Self-consumption and direct sale of electricity in South Africa: An option for German enterprises?

Electricity prices continue to rise strongly in South Africa. Due to improved legal framework conditions regarding the requirement to hold a licence for electricity generation, installations for self-consumption or direct sale of electricity could be an attractive alternative for energy-intensive companies in the future.

In the past, many manufacturing companies chose South Africa as a location for their production facilities due to favourable electricity prices, among other reasons. Since 2008 however, the electricity price has been continuously rising by more than 15% p.a. on average. Also for the coming years, further strong electricity price increases are expected.

In South Africa, there is no free choice of electricity supplier. Electricity is supplied either by the national electricity group “Eskom” or by the relevant municipality, depending on the region of the country where the electricity consumer is located. Generating more than 90% of the electricity, Eskom is also the dominant power producer in South Africa.

If an electricity consumer wishes to no longer be supplied with electricity by Eskom or a municipality they basically have the options of self-consumption or a direct purchase of electricity based on a power purchase agreement (PPA). Since the so-called wheeling is a relatively new feature in South Africa (one of the few known examples is a biogas plant supplying BMW) and requires individual negotiations with Eskom and/or the municipality, power production plants on a company’s own site are particularly attractive.

In the past, one of the major hurdles to such projects was the requirement to hold a licence for electricity generation (the so-called “generation licence”), which is issued by the national regulatory authority “Nersa”. Since a legal amendment in late 2017, however, the following six situations have been exempt from the requirement to hold an electricity generation licence:

Each of these exceptional situations includes further prerequisites. So, for exceptional situations 1 and 2, it is required, among other things, that the MW volume specified for grid-connected power plants of this type in the Integrated Resource Plan (“IRP”) has not yet been reached. The IRP is an official strategy paper determining the energy mix for the whole country. The current IRP does not yet provide for grid-connected self-consumption power plants; however, it is being revised and is expected to include them. Information on the current IRP and the planned revision may be found at http://www.energy.gov.za/files/irp_frame.html.

In all the six exceptional situations the registration of a power plant with Nersa will be required instead of obtaining an electricity generation licence. Details regarding this registration (registration procedure and fee) are not known yet.

Whether such power plants can feed surplus electricity into the national grid depends on the region where the power plant is situated because no nation-wide applicable provisions regarding feeding-in electricity exist and regulations are determined by the relevant municipality or by Eskom.

If a power plant feeds electricity only into the grid assigned to the specific land plot of a given company but not into the national grid it could fall within the scope of either exceptional situation 1 or 3. Which of these exceptional situations will be applicable in the individual case, in our judgment depends on whether feeding electricity back into the national grid can be prevented by technical means. Especially with solar, such a feature can be secured already when designing the installation and arranging the modules. Consequently, the operation of a power plant and the sale of electricity to a given consumer on the land plot would be exempt from the requirement to hold an electricity generation licence. Where an electricity generation licence is required for a given power plant, power producers are currently facing the challenge that grid-connected power plants have not been included in the latest IRP. In this case, Nersa requires them to obtain an approval from the Minister of Energy for a given project.

We recommend that energy-intensive companies in South Africa have their electricity consumption estimated based on a load profile in order to analyse possible advantages of using e.g. a rooftop PV installation on their own site for producing electricity for their own use or for direct sale via power purchase agreement. A power plant should be designed so that the prerequisites of one of the above-mentioned exceptional situations are fulfilled in order to avoid the difficult hurdle of obtaining an electricity generation licence. We expect that this legislative overhaul will result in an increase in the number of power plants on company sites (operated by the companies themselves or via PPA). The integration of such an energy-efficient power plant simply helps unlock the local potential and can, of course, be used as an advantage of South Africa as a business destination and create a competitive advantage. However, should load shedding become necessary again, this would have a considerable advantage in that backup power (from generators) would probably be much cheaper at such times. And, last but not least, the environment would benefit if power generated from black coal was replaced with electricity from energy-efficient installations.