SA municipality seeks approval to generate 400 MW

From the newsletter

The eThekwini Municipality has applied for ministerial approval to procure 400 MW of electricity from independent power producers. This comes after the Electricity Regulation Act (ERA)  2023 came into effect in January 2025, which creates an open electricity market. Municipalities can now source electricity from independent power producers.

• The municipality's application is seeking to procure 100 MW of solar photovoltaic (PV) and 300 MW of natural gas. This is part of a broader goal of diversifying its energy mix and moving away from the expensive Eskom electricity, the national power utility provider.

• It has set a short-term target of reducing its reliance on the national grid by 20% in 2025, with a further plan to reduce reliance by 40% in 2030 and achieve energy independence by 2035.

More details

• Under the previous regulations, Eskom and IPPs were the only entities allowed to generate electricity. IPPs, however, could only sell this electricity to Eskom, who would then sell it either directly to consumers or to municipalities who would then sell it to end consumers. Eskom and municipalities share the market in a 60:40 ratio of customers respectively.

• The current Electricity Regulation Act has liberalised the energy sector, permitting any entity to participate in the electricity supply chain, provided they meet the licensing requirements set by the National Energy Regulator of South Africa (NERSA).

• This previous monopolistic market structure led to inefficiencies and contributed to load shedding. Additionally, Eskom's escalating electricity prices for both consumers and municipalities have prompted many to seek alternative solutions. Consequently,  customers are increasingly turning to self-generation to reduce their reliance on Eskom and municipal suppliers.

• eThekwini and Cape Town are some of the municipalities that have expressed interest in sourcing electricity from independent power producers as a way of avoiding the expensive and unreliable Eskom electricity. eThekwini plans to procure 2,600 MW of new generation capacity over the medium to long term.

• The South African market has experienced quite a big shift, with many large-scale customers switching away from the grid. About 3 GW of commercial and industrial solar capacity was installed in the last two years alone as load shedding worsened in 2023. The grid has, though, improved, going 10 months without load shedding, but the nearing winter is expected to strain the grid with possible load shedding.

Our take

• The liberalised energy market opens opportunities for Independent Power Producers. They can now generate electricity and sell it to any interested customer. IPPs can therefore diversify their customer base and target entities where they can secure favourable power purchase agreements and ensure profitable returns.

• The change in regulatory space, allowing municipalities to source electricity from IPPs, is set to increase competition. This challenges Eskom's historical dominance and forces them to become more efficient and customer-centric to retain market share. Moreover, Eskom will be forced to adopt renewable energy generation to meet market sustainability demands.

• The rapid adoption of renewables signals more opportunities for IPPs. However, one significant challenge they need to overcome is access to low-interest loans. This would enable them to structure lower-priced power purchase agreements to compete effectively. Banks can play a crucial role by creating specialised loan terms for the energy sector, ensuring access to competitive financing and generating good revenue flow for themselves.