Policy: Renewable power plans and Green Hydrogen
In early November, President Cyril Ramaphosa confirmed that South Africa secured $8.5 billion from developed nations at the COP26 to accelerate the country’s green transition. The acceleration is focussed on phasing out coal and supports investment in green hydrogen energy production.
Significant developments on this front include:
- An announcement by Deputy Minister of Trade, Industry and Competition, Fikile Majola’s at the webinar Hydrogen Economy – An Opportunity for South Africa to Create an Inclusive Energy Sector with Significant Black Participation in October of last year confirming that the department was in the process of reviewing its Critical Infrastructure Program to alleviate infrastructure costs associated with hydrogen production, fuelling and transport facilities.
- In October, government and private-sector partners released a feasibility study identifying three green hydrogen hubs to form a hydrogen valley as well as nine pilot projects in the mobility, industrial and buildings sectors. It also examined opportunities for the export of green hydrogen.
- In September, government approved the development of the Hydrogen Society Roadmap intending to prepare South African for a hydrogen economy. The roadmap is being developed by the Department of Science and Innovation, Hydrogen South Africa (HySA), government and industry stakeholders, focussing on national ambitions, sector prioritisation, overarching policy framework and the macro-economic impact of the hydrogen economy.
- In July, Sasol Limited and the Industrial Development Corporation (IDC) concluded a memorandum of cooperation to jointly develop and shape an enabling environment to advance South Africa’s green hydrogen economy. At the Africa Green Hydrogen Forum, held in November, Sasol announced that it aimed to start producing green hydrogen by 2023.
- In June, the Super H2igh Road Scenario for South Africa report was published demonstrating the economic growth potential of green hydrogen, specifically for South Africa to become a key exporter and cutting its greenhouse gas emissions by 70%, if it were to capitalise on opportunities presented by the hydrogen economy.
- In May, German development bank KfW initiated a EUR200 million program to support the establishment of green hydrogen projects in South Africa. The Council for Scientific and Industrial Research (CSIR) and Meridian Economics were appointed by KfW to help it identify and evaluate high-potential projects for implementation.
- Finally, in April the Department of Trade, Industry and Competition outlined the steps it had taken to support the development of the green hydrogen economy in South Africa, including partnering with the private sector in funding opportunities across the hydrogen value chain, and the start of the local production of fuel-cells.
This year will most certainly see further developments in advancing South Africa’s hydrogen energy potential.
This trend will hopefully expand into clearer policy and a sense of urgency for self-generating energy projects. Members of the Minerals Council of South Africa have 3.9GW of renewable energy projects lined up with mining companies ready to contribute 13% to South Africa’s generating capacity. Stakeholders have noted issues with getting these projects off the ground, including issues around Eskom’s transmission to send power from the new plants to mines if they are separately located as well as the sale of excess power into the national grid or to other users. The planned energy projects can contribute significantly to economic growth and job creation. Notwithstanding Eskom’s process to auction off land, sectors are showing willingness to invest large amounts into self-generations projects and, as such, government will have to work expediently to remove barriers in the approval process.
NERSA, the Gas Amendment Bill and sector challenges
The proposed Gas Amendment Bill contemplates dealing with a number of regulatory gaps that limit the powers of Nersa to regulate maximum prices and tariffs for different parts of the gas industry. The Bill that has been in the pipeline for eight years, aims to provide for new developments and changing technologies in the gas sector as well as the facilitation of gas infrastructure development and investment. In public hearings held by the Mineral Resources and Energy Committee in early December, the Bill was describe as providing for the promotion of the orderly development of the gas industry and broad-based BEE.
As part of the ‘gas master plan’ the Department of Mineral Resources and Energy published an earlier ‘base case report’ in order to call for stakeholder input. The plan was envisaged to serve as a policy instrument to inform strategic, political and institutional decisions in guiding the gas industry in investment planning and co-ordinating implementation. The report detailed gas sector prices and tariffs, discussed domestic gas reserves and resources, and explored gas utilisation options. It also covered existing gas infrastructure and related ‘short-term plans’ as well as the broader gas economy.
