Mantashe seeks comment on draft regulations enabling municipalities to buy own power

Mineral Resources and Energy Minister Gwede Mantashe has released, for public comment, draft amendments to the Electricity Regulations on New Generation Capacity that would enable municipalities “in good financial standing” to develop or procure their own power generation.

In a statement, Mantashe said the proposed changes were designed to give effect to President Cyril Ramaphosa’s State of the Nation Address (SONA) announcement that municipalities should be allowed to procure power from independent power producers (IPPs).

The City of Cape Town has for years been demanding to be allowed to contract directly with IPPs rather than Eskom and, in 2017, launched legal proceedings in an effort to secure that right, arguing that the Constitution mandated municipalities to provide power to customers.

Following Ramaphosa’s February SONA, Cape Town Executive Mayor Dan Plato “cautiously welcomed” the announcement, but the city did not withdraw the court case, which, ahead of the Covid-19 lockdown, was set down to be heard in this month.

Mantashe said the draft amendments were aimed at clarifying the regulatory regime applicable to municipalities for procurement or development of power generation capacity.

“The amendments will ensure orderly development that is in line with the Integrated Resource Plan 2019 and municipal integrated development plans. Furthermore, the amendments will also ensure that Section 34 determinations by municipalities are feasible as they will be issued on the basis that they are supported by a feasibility study with minimum requirements as spelled out in the regulations.”

The amendments stipulate, however, that municipalities apply to the Minister to establish new generation capacity and that such an application be accompanied by a detailed feasibility study.

Municipalities would also need to demonstrate “sound financial standing”, which the regulations define as an organ of State being a “going concern” and that the financial commitments to be incurred by acquiring new generation capacity can be met either through an existing budget or in accordance with future budgetary projections.

The draft amendment also stipulates that any power purchase agreement be subject to Public Finance Management Act, Municipal Finance Management Act and Municipal Systems Act provisions and approvals.

The public had 30 days from the May 5 date of Gazette notice to provide comments.

Initial reaction to the draft amendments was cool, with Professor Anton Eberhard of the University of Cape Town Graduate School of Business' Power Futures Lab tweeting: “But why do municipalities even have to ask the Energy Minister’s permission? South Africa’s power planning, procurement and regulatory regime is far too dirigiste. It needs overhauling. National power expansion plans should be indicative only and licensing procedures eased”.

Solareff’s DeVilliers Botha, meanwhile, told Engineering News that he was not “overly excited” by the draft, which merely allowed municipalities to apply to the Minister, who would still be able to decline their request.

“It is then not an empowering regulation in itself from which any action could be taken but simply opening a conversation with the Minister. It also does not necessarily say that municipalities may purchase power from IPPs such as what the City of Cape Town wants to achieve through their court case,” Botha added.

EE Business Intelligence MD Chris Yelland questioned why it had taken the Minister so many months to move to align the regulations with Ramaphosa’s SONA commitment.

"What amazes me is that it has taken more than a year since the 2019 SONA and Budget speech for the Department of Mineral Resources and Energy to prepare these minor tweaks to the regulations and prepare a draft for public comment. This could have been done in a few days at most, and it will no doubt take several months more for any changes in the regulations to be finalised and Gazetted."

Yelland added that the proposed new regulations might, on the one hand, be seen as a welcome new approach that paved the way for municipalities to build their own generation capacity and/or procure electricity from IPPs, while also enabling self-generation by municipal customers and signalling the end to the single buyer model in South Africa.

"On the other hand, the proposed new regulations may be seen as perpetuating a painfully slow, bureaucratic, central command and control planning-and-procurement approach, requiring additional feasibility studies by municipalities and specific ministerial permissions on a case-by-case basis, in a process that is both outdated, dysfunctional and no longer fit for purpose."

FALLING SHORT OF EXPECTATIONS

Meanwhile, Plato acknowledged that the draft regulations were "a step forward in this protracted matter".

However, he told Engineering News & Mining Weekly that the city intended continuing with its application to the courts for a declaratory order, as urgent clarity was required on the roles and responsibilities of municipalities and other stakeholders in terms of the New Generation Capacity Regulations. 

"The new draft New Generation Capacity Regulations allow a municipality to apply to the Minister of Mineral Resources and Energy for a determination in terms of Section 34 of the Electricity Regulation Act and require that this determination must be made in accordance with the national Integrated Resource Plan for electricity.

"All along it has been the city’s contestation that it does not require a Section 34 determination but that it is free to generate and procure electricity in terms with its statutory responsibilities to provide a secure electricity supply. The city, therefore, intends continuing with its application to court for a declaratory order," Plato said in a written reply to an Engineering News & Mining Weekly enquiry.

"As a staunch proponent of more affordable, secure, cleaner and diversified energy sources, the city has been putting pressure on national government for many years to reform the energy governance regime in South Africa for the benefit of our people and commerce and industry," Plato said, noting that the draft regulations fell short of the city’s expectations.

He said the city would be communicating further as more in-depth analysis is done on the regulations.