Unpacking Municipal Procurement

Draft amendments to the Electricity Regulations Act on New Generation Capacity were published by Mineral Resources and Energy Minister Mantashe for public comment, in May this year.  In broad strokes, the amendments will pave the way for municipalities, with good financial standing, to be able to either develop or obtain their own power-generation capacity from Independent Power Producers (IPPs).
At this point in time, the country has only a handful of financially sound municapalities, so although the current uptake may be greatly restricted, this decentralized way of procuring power is most certainly a game changer.
Municipalities are furthermore expected to align with the Integrated Resource Plan (IRP); comply with the Municipal Finance Management Act and the Municipal Systems Act; and align with the individual municipality’s Integrated Development Plan.
The regulations have attracted numerous comments to the effect that the guidelines do not go far enough in unfettering the procurement of power from IPPs by municipalities, with the City of Cape Town calling for a nationally coordinated renewable energy procurement programme through which municipalities can procure renewable power from IPPs.
The City of Cape Town has been fighting for the right to choose their own electricity suppliers, since 2017, when it filed its case with the High Court.  The most recent ruling, 11 August 2020, is that the City needs to first exhaust negotiations with the government on the matter, putting the decision back in the hands of the Minister and his Department.
There are several emerging questions that need to be addressed as the regulatory environment becomes more conducive for municipalities to procure power directly from IPPs. Additionally, there are problems that still need to be cleared to offer an even more conducive regulatory environment for the municipal sector in order to be an effective off-taker of renewable power.
One of these questions is whether wind energy will have a significant role to play in this market segment. Wind energy definitely has a role to play in the distributed generation space. Indications from industry experts are that distributed generation wind energy projects could be viable at a minimum size of 10 MW with a Power Purchase Agreement (PPA) length of 15 to 20 years. This works even better if the smaller projects are built alongside other big projects and source turbines simultaneously, to minimize costs. The opportunity for IPPs to pair up smaller