During the hearings, submissions were made on behalf of Tetra4, an emerging gas producer that holds the only onshore petroleum licence issued by the Department of Mineral Resources and Energy. Tetra4 called for the Bill to be amended so that Nersa can set maximum tariffs only in concurrence with licensees whose profitability will depend on those tariffs. Submissions on behalf of the business organisation Sakeliga objected to the provisions in the Bill that obliges the promotion of BEE, which also contemplates that Nersa can suspend a licence in case of non-compliance. The organisation pointed to the impact of this requirement on the development of enterprise and the possibility of it acting as a deterrent for investment.
Tetra4 further submitted that the proposed amendments could lead to an ambiguous licencing and regulatory regime for domestic gas, which is already regulated under the Mineral and Petroleum Resources Development Act. The same activities would, as such, be regulated by multiple regulatory instruments.
Nersa welcomed the proposed amendments arguing that the current legislative framework enables monopolising companies to charge exploitative gas prices. The amendments, Nersa contends, will assist in third parties having access to network infrastructure thereby promoting transformation and inclusion.
The Offshore Petroleum Association of South Africa (OPASA) raised concerns regarding the complex and varying nature of gas prices and Nersa’s capacity to set tariffs and prices to differentiate how projects and entities would operate. Giving Nersa this power would restrict entities to trade freely at competitive prices, discouraging investment. OPASA further argued that granting exclusive rights to sell and distribute within a specific geographic area will create geographic monopolies and encourage anti-competitive behaviour.
Sasol’s Vice-president for legal: energy, JP Meintjies, noted that commodity prices such as gas are difficult to successfully regulate as regulators cannot foresee market dynamics, provide flexibility, cater for multiple sources of supply and accurately value for specific applications. Meintjies further pointed to the dangers of a one-size-fits-all approach that will not be suitable for all sectors in the gas market and he called for the current framework to continue, specifically, that Nersa should only have to power to set maximum prices.
ESKOM: Private Renewable Energy Projects, environmental compliance, tariffs and profitability
In December, Eskom reported a 4000% improvement for a six-month period at the end of September. It is however, still expecting to incur a R9.1 billion loss at the end of the financial year in March. Eskom’s earnings were up by 58% through 8% growth in electricity sales volumes and a 15.06% tariff increase during the same period. CFO Calib Cassim noted that certain key metrics are improving as Eskom’s assets are now exceeding its liabilities, something that has not occurred in a long time. The recovery was largely due to the easing of lockdown restrictions that meant a return to operations in many sectors. Eskom stated that the fourth multi-year price determination (MYPD 4) along with successful court review applications resulted in the 15.06% tariff increase for direct customers from 1 April 2021 and from 1 July 2021 for metropolitan and municipal distributors.
CEO André de Ruyter did however warn that the seasonality of Eskom’s performance means that there will be cost pressure in the second half of the financial year, driven by summer maintenance requirements and costs for ensuring the security of supply. This is against the background of Eskom’s proposed 20.5% tariff increase for 2022/23 from 1 April for non-municipal customers and 1 July for municipal customers, citing the requirement to increase purchases from independent power producers and increase in carbon taxes as justification. Nersa will decide the tariff on the legislation methodology. Nersa does not often grant Eskom’s proposed increase, usually citing certain costs to be ruled out because of inefficiency.
Eskom’s applications to postpone the implementation of its compliance with pollutions standards in terms of the National Environmental Management: Air Quality Act was denied. Eskom noted in a statement that the decision regarding its minimum emission standards for five of its coal power stations will have a significant impact on its ability to provide electricity as it would have to shut down 10 000Mw of installed coal-fired capacity. Eskom noted that it is engaging in ongoing discussions with government on how to move forward, detailing plans to move to cleaner energy.
Importantly, Eskom plans to make land available to private investors for renewable energy. Eskom initiated an auction process in a move to remove significant barriers to private investment for renewable energy projects. The competitive bidding process is set to start on earmarked land in Mpumalanga, the province with the most coal-fired plants. The bidding criteria involves the size and speed of delivery of generators in order to, as soon as possible, relieve the constraints on the power system. This is a welcomed development against the IMF’s statement this last week regarding the need for Eskom to reduce its footprint in the sector and compete on a level playing field with private participants including producers of renewable energy.
