South Africa’s new grid capacity allocation rules challenged in court by IPP

• Wind project developer, G7 Renewable Energies, has turned to the courts to challenge the new Interim Grid Capacity Allocation Rules set by Eskom citing that they are unlawful, unreasonable and irrational.

In June, Eskom’s general manager for operations enablement, Velaphi Ntuli, announced that new rules will apply for grid capacity allocation in the country. The new ‘Interim Grid Capacity Allocation Rules’ are aimed at addressing levelling the playing fields between independent power producer (IPP) projects participating in the country’s Renewable Energy Independent Power Producer Programme (REIPPPP) and private sector IPP projects participating in distributed generation which includes wheeling. Both sectors are currently competing for limited grid capacity in South Africa.

The country has seen a flood of private sector projects totalling 9789MW since the amendment of Section 2 of the Electricity Regulation Act by the Department of Mineral Resources and Energy (DMRE) in August 2021, which allows the operation of a generation facility with a capacity of up to 100MW without obtaining a licence from the National Energy Regulator of South Africa. The projects are made up of 2899 MW of solar photovoltaic PV and 6890MW for wind energy facilities. Read more.

At the same time, the country’s Minister of Mineral Resources and Energy, Gwede Mantashe, recently announced that his department will open Bid Window 7 in July to procure an additional 5000MW of renewable energy plus Bid Windows 8 later in the year which will procure another 5000MW. In addition, he said the second and fourth quarters will see further requests for proposals for the procurement of battery storage with a capacity totalling 1 230MW. He also announced that a request for proposals for the procurement of gas-to-power, totalling 3 000MW, will be issued in the second quarter. He added that a bid for proposals for the procurement of 2 500MW of nuclear energy will be open in the fourth quarter. Read more

Ntuli explained that the new rules will ensure that shovel ready projects will connect to the grid in good time. “We can’t continue to have a situation where capacity is allocated, and capacity is not used. We need to work together to ensure we have these minimum things in place so that guaranteed generation capacity is added to the grid”.

Under the old system REIPPPP project bidders are not allowed to secure feed in capacity until they are awarded preferred bidder status.  The grid access problem was highlighted by the outcome of REIPPPP Bid Window 6, where 23 wind projects totalling over 3.6GW of capacity were set aside because the grid access capacity allocation had already been taken up by other private off-taker projects in those project locations. Read more

In a further twist,  projects that have been awarded preferred bidder status in REIPPPP Bid Window 5, who have managed to secure grid allocation capacity, have struggled to reach financial close. Ntuli explained that in such cases, Eskom is working with the Independent Power Producers Office to finalise the status of the projects that have taken up grid allocation in various power procurement programmes which have failed to reach financial close.

Seetsele Seetswane, engineering manager at Eskom, added that issues with the emergency procurement projects hogging space had caused delays for Bid Window 5 of the REIPPPP and, consequently, Bid Window 6. “As we now get ready to Bid Window 7, the problem is getting worse. That is why we developed the rules,” said Seetswane.

Eskom made a call for comment on proposed amendments to the grid code in early March this year to ensure a non-discriminatory queueing system for grid access for new generation projects for IPP’s.

Seetswane added that if a project does not follow through and meet set out timelines then their grid allocation will be revoked. Eskom will then also draw down on the guarantee for the damages caused by delays.

The interim rules are a short-term solution, said Seetswane. In the long term, Eskom will ultimately be expanding grid infrastructure to connect more projects.

The new rules will first be implemented in the Western Cape where there are around 40 projects with a capacity of under 5GW that Eskom needs to finalise allocations for. Eskom will issue them letters to submit outstanding information required by the new rules.

From 7 July, Eskom will assess projects against the readiness criteria. It intends to give notice of whether the criteria have been met by 31 July. The projects deemed ready will have 15 days to provide Eskom the guarantee. Thereafter the allocation of grid access will continue.

Seetsele Seetswana says the new rules retain the principle of non-discriminatory and open access, but reports that Eskom has reserved the right to set aside allocations for future public procurement programmes to avoid a repeat of the failure of bid window six.

In line with the ‘first ready, first served’ principle, Eskom outlined the following new criteria:

• All permitting, including environmental impact assessment and water-use authorisations must be in place
• A power purchase agreement, including heads of terms must be in place between IPP and the off-taker
• Confirmation of the appointment of Eskom-approved design consultants for self-build connections
• Solar performance assessment for one year in the case of solar PV projects
• Wind energy performance assessment for two years in the case of wind projects
• The payment of a Grid Capacity Allocation Guarantee issued by an Eskom-approved financial institution.

Only once these conditions have been met will Eskom issue a budget quote for grid connection, while still reserving the right to revoke such a quote should there be a failure on the part of the IPP to meet any of the milestones outlined above.

The South African Photovoltaic Association (SAPVIA) welcomed the grid capacity guidelines. However, Frank Spencer, spokesperson for SAPVIA said that Eskom’s new rules may have gone too far in terms of the requirements and expressed some concerns about how legally binding they are. He added that solar project developers will be spending a lot more money on development works and will be taking on a significant amount of additional risk, with no assurance of grid allocation capacity under the new rules. Spencer added that some parts may need to be repealed.

Niveshen Govender, CEO of the South African Wind Energy Association says that while they comprehend the challenges faced by the Utility, it is concerned about the onerous criteria imposed.

“As outlined during the engagement session, the proposed rules that include the primary energy resources assessment, which for wind is two years of measured data, is in our view, an unnecessary and unreasonable requirement and could potentially delay the implementation and roll-out of new wind projects,” stated Govender.

SAWEA points out that investor confidence in the South African energy sector, continues to dwindle and that from an economic standpoint, urgent consideration for investor perspective is essential.

“We need to consider how investors’ views on the rules and position in the market will be impacted should the Utility’s process not take into consideration a holistic approach as far as the criteria are concerned. Furthermore, given the current state of the energy sector, a better environment is requisite to attract much needed investment, in order to urgently bolster our electricity network with new generation capacity,” he added.

A South African power-project developer is now seeking to have the new rules dismissed citing flawed process and that they will impair the addition of much needed generation capacity.

The CEO of independent power producer G7 Renewable Energies, Kilian Hagemann, has since file court papers arguing that the new rules are unlawful, unreasonable and irrational. Kilian further argues that the new rules will also compel applicants for access to undertake procedures which are onerous and prejudicial.

G7 Renewable Energies is involved in two wind farms identified in the court papers that are not part of a government program to buy power from producers but will provide electricity to private customers.

Author: Bryan Groenendaal