22 October 2019 by Energy Alert

The Integrated Resource Plan 2019: Distributed Generation MW Allocation

The Integrated Resource Plan 2019 (IRP2019) was approved by Cabinet and promulgated on 18 October 2019 by the Minister of Mineral Resources and Energy (Minister), Gwede Mantashe. In a welcome move, emphasis has been placed on the opportunity presented by privately owned and operated distributed generation (otherwise referred to as embedded generation) to address South Africa’s expected energy shortage in the immediate term as well as playing a part in increasing long-term capacity.  

“Other” Distributed Generation MW Allocation

The IRP2019 is an electricity infrastructure development plan based on least-cost electricity supply and demand balance, taking into account security of supply and environmental considerations. In essence, it aims to provide an indication of the country’s electricity demand, how this demand will be supplied and what it will cost.

The IRP2019 allocates 500MW per annum for “Other [Distributed Generation, Co-Gen, Biomass, Landfill]” commencing in 2023. For the period 2019-2022, there is no prescriptive MW allocation and instead, the IRP2019 simply provides for an ‘allocation to the extent of the short-term capacity and energy gap.’ The short-term capacity gap for the period 2019-2022 is estimated at 2,000MW in the footnote to Table 5 [IRP2019].

The MW allocation in the IRP2019 of 500MW commencing from 2023 for other distributed generation in the manner prescribed is an increase from what was previously put forth in the Draft IRP and is a welcome development aimed at stimulating the growth of the own generation and captive power market in South Africa.

What qualifies as “Other” Distributed Generation

The IRP2019 deviates from what was previously contained in the Draft Integrated Resource Plan released in 2018 (Draft IRP) in respect of the allocation for embedded generation. The Draft IRP allocated 200MW per annum for embedded generation-for-own-use with an installed capacity between 1MW to 10MW, starting in 2018. The allocation was not technology specific but was rather determined by the installed capacity of the generation facility and the nature of the operation.

The term embedded generation previously defined and referenced in the Draft IRP has been replaced with the term ‘Distributed Generation’ referring to “small-scale technologies to produce electricity close to the end users of power”. There is no specific limitation on the installed capacity of the generation facility nor on the nature of the operation. Rather, the determining factors are the location of the generation facility and that the technology used is considered to be small scale technology.

Other Distributed Generation for the purpose of the column titled “Other [Distributed Generation, Co-Gen, Biomass, Landfill]” in Table 5 [IRP2019] refers to ‘generation facilities in circumstances where the facility is operated solely to supply electricity to an end user customer within the same property with the facility’ and includes distributed generation capacity for own use.

Consequently, the capacity allocation for ‘Other Distributed Generation’ is only available for generation facilities that supply electricity to a single end user and the generation facility is located on the same property as the end user. This excludes generation facilities where the electricity generated is wheeled to an end user or where the electricity is supplied to multiple end users.

There is no guidance as to what is considered to be ‘small scale technologies’ for the purpose of qualifying as distributed generation and there is no specific reference to the installed capacity of the generation facility. The Department of Mineral Resources and Energy (DMRE) has previously indicated that the allocation to be made available in this manner would be restricted to generation facilities with an installed capacity of no more than 10MW for the purpose of facilitating the issue of generation licences. The idea being that generation facilities with an installed capacity of greater than 10MW would have to seek an exemption from the Minister as detailed below. The DMRE will need to provide the market with further clarify in this regard.

Application for a Generation Licence

Under the current legislative framework, an applicant has to apply for and hold a generation licence administered by National Energy Regulator of South Africa (NERSA) in order to operate a generation facility and sell electricity (unless otherwise exempt). In terms of s10(2)(g) of the Electricity Regulation Act, No 4 of 2006 (Act), an applicant has to demonstrate that it complies with the IRP2019 by evidencing that there are available MWs allocated in the IRP2019 to the technology and type of generation envisaged, failing which, it has to obtain an exemption from the Minister from the obligation to comply with the IRP2019 before an application for a generation licence can be considered by NERSA. Historically, applicants have been unable to secure such ministerial exemptions which has resulted in significant delays to the development and implementation of projects.

By introducing a predetermined MW allocation in the IRP2019, an Independent Power Producer (IPP) looking to install a ‘small scale’ generation facility that is located on the same property as the end user (Including where electricity is consumed for own use) will no longer have to obtain a ministerial exemption prior to applying to NERSA for a generation licence provided there are still MWs available under the capacity allocation for “Other [Distributed Generation, Co-Gen, Biomass, Landfill]” for a particular year. This development will facilitate the processing of generation licences by NERSA.

However, an IPP looking to install a generation facility that is not located on the same property as the end user and instead electricity is wheeled to the end user not located on the same property and/or intends to sell electricity generated to multiple end users would not be able to utilise the capacity allocation for “Other [Distributed Generation, Co-Gen, Biomass, Landfill]” when applying for a generation licence. Pending further clarification on how the DMRE intends to allocate the capacity allocated for the other technologies (Wind, PV, Hydro) detailed in Table 5 [IRP2019] through the issue of a ministerial determination made under s34 of the Act, it is unclear as to whether there will be available MWs in the IRP2019 for such projects and it is likely that any such IPP will still have to seek an exemption from compliance with the IRP2019 from the DMRE in terms of s10(2)(g) of the Act.

It is also unclear as to how NERSA intends to deal with the current backlog of generation licence applications that have been made over the past year(s) and whether this will be dealt with on a ‘first come first serve’ basis or another method of adjudication.

There are no policies and regulations in place currently to regulate the application of the IRP2019 and the issue of generation licences by NERSA. In terms of the Act, NERSA is required to issue rules designed to implement the IRP. It is notable that NERSA has not issued any such rules since the IRP was first published.

Micro Grid and Off-Grid Solutions

The IRP2019 does not include any capacity allocation for off-grid generation facilities. In this context, off-grid refers to generation facilities that are not interconnected with the grid. An IPP looking to install, operate and sell electricity from an off-grid generation facility with an installed capacity in excess of 1MW (or does not comply with the exemption under Schedule 2 to the Act) will need to apply to the Minister for an exemption from compliance with the IRP2019 in order to obtain a generation licence from NERSA.

It is acknowledged in the IRP2019 that there is a need to still quantify the off-grid and micro-grid opportunities and to put in place the necessary frameworks for accelerated development.

Where to from here…

Whilst the introduction of a MW allocation for such ‘other’ distributed generation is a step in the right direction towards driving the private sector generation market, the success of this will largely be driven by the implementation of this capacity allocation by NERSA when issuing generation licences. NERSA also needs to issue appropriate regulations and policies in order to regulate the implementation of the IRP2019 and to provide the market with further clarity on the interpretation and application of the IRP2019.

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