The Energy Regulation and Markets Review - Stikeman Elliott

South Africa
South Africa’s electricity industry is characterised by a vertically integrated supply
chain with the substantial majority of its generation, transmission and distribution assets
being owned and operated by Eskom. Recent and pending revisions to the regulation
of the electricity industry have focused on the opening up of generation through the
facilitation of investment by independent power producers (‘IPPs’) and the transfer of
Eskom’s transmission assets and activities, including the operation of the integrated
transmission system, to an independent system and market operator (‘ISMO’).
In August 2011, the Department of Energy issued a request for qualification
and proposals for new generation capacity under an IPP procurement programme
for renewable energy generating capacity 3 (to be sourced from onshore wind, solar
photovoltaic, concentrated solar power, biomass, biogas, landfill gas and small hydro –
‘the RE-IPP Procurement Programme’) totalling 3.65GW. Eskom has been designated by
the Minister of Energy as the single buyer for all electrical energy produced pursuant to
this programme. Eskom also commenced its own tender programme for the construction
of a 100MW onshore wind project in 2011, which Eskom will own and operate. The
targeted commercial operation date for these projects ranges between June 2014 and
December 2016.
ii Coal
South Africa’s primary energy resource base is dominated by coal (77 per cent). Apart
from extensive domestic consumption including in the generation of electrical energy
(Eskom ranks first in the world as steam coal user and seventh as electricity generator),
about 28 per cent of domestic coal production is exported with South Africa being one
of the five largest coal-exporting countries in the world. Just over 51 per cent of South
Africa’s coal mining is done underground, the balance is done using open-cast mining.
Given changes in South Africa’s coal supply market towards global commodity
pricing and to facilitate its carbon emission reduction commitments, national energy
policy is keenly focused on significantly reducing the use of coal in the country’s electricity
generation mix. South Africa’s current 20-year new generation capacity plan proposes to
reduce coal participation in the electricity generation mix to 65 per cent.
iii Natural gas
South Africa’s fledgling upstream natural gas industry has limited potential. To date there
have been no onshore natural gas discoveries in South Africa. Domestic natural gas does
not form part of the country’s mainstream energy supply. South Africa has no gas-fired
electricity generation, however, its operational OCGT capacity which uses kerosene or
diesel-fired systems may be converted to gas-fired systems.
3 To date this is only the second procurement for new generation capacity from IPPs undertaken
by the South African government acting through the Department of Energy. The first
procurement for diesel-fired peaking power (1GW), which commenced in April 2006 has not
yet achieved financial close following delays linked to the withdrawal of the first preferred bidder,
the 2008–2009 global financial crisis and changes to the electricity regulatory framework.
238