration. For a simple solar PPA to take effect, there is typically a 5 – 6 month procurement time before the site establishment and construction, which incorporates the negotiation and signing of the commercial PPA as well as the design and licensing of the solar PV system. Here’s an example of the typical timeline of a solar PPA negotiation period:

Off-site PPAs that include a wheeling agreement may take longer to initiate because a solar generating site needs to be identified and permitted in addition to the normal PPA process. 

What’s the difference between a solar PPA and a solar lease?

Over the years, the terms “solar PPA”, “solar finance”, and “solar lease” have come to be used interchangeably, so what is the actual difference between these terms? The answer has to do with the history of energy legislation in South Africa and the allocation of risk.

Before November 2017, it was not possible in South Africa for Independent Power Producers to sell energy directly to consumers without a generation licence. As such, solar leases were utilised as a way for a private energy consumer to make use of a solar PV system by leasing the system instead of paying per unit of electricity the system generates. Then, in November 2017, an amendment to Schedule 2 of the Electricity Regulation Act allowed for private energy sale without the need for generation licence of projects less than a 1MW in size, which opened up the opportunity for Power Purchase Agreements to take effect. 

So the main difference between a solar lease and a solar PPA is contractual, and dependent on where the performance risk of the asset lies. In a solar lease, the performance risk lies with the customer or user of the solar PV system as they pay a fixed monthly fee for the system not linked to the output it generates. Whereas in a solar PPA the entire risk of the asset lies with the solar PV operator as only energy generated is paid for on a take-or-pay basis, making it a purely cost-saving mechanism for businesses.

Are there risks associated with a solar PPA?

As with any large commercial decision, the risks need to be understood up front. The main risks in entering into a PPA agreement include:

  1. The length of the contract

Whilst most business contracts are typically renewed on an annual basis, a PPA term is typically 10 years and longer to ensure the most cost effective solar tariff. As such, senior management will want to ensure that the cost and carbon savings associated with procuring clean electricity are worth the risk of entering into such a contract. This can be mitigated through various exit options including an option to purchase the system, which can be a condition of PPAs that allows the client to buy the solar PV system after a set amount of time for a periodic price that is agreed upfront, should the operational requirements of the business change.

  1. Changing operational requirements

The risk of changes to the business’ operational requirements is a standard business risk that should be considered for every new venture and/or product that is introduced, as it will have an impact on the overall efficacy of the plant or operation. If, for example, a product is no longer required and its manufacturing operation suddenly starts to use less electricity, this could impact on the cost-saving aspects of the PPA. Most PPAs are arranged on a “take-or-pay” basis, meaning that the client is responsible for paying for all the electricity that the system generates, including instances where the customer cannot take the energy not at the fault of the generator. In addition to careful business management, this risk is also mitigated through careful feasibility and design phases, which look in detail at the electricity requirements of the building or facility before suggesting the total size of the solar PV system to the client. Similarly, a PPA has a fixed tariff increase each year, meaning that electricity costs will be very predictable into the future, allowing for better business planning. 

Is a solar PPA right for my company?

Understanding if a solar PPA is the right option for your company is a decision that comes down to business management decisions around cost saving and sustainability. On cost saving, does your business have energy-intensive operation(s) around South Africa, and is a large amount of your company’s operational budget spent on electricity procurement? If so, a solar PPA is a great way to reduce electricity costs quickly, with low risk to the business, improving the profitability of your operations. Similarly, a PPA also ensures that future electricity costs are predictable, hedging against unpredictable Eskom increases.  

From a sustainability perspective, does your business have sustainability targets that require a reduction in carbon emissions or a requirement to procure renewable energy? If so, a solar PPA is a great capex-free way to reduce reliance on grid-supplied electricity, which in South Africa is highly carbon-intensive. For example, the CO2eq for South Africa’s grid is just under 1 kg per kWh, whilst solar is less than 0.01kg per kWh. From a procurement perspective, solar PV is considered 100% renewable, so the more solar PV that fuels your operation, the closer you will be to your renewable energy procurement target.

Energy Wheeling supplies power to areas located away from the direct source of power

SOLA gets approval for largest solar PV wheeling agreement in South Africa

A flagship renewable energy project, commissioned by Amazon, is set to demonstrate the flexibility and convenience of procuring independent power through the electricity grid. The project will see 28 GWh of solar energy wheeled via Eskom’s utility grid from a solar farm in the Northern Cape to Amazon’s facilities each year.

Energy wheeling holds tremendous value in that it enables the supply of energy to urban areas from energy projects in outlying areas, such as a solar farm located in an area where the sun is most powerful and consistent. This is done through the transfer of electrical power via a utility’s distribution system. In other words, the power generated in a sunny area is distributed to an offtaker where there might be less solar resource. 

Chris Haw, SOLA’s Executive Director, explains that although the concept of wheeling energy using Eskom’s existing infrastructure has been in place since 2008, certain administrative barriers have hindered the uptake of such services. “This project, which comprises a 10 MW solar PV farm, has also received a sought-after generation license from NERSA, a milestone that other similar projects have struggled to achieve.”

SOLA will be responsible for developing the project and will build, own and operate the solar facility.

Haw explains that the NERSA process requires a signed Power Purchase Agreement and fully developed project in order to obtain approval. “This creates contractual challenges because many inputs, such as the foreign exchange rate, are still fluctuating whilst the application process is underway. The high standard of development required for submission means that NERSA are not handing out licenses to projects that won’t proceed, which is a very good thing.” 

The project aligns with the South African Government’s intent to open the electricity grid, allowing independent generators of electricity and consumers to enter into bilateral agreements to optimise the cost and sustainability of energy, which has previously been difficult to achieve. The generation license received from NERSA is one of the first granted as part of the recent allocation made for distributed electricity generation in order to plug the short-term capacity gap.

Haw says that SOLA will deliver the energy via the Transmission Network though a Wheeling Use-of-System agreement. “This Wheeling Use of System Agreement is the first of its kind and the largest solar PV wheeling arrangement in South Africa to date.”

Haw credits the company’s multi-disciplined skillset and 10-year track record of developing, financing and building solar PV projects in South Africa with overcoming the many challenges that were faced.

The SOLA Group has a history of breaking down barriers to enable renewable energy projects in South Africa. The group developed some of the county’s first IPP projects, signed the first bi-directional metering agreements with municipalities, and are responsible for innovative solar-plus-storage projects like the microgrid currently powering Robben Island.

The project will be majority black South African-owned, demonstrating a pivotal dedication to transformation in South Africa’s energy sector. Mahlako a Phahla Investments, a black women-owned and operated energy and infrastructure investment holding company will own 45% of the project.

Other investors into the project include African Infrastructure Investment Managers (AIIM), through the IDEAS Fund, one of South Africa’s largest domestic infrastructure equity funds and one of the largest investors in the country’s renewable energy landscape.

The project’s success could mean that more companies like Amazon will look to procure cleaner independent power through the grid.

“This project is the tip of the iceberg in terms of what the electricity picture in South Africa could look like,” says Haw. “Projects like this demonstrate the potential of a truly modernized electricity market where consumers can procure cleaner energy through state-owned grid lines whilst paying for their upkeep in the process,” he adds.

The project will begin construction in early 2021.