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Nersa Should Take Eskom To Task Over Illegal Refusal To Sign PPAs

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Nersa Should Take Eskom To Task Over Illegal Refusal To Sign PPAs

11th November 2016

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The internationally acclaimed renewable energy independent power producer procurement (REIPPP) programme recently came under threat when Eskom CEO Brian Molefe indicated that the utility will not be signing power purchase agreements (PPA) with independent power producers after the current bid window, being round 4.5, has been completed. Molefe reasoned that the power utility could not afford to conclude these agreements, as it is compelled by government to buy at prices it did not negotiate. Shortly after this announcement, the state-owned utility delayed the signing of a 20-year PPA for the Redstone Solar Thermal Power Project which was developed by successful bidder SolarReserve as part of the REIPPPP.

The question arises, whether Eskom can legally refuse to sign the PPAs on the basis that it cannot afford to do so. In what follows I will briefly set out an overview of the regulatory regime which governs electricity planning before considering the legality of Eskom’s actions.

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Electricity planning occurs within a regulatory framework established in terms of the Electricity Regulation Act 4 of 2006. The Electricity Regulation Act empowers the Energy Minister to determine, after consultation with the National Energy Regulator of South Africa (NERSA), the regulator established in terms of the Electricity Regulation Act and the National Energy Regulator Act 40 of 2004, new generation capacity in order to ensure security of supply. As part of this power, the Energy Minister may also determine the types of energy sources from which electricity must be generated, the percentages of electricity that must be generated from each source and, importantly, that electricity produced must be purchased by a specific buyer.

The Electricity Regulations on New Generation Capacity requires that the planning for new generation capacity must occur within the framework of an integrated resource plan (IRP). The IRP published in May 2011 lays out the proposed new generation for the period 2010-2030 and calls for 42,6 GW of new generation capacity made up of 9,6GW of nuclear; 6,3 GW of coal; 17,8 GW of renewables; and 8,9 GW of other generation sources. The outcome is based on a multi-criteria decision-making process representing a balance of different government objectives including economic growth, job creation, security of supply and sustainable development.

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The regulations empower the Energy Minister, after consultation with NERSA, to make ministerial determinations relating to new generation capacity, in line with the IRP. The determination must specifically determine who will establish the new generation, Eskom or an IPP, and the identity of the buyer, or where applicable, the procurer and the buyer. Importantly, the determination is binding on the buyer. Therefore, if Eskom is identified as the buyer in a ministerial determination that requires new generation capacity to be established by an IPP, the determination is legally binding on it and it will have to fulfil all duties of a buyer, including purchasing electricity from the IPP appointed in terms of the relevant procurement programme.

In line with this power the Energy Minister has made various ministerial determinations for new generation capacity to be sourced from renewable energy technologies of which 17.3 GW has been for renewables and 13.2 GW specifically in terms of REIPPP programme. In each of the determinations relating to renewably energy, the following is clearly determined:

  • the amount of energy required to ensure energy security;
  • the source from which the energy must be obtained;
  • that it must be procured by means if the competitive bidding process; and
  • that the buyer is Eskom Holdings SOC Limited.

The determinations emphatically state that procurement must be undertaken with regards to the “urgent need to secure connection to the Grid as soon as possible” and that “the procurement programmes shall target connection to the Grid for the new generation capacity as soon as reasonably possible.”

It is therefore clear that Eskom is lawfully required in terms of the ministerial determinations made in terms of the Electricity Regulation Act to conclude PPA agreements – it does not have a discretion in this regard. Simply put, Eskom does not have the power to refuse to sign a PPA. To do so is illegal. Further, the ministerial determinations require Eskom to connect electricity produced in terms of the REIPPP programme “as soon as reasonably possible”. Eskom is therefore required to act expeditiously in ensuring access to the national electricity grid. Frustrating connection to the grid is in contravention of the explicit requirements stablished in the determinations.

In addition to the clear unlawfulness of Eskom’s refusal to sign PPA and to give access to the grid, Eskom’s justification for its actions is also spurious. Eskom states that the REIPPPP is causing it indefensible financial strain due to the fact that it is compelled by government to buy electricity from independent power producers at prices it did not negotiate.

It is so that the Electricity Regulations on New Generation Capacity requires all PPAs to meet the requirement of value for money. However, Eskom bears no direct financial cost associated with concluding a PPA agreement as these costs are passed through to NERSA via a regulated tariff mechanism established in terms of the Regulations. The Regulations provides that NERSA, when determining licence conditions relating to process, charges and tariffs, must ensure that the buyer (in this instance Eskom) is able to recover at least the full amount of costs incurred in respect of all payments made for the purchase of new generation capacity in terms of a PPA. In line with this legal requirement, NERSA has assured Eskom that PPA costs will be treated as pass-through for revenue regulation purposes. Eskom therefore has very little basis to claim that the REIPPPP is putting financial strain on its revenues based on this basis.

The more likely cause of Eskom’s financial strain is the introduction of competition in the market for the generation of electricity by means of the independent producer programme. This has resulted in Eskom actually having to compete with other market players in the supply of electricity, which it, as sole purchaser, is legally required to purchase. In the meantime, Eskom’s debt is increasing at an alarmingly rate catapulted  as a direct result of the contentious new coal-fired mega generator builds, Medupi and Kusile which is hugely over-budget and over-time.

In contrast a recent study by the CSIR confirmed that renewable energy has become cheaper with every round of competitive bidding: the cost of solar pv having dropped from R 1,51 R/kWh in bidding round 1 to R 0.62 R/kWh in bidding round 4 (expedited) and wind having dropped from a staggering R3,65 R/kWh in biding round 1 to R 0.62 in bid window 4 (expedited). The CSIR study further showed that new power from solar PV and wind today is at least 40% cheaper than that from new baseload coal today. The refusal by Eskom to sign PPAs under the Department of Energy’s IPP programme and to give access to the national grid is therefore not as a result of the cost of renewables but a veiled attempt to protect its own precarious financial situation due to poor investment in and management of new power plants.

Eskom should be held legally accountable to sign the PPAs and provide access to the national electricity grid. NERSA as regulator is the custodian and enforcer of the national electricity regulatory framework with far reaching powers and duties in terms of the. Importantly these duties include that NERSA must enforce performance and compliance, and take appropriate steps in the case of non-performance. Additionally, NERSA may mediate disputes between generators, transmitters, distributers, customers or end-users.

NERSA should therefore act in accordance with its legal powers and duties to hold Eskom legally accountable to sign the PPAs and to provide access to the grid. Immediate and authoritative action by NERSA is essential in order to assuage uncertainty currently faced by investors who see smarter grids with more decentralised and locally located renewable generators as sound investments. It will further enable South Africa to meet its greenhouse gas emissions commitments under the Paris Agreement on climate change which government has formally ratified on 1 November 2016 and which has come into force on 4 November 2016.

Written by Janah Miller, Senior Associate, Cullinan & Associates

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