DOE'S LOCKDOWN ON CONSENTING TO DEVIATION FROM THE PROVISIONS OF THE IRP

The above letter was received from the Department of Energy yesterday after a client of mine had requested consent to deviation by the Minister of Energy from compliance to the IRP in having a generation facility licensed (one of the conditions for granting of a licence under section 10(2)(g) of the Electricity Regulation Act (ERA)). So, no, it's not a hoax. I've seen the e-mail attaching the letter, which was sent from the Office of the DDG: Policy, Planning and Clean Energy.

This letter was sent to my client after his submission to the Minister that (a) his proposed generation facility did comply with the IRP and, (b) in the alternative, and in the event that the Minister didn't agree with his submission regarding compliance to the IRP, setting out why his proposed generation facility furthered the aims of all energy related policy and the “deviation” should be consented to.

The Electricity Regulation Act (ERA) is drafted in such a way that (amongst other things) generation facilities and trading must be licensed by the regulatory authority (NERSA), subject to the exemptions contained in schedule 2 to the Act (see below). 

The licensing process is extremely arduous and it has traditionally been very difficult for independent power producers (except for those participating in national procurement programmes - e.g. the REIPPP programme (renewable energy independent power producer programme)) to obtain generation licences from NERSA.

The Department of Energy (DoE) is well known to be actively protecting Eskom’s generation facilities (including the new incredibly expensive coal based generation facilities that are coming on line) on the basis that they do not wish State assets to become “stranded”.

This, notwithstanding the fact that renewable energy, apart from being clean energy, is becoming cheaper and cheaper. Based on Eskom’s price trajectory, the difference between the Eskom price (and therefore the Municipality prices which are informed by the cost of Eskom energy) and the renewable energy price will become larger and larger.

One of the licensing application criteria is that the applicant for the licence must show compliance to the current (please note - current) integrated resource plan (IRP), or provide reasons for deviation for the consent of the Minister. This is the method used by the DoE to (in my view) block the granting of new licences to independent power producers, because they deem any generation, apart from that procured under a national procurement programme to be non-compliant with the IRP. I believe this to be incorrect and an incorrect interpretation of the ERA and the current IRP, the IRP 2010.

Generators therefore prefer to rely on the exemptions from licensing which are contained in a schedule to the ERA.

These are :

1 Any generation plant constructed for demonstration purposes only and not connected to an inter connected power supply

2 Any generation plant constructed and operated for own use 

3 Non-grid connected supply of electricity except for commercial use

The first and third exemptions are hardly ever relied on. The second, the “own use” exemption has largely been used by rooftop photovoltaic (Rooftop PV) installations, which have interpreted “own use” very widely and applicable to a variety of situations, including, in some cases, differences in the entities constructing, installing, owning, operating, maintaining and/or using the electricity provided. 

NERSA’s view, quite simply, is that the "own use" exemption may only be applied when the electricity generated is used only by the owner or operator of the facility, for supply only to that person or entity and that the facility must not be situated on a property other than the one on which the electricity is generated.

“Own Use” is not defined in the ERA and it is therefore very much open to interpretation. Although NERSA does not agree with the view expressed by Rooftop PV generators, it has not taken any of them to task (creating a precedent?). This may be because if NERSA had to review all of the ensuing applications for generation licences their administrative burden would be overwhelming.

What has now happened is that there are proposed amendments to schedule 2, which I won’t go through in any detail, except to say that the current notice gazetted by the Minister of Energy provides for exemptions from licensing for certain qualifying categories of generators (under 1MW) and subject to a cap to be contained in the draft 2016 IRP, licensing for facilities of between 1 and 10MW s (but no requirement to apply for Ministerial consent to deviation – the big blockage in the system referred to above), subject to a cap, and for anything else – licensing, together with an application for Ministerial consent to deviation from the provisions of the IRP. All 3 of these categories will have to be registered.

Generation facilities which are currently exempt will continue to be and the new exemptions will apply to generation facilities going forward.

An application for a license is subject to a fee, and this is what the registration process will involve too. As there is no current registration procedure, it is not known what this fee is likely to be, or what the registration process will involve.

The most important (in my view) use of the “own use” exemption has been the traditional use of this exemption by co-generators who produce and consume electricity as a by-product of their core production process. If, for example, steam was not used to generate electricity, it could well be wasted. These are manufacturers who are large employers and material contributors to the country's GDP.

The existing exemptions have been amended or deleted. The current "own use" exemption no longer applies, except for facilities with a capacity of less than 1MW. Most importantly (I think) is that prosumers (e.g. co-generators) will have to apply for a licence for their (sometimes very large) generation for own use, which could render their core business expansions uneconomical.

As it stands, probably the most material adverse provisions in the Minister’s notice are those relating to the “own use” exemption, the low thresholds under the new proposed exemption provisions and the fact that the caps on the ability of potential generators to rely on the exemption provisions relating to facilities of up to 1MW, and the “licence lite” cap for generators of up to 10MW s still need to be published in a new IRP which is still to be gazetted in final form.

Some of the reasons for registering all facilities is (a) to decrease the administrative burden on NERSA in having to licence activities (no doubt, hopefully, the registration process will be relatively straightforward, but who knows?) and (b) to evaluate what generation is taking place, and where, for the purposes of planning.

It must also be borne in mind that safety issues play a large part in government’s concern about small scale embedded generation - e.g safety of those working on maintenance on a “live” grid, and this process will no doubt be subject to technical requirements relating to small scale embedded generators, which, in my view, is a good thing.

Although the DoE told the Parliamentary Committee on Energy that the new exemptions would be published by the end of September 2017, this hasn’t happened.

So, to sum up, the situation at present is that all generation for sale requires a generation licence (including a request for Ministerial deviation). The only exceptions are the 3 categories of generation contained in the schedule : demonstration plant; own use and off-grid generation.

Thus, it is obviously of prime importance to independent power producers that their Ministerial consents to deviation are granted. The (erstwhile, as of yesterday) Minister of Energy put out what seems to be a blanket response (see letter above) to those waiting for consents to deviation to be granted, to the effect that there is an excess of supply of electricity in the medium term, and that no Ministerial consents to deviation will be signed until after the new IRP comes into action. 

I’m concerned about a couple of things there. Government are notoriously bad at meeting their deadlines. The IRP 2010 was supposed to have been updated 2 years later (it’s thus more than 5 years out of date). Also the Minister refers to an excess of supply in the “medium” term. I’m not sure what that is, but in the current “Medium Term Risk Mitigation Plan” attached as annexure E to the IRP it refers to a period of 5 years.

In addition, there has been very little public consultation on what the new IRP will look like. There was extensive consultation on the Base Case scenario, but nothing else. The Minister refers to the embedded generation allocation which will be in the new IRP. The public hasn’t seen a draft which allocates energy to embedded generation, and yet, according to the (then) Minister of Energy, the public consultation phase has finished. 

Although there has been public consultation on the Draft Licensing Exemption and Registration Notice (published by the Minister) and which set out the proposed changes in the schedule 2 exemptions, it seems that the Minister now seems poised to put out a document which further restricts the allocations to embedded generation because facilities of between 1 and 10 MW s will now require licensing together with Ministerial consents for deviation. 

This is a material change to what was published by the Minister for comment, as the 1 – 10 MW allocation would have been subject to licensing and registration, but no Ministerial consent to deviation would have been required (subject to a cap which was to have been set out in the IRP). The bottom line is that, unofficially, but confirmed by a senior DoE official, anything above 1MW will now require Ministerial consent to deviation.

As an aside, I’m not sure how the DoE goes out in a fairly public letter and says that there’s excess of supply over demand, and, on the sidelines the DEA (note, not the DoE yet, but this will have to happen to get the project of the ground and authorise sales from the proposed generation facility) has granted authorisation for a 9 600 MW nuclear facility - coincidentally the exact amount allocated in what is apparently an IRP that is no longer being considered for the general public, as it is out of date.

There is no Ministerial Determination in place for that 9 600 MW facility – that was thrown out (together with the procurement process for nuclear) by the court in the Western Cape High Court judgment brought against the Minister of Energy, NERSA, the President etc. regarding the nuclear deal.