Case Study Details - Playbook of Solutions - Raising License Threshold for Small Embedded Generation

Challenges to Investment

In 2021, South Africa faced the highest number of load-shedding hours since 2014, revealing increasing imbalances in electricity supply and demand. Load-shedding issues stemmed in part from the country's heavy dependence on aging coal-powered plants, managed by the state-owned utility company Eskom. Energy supply disruptions posed a significant challenge for industries such as mining, which require a consistent power supply to sustain operations. In 2021, total load-shedding – which represents the electricity demand that is not met – reached 2,521 GWh. With unserved energy demand expected to cost $6.13/kWh in 2021, the total cost to the economy from load-shedding was estimated at $15.5 billion. To combat electricity shortages, South Africa has focused its efforts on reducing energy market concentration, decreasing dependence on Eskom’s coal-powered generation fleet, limiting load-shedding in the short- and medium-term, achieving national energy security, and increasing the contribution of renewable energy sources.

Approach

Among other energy policy measures, in 2021, the South African Government waived the license threshold requirements for embedded electricity generation projects, raising the threshold from 1 MW to 100 MW. This change exempted projects below 100 MW from licensing obligations under the National Energy Regulator (NERSA), ending what was considered a time-consuming process for small projects. To maintain a well-organized system and ensure the ongoing stability of the grid, private generation projects that seek to utilize the grid continued to be subject to specific requirements. These included obtaining a grid connection permit from either Eskom or the relevant municipality; establishing a wheeling agreement with Eskom and the relevant municipalities for transfer across the grid; conducting a successful Environmental Impact Assessment; and securing a registration approval from NERSA to ensure the aforementioned requirements were met. Notably, renewable energy projects had the flexibility to operate in optimal locations, separated from energy consumption sites. The regulatory changes allowed large electricity users to directly source power from Independent Power Producers (IPPs) and transmit it through the Eskom grid. This arrangement empowered businesses to engage with IPPs, providing them with long-term price certainty.

Key Enabling Conditions

South Africa’s change to the license threshold and subsequent investment in clean energy were supported by a number of related conditions and policies. The implementation of a flexible electricity wheeling framework allowed the sale of electricity to clients in different grid-connected areas, which attracted investor interest in location-specific clean energy. Large users such as corporates and miners could buy electricity directly from IPPs, ensuring price certainty over the long term. Last, the threshold announcement itself helped to initiate an investment environment for small scale embedded generation, which endures today.

Impact / Outcomes

The government estimated that the threshold waiver could unlock up to $5.5 billion (ZAR 100 billion) of investment from 2021-2028. Those investments in turn could create 15,000 MW of additional generation capacity to support South Africa’s strained electricity system. In May 2022, following the threshold amendment, the first two private 100 MW solar projects were registered by NERSA. As of November 2022, the government estimated the pipeline of private embedded generation projects at 9,000 MW. South African mining companies were expected to invest in renewable energy projects worth up to $3.8 billion and comprising 3,900 MW of wind, solar, and battery energy projects, adding to the 585 MW of solar generation capacity that was already under construction.

The Government of South Africa has further proposed to amend the governing law, which would lift the threshold to 100 MW and remove licensing requirements for clean energy projects below the threshold permanently.

Additional Sources