Small-scale embedded generation in South Africa: Implications for energy sector transformation from a local government perspective

May 2018
By Anna Filipova and Mike Morris

1 Introduction: Energy sector transformations and the role of small-scale embedded generation

The rise of renewable energy globally was until recently driven by commitments to tackle climate change through the implementation of clean energy technologies. The 2015 Paris Agreement created significant momentum for the scale-up of clean energy generation technologies, as it aimed to stimulate policies which would restrict the global rise in temperature, caused by human impact, to below 2 °C (UNFCCC 2015). As a result of the Agreement, renewable energy considerations featured prominently in national policies, including the signatory countries’ nationally determined contributions and national development plans. The global community has clearly recognized and voiced support for the urgency to increase the adoption of renewable energy (RE) technologies as a climate change mitigation measure (Hermanus 2017; IEA 2016; Riahi 2015; UNECA 2016; UNFCCC 2015). These national objectives have until recently been implemented through incentive mechanisms, such as subsidized feed-in tariffs (FITs) and auctions, which made RE more attractive for private sector investors. Such policies were largely successful in creating an enabling environment, leading to a boom in the global demand for RE technologies. As a result, the cost of solar photovoltaic (PV) technologies has reached record lows, based on prices coming out of 2017 RE auctions: USD 0.032/kWh in Mexico and USD 0.024/kWh in Abu Dhabi (IRENA 2018). The global weighted average levelized cost of electricity1 (LCOE) for utility-scale solar PV decreased by 73% since 2010, reaching a record low of USD 0.10/kWh, based on projects commissioned in 2017 (IRENA 2018). 

As one of the signatories to the Paris Agreement and the world’s fourteenth largest emitter of CO2 (Global Carbon Atlas 2015), South Africa has made a commitment to diversify its energy mix by adding more than 20 GW of RE (NPC 2013), amounting to 40% of its current total generation capacity. Parallel to such policy commitments, South Africa suffered two severe supply crises in the period between 2007 and 2015, which became a key driver of the creation of the RE auction programme: the Renewable Energy Independent Power Producer Procurement Programme (REI4P) (Morris and Martin 2015). Deemed, until recently, ‘one of the world’s most successful and best-governed renewable energy procurement programmes’ (Eberhard and Naude 2017: 3), it added 2.15 GW of RE to the energy mix, and led to wind and solar becoming the cheapest new-build generation option, at an LCOE of ZAR 0.62/kWh, compared to ZAR 1.03/kWh for electricity produced by baseload coal and a projected cost of new nuclear of ZAR 1.09 /kWh (Wright et al. 2017). The REI4P had significant implications for the cost of RE technologies and was the first mechanism which allowed competition to enter the electricity value chain (VC), creating entry points for small-scale RE projects, such as small-scale embedded generation (SSEG) to enter the generation space. 

SSEG is part of a global trend towards decentralization of electricity generation. Internationally the phenomenon is known as distributed generation, signifying that the generator is situated at the point of consumption of electricity, rather than centralized, as power generation has been historically in the electricity VC. This form of electricity generation is increasingly seen as a solution to electrification issues in sub-Saharan Africa, where 30–40% of the population on average is rural (Turkson and Wohlgemuth 2001). For the purpose of this study, SSEG is understood as an electricity generation system with an installed capacity of less than 1 MWp,2 which is connected to the national grid, with the purpose of using the grid as a back-up system and feeding electricity back into the grid at a predetermined FIT. SEEG creates significant implications for actors and stakeholders along the VC via two main channels: i) it lowers the demand for electricity; and ii) it allows new players to enter the electricity generation space by utilising decentralized small-scale renewable energy technologies. SSEG therefore has the potential to become a disruptive force in the context of a highly vertically integrated electricity VC (Figure 1). 

Figure 1. South Africa’s electricity value chain with small-scale embedded generation

The South African energy sector has historically been highly politicized and is characterized by a highly vertically integrated electricity VC, which is dominated by the national electricity utility, Eskom. The electricity sector’s historical importance in terms of the country’s industrialization and economic development have made it a valuable token on the political agenda, creating huge vested interests for the key actors. This has contributed both towards solidifying the concentration of its governance in the hands of the central government through its largest state-owned enterprise and towards its path dependency on widely available resources for electricity generation, such as coal. SSEG is a disruptive force for this status quo.

As seen from Figure 1, Eskom holds significant rents in electricity generation, distribution and transmission along the VC, resulting in significant power over the governance of the VC and ability to prevent competition. Municipalities are responsible for less than half of the electricity being distributed, with Eskom supplying 58.2% of electricity to consumers in 2016, while electricity is a significant source of revenue for municipalities, with 35% of total revenue on average being derived from electricity. Electricity consumers play a critical role in determining the demand for electricity and have been negatively affected by the trend of rising electricity tariffs and load-shedding due to supply constraints. In this context, SSEG enters the VC at the points of the consumer and municipal distributor and changes the power dynamics in the VC by allowing consumers and municipalities to generate electricity. It therefore has important implications for the mandate of municipalities. This is why municipalities were selected as the focal point for investigating the implications of SSEG for the structure of the South African energy sector.

Between 2003 and 2015-16, Eskom’s residential tariff increased by 47% in real terms, while the tariffs to commercial consumers and local government (electricity distributors) increased by 141% in real terms (Figure 2). The rising cost of electricity has, therefore, been one of the key drivers of SSEG implementation both by municipalities and consumers. 

Figure 2. Eskom tariff increases in real terms (2015 prices)

SSEG is an opportunity for municipalities to tap into the function of electricity generation and sell their own electricity to consumers instead of purchasing it from Eskom. The South African Constitution of 1996 mandates municipalities with the right and authority to administer electricity distribution within their area of jurisdiction, subject to national and provincial regulation. In reality, electricity distribution is divided between Eskom and municipalities, each responsible for supplying electricity to about half of electricity consumers in the country. At the same time, municipalities have local development plans and policies, which increasingly incorporate climate change issues and deal with mitigation and adaptation strategies, a significant part of which is the implementation of RE projects. In addition, municipalities are key actors in meeting the government’s socioeconomic objectives at the local level through providing access to affordable electricity services, among others. SSEG presents itself as an opportunity for municipalities to fulfil these mandates despite any misalignments between national- and local-level agendas.

In the absence of an overarching policy clarifying and guiding the approach of the national government towards SSEG, many questions remain, creating a grey area for SSEG systems to thrive in. Despite the lack of clarity in terms of national level regulation of SSEG, municipalities have been allowing systems up to 1 MWp within a framework of local level rules or processes. This in turn has disrupted and introduced new dynamics into the historical structure of the energy sector in South Africa.  Read more

Download SA-TIED Working Paper 13/2018