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South Africa does not use the feed-in tariff model. Its implementation was, however, discussed and contemplated in the past. Ultimately, instead of the FiT model, South Africa decided to implement a public auction model, which was launched in 2011. Certain municipalities allow the use of net metering for the export of electricity into the grid (read more in the “Self-consumption model” section).
It should not be expected that South Africa will implement feed-in tariffs in the medium term.
The market volume of the self-consumption model is steadily growing. This growth has been driven by the strong increase in electricity prices (by 15% p.a. since 2008 on average), the more frequent (planned) power shutdowns (“load shedding") and the enhanced legal framework. The regulatory responsibility for power plants of up to 1 MW operated for self-consumption purposes rests with municipalities. The municipalities that allow the operation of power plants for self-consumption purposes with a net metering option include the metropolises of Cape Town and Johannesburg. Power plants of up to 1 MW operated for self-consumption purposes do not require holding any electricity generation license, but must be registered with the municipality and the National Energy Regulator Nersa (Schedule 2 Electricity Regulation Act 4 of 2006). Net metering is a system where the amount of electricity fed into the power grid is deducted at a certain fixed tariff from the amount of the electricity drawn from the public electricity grid. A prerequisite for net metering is that the power producer must remain a net consumer. This means that, over a period of 12 consecutive months, more electricity must be purchased (imported from) than exported to the electricity grid (a credit against the bill is thus not possible).
Self-consumption does not enjoy any privileges, e.g. in the form of reduced levies or taxes on the self-consumed electricity. The process of registering the power plant with the municipalities and Nersa is not customer-friendly and is neglected by many. The fact that net metering is an option available only to net consumers and that the tariff is lower than the electricity price curbs interest in using this model.
More and more municipalities are allowing the operation of grid-connected power plants for self-consumption purposes. The last wave of load shedding of early 2019 led to a great boom in power plants operated for self-consumption purposes. Because of recurring power shutdowns and the restrictive net metering regulations, particularly sought-after are power plants operated for self-consumption purposes with battery systems. The outlook for power plants operated for self-consumption purposes remains positive.
In South Africa, utility PPAs are signed between Independent Power Producers (IPPs) and the state utility Eskom as part of the “Renewable Energy Independent Power Production Procurement Program” (REIPPPP). REIPPPP is a public auction program for renewable energy projects (generally for projects of at least 5 MW, but certain projects of between 1 and 5 MW are also eligible). REIPPPP covers technologies such as wind, PV solar, “concentrated solar power“ (CSP), small hydro, biomass, biogas and landfill gas. Within the framework of REIPPPP, the price to be paid by Eskom for the power generated by IPPs is determined by way of competitive bidding. Successful bidders are awarded power purchase agreements (PPAs) with Eskom for 20 years. So far, four auction rounds have been completed and 6,376 MW have been connected to the grid as part of 112 projects. Corporate PPAs are still rather an exception in South Africa and are concluded in rare cases only. This is mainly because it is difficult to obtain an electricity generation license. One of the pioneer projects is a biogas plant that supplies power to BMW assembly plant in South Africa.
As regards REIPPPP, prices have kept falling dramatically with each completed auction round and are now some of the lowest for grid-connected renewable energy. But because not only the price (70%) but also economic development criteria (30%) are taken into account when evaluating projects as part of REIPPPP, the sharply decreasing prices are a big challenge. The economic development criteria include, among others, job creation, local content, or percentage of black South Africans in companies’ ownership and management structures. PPAs to be signed with Eskom are non-negotiable, are denominated in South African Rand and include adjustment for inflation. After REIPPPP had stalled for nearly three years due to Eskom's refusal to sign PPAs with winners of the fourth auction round, confidence in the previously highly acclaimed program has been shaken. This standstill was, however, overcome following state intervention and the PPAs were signed. South Africa is currently waiting for the next auction round to start. As regards corporate PPAs, it should be emphasised that in line with the South African Electricity Regulation Act (section 7 Electricity Regulation Act 4 of 2006), basically every power plant must be licensed. But the Act provides for exemptions in certain cases (Schedule 2 Electricity Regulation Act). Such cases include grid-connected power plants with an installed capacity of up to 1 MW with or without energy wheeling. Because it is unlikely that the requirement to obtain an electricity generation license will be imposed on such projects, corporate PPAs are usually only possible for power systems of up to 1 MW. As regards the possible wheeling of energy, the challenges lie in the complex regulatory framework and the fact that wheeling has still been little in use in South Africa.
The fifth auction round of REIPPPP is planned to be held in 2020. As regards corporate PPAs, eagerly awaited is the planned increase of the license exemption limit from 1 MW to 10 MW. It should be expected that this increase will bring an upswing in the market of corporate PPAs.
Leasing is still a relatively new model in South Africa. First smaller companies are beginning to offer leasing of PV solar power plants mainly to private households. Local utilities (Eskom or municipalities) do not offer any leasing products. There is no specific legal framework in place, which means a high degree of freedom of contract.
According to the South African Electricity Regulation Act, the requirement to obtain an electricity generation license is not linked to the fact who owns the power plant but who operates it. This means that, unless the power producer is exempted from the licensing requirement, he must hold an electricity generation license irrespective of whether he owns or leases the power plant. Thus, there is no simplified regulatory framework [for leasing] and the lease model is alone an alternative form of financing.
Because costs of acquiring a power plant are one of the main hurdles in self-consumption, the lease model has great potential in South Africa. In addition, the recurring phases of load shedding increase the interest of energy consumers in breaking away from the national utility Eskom.
Other direct marketing models have not been much in use in South Africa. This is mainly because it is difficult to obtain an electricity generation license. A relatively new model is the energy exchange model. The currently only electricity trader is POWEREX, which procures and sells electricity generated from renewable resources.
Also here, power producers are faced with the challenge of obtaining an electricity generation license or, otherwise, they must not exceed the exemption limit of 1 MW.
The opening of the energy market is a highly politically charged issue in South Africa, because on the one hand Eskom is a state-owned, heavily indebted company and on the other hand many municipalities in the country are in financial difficulties and rely on income from the sales of electricity. This is why the opening of the market is going so slowly.
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Anna-Lena Becker, LL.M.
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