Embedded generation MW allocation - A welcome introduction, but what about small scale embedded generation (Under 1MW)?

The draft IRP Update allocates 200MW per annum for embedded generation-for-own-use of between 1MW to 10MW, starting in 2018. The activities that constitute embedded generation for own use are set out in Appendix E to the draft IRP Update and relate to the operation of a generation facility with an installed capacity between 1MW and 10MW, whether connected to the national grid or not, that is operated solely to supply electricity to a single customer or related customer (which includes different legal entities within the same group of companies). The allocation is not technology specific but rather determined by the installed capacity of the generation facility and the nature of the operation. 

Facilitating Market Growth 

The introduction of a MW allocation in the draft IRP Update for embedded generation facilities with an installed capacity between one and 10MWs is a welcome development aimed at stimulating the growth of the embedded generation market in South Africa. 

Under the current legislative framework, in order to undertake the activities listed as embedded generation in Appendix E to the IRP Update, an applicant has to apply for and hold a generation licence administered by National Energy Regulator of South Africa (NERSA). Given that there is currently no MW allocation for generation capacity of this nature in the Integrated Resource Plan 2010-2030 (IRP 2010), an applicant has to first obtain an exemption from the Minister of Energy from the obligation to comply with the IRP2010 in terms of s10(2)(g) of the Electricity Regulation Act, No 4 of 2006 (Act) before an application for a generation licence can be considered by the NERSA. 

In 2017, the Minister of Energy placed a moratorium on granting and processing any such ministerial exemptions until such time as the updated IRP is finalised and clear rules indicating system balancing are developed by the NERSA. This has significantly hindered the growth of the embedded generation market in South Africa as Independent Power Producers (IPP’s) have been unable to secure generation licences outside of the government procured Renewable Energy IPP Procurement Programme.  

By introducing a predetermined MW allocation in the IRP Update, an IPP will no longer have to obtain a Ministerial exemption prior to applying to NERSA for a generation licence provided that there are still MWs available under the capacity allocation for a particular year.   

It is however unclear at this stage 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.  

Unintended restrictions for embedded generation facilities with multiple offtakers?

The definition of embedded generation contained in Annexure E to the draft IRP Update restricts the MW allocation to generation facilities that are operated to sell electricity to a ‘single customer or a related customer (which includes different legal entities within the same group of companies)’. On the current drafting, if an IPP wishes to supply electricity generated to multiple offtakers, the IPP would not be able to take advantage of the MW allocation made available to ‘embedded generation’ in the IRP Update and would have to apply for a ministerial exemption, or obtain a ministerial determination in terms of s34 of the Act, prior to applying for a generation licence.  

Given that the inclusion of a MW allocation in the IRP is intended to facilitate the process of applying for a generation licence in respect of generation facilities with an installed capacity between one to 10MW, we would have expected the MW allocation to include embedded generation where the electricity generated is supplied to multiple offtakers and not only a single offtaker. Is this an unintended consequence of the current drafting or a deliberate restriction?

No allocation for Small Scale Embedded Generation

Surprisingly there is no MW allocation in the draft updated IRP for small scale embedded generation for-own-use up 1MW.  

In terms of Schedule 2 to the Act, a person is exempt from having to hold a generation licence when operating or owning a small scale embedded generation facility with an installed capacity of less than 1MW which is operated to serve either single or multiple loads, provided that the facility only supplies electricity to a single consumer or related consumers (which includes different legal entities within the same group of companies). 

However, various exemptions contained Schedule to the Act are linked to the IRP as one of the conditions to the exemption is that “the Minister of Energy has not published a notice in the Government Gazette at the time that the connection use of system agreement or the approval of the relevant licensed distributor is obtained stating that the amount of MWs allocated in the IRP for embedded generation of this nature has been reached”. It was therefore contemplated that any update to the IRP 2010 would contain a MW allocation for small scale embedded generation of under 1MW. The omission of a MW allocation in this regard contradicts the current application of Schedule 2 to the Act. It is unclear if the failure by the Department of Energy to include a MW allocation in the draft IRP Update is intentional or an oversight but further clarification should be sought particularly since a number of generation facilities falling within this capacity have been developed pursuant to Schedule 2 of the Act.

Contradictions and Overlaps

It is also noted that the draft IRP Update currently overlaps with the exemption contained in s2.5 of Schedule 2 to the Act. In terms of s2.5 of Schedule 2 to the Act, a person is exempt from having to obtain a generation licence where the electricity is produced from a co-product, by-product, waste product or residual product of an underlying facility that is operated solely to supply electricity to (a) the owner of the facility; or (b) supplies a customer that is related to the generator or the owner (as defined in the Companies Act) related customers by wheeling electricity through the national grid; or (c) a customer on the same property on which the generation facility is located. There is no restriction on the installed capacity of such generation facility.

The description of an embedded generation facility under Appendix E to the draft IRP Update encompasses the embedded generation facility described in s2.5 of Schedule 2 to the Act and consequently there is an overlap between what activity is exempted under s2.5 and what is described in Appendix E to the draft IRP Update as requiring a generation licence. Whilst the provisions of the Act will take precedence over the IRP from a legal perspective, the Department of Energy should clarify the position in the final IRP to avoid any unintended contradiction and market confusion. 

Where to from here…

Whilst the introduction of a MW allocation for embedded generation for-own-use between 1MW and 10MW 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 the NERSA. It also remains to be seen whether or not the annual capacity allocation is considered to be too restrictive to meet the increasing market demand for small and large scale embedded generation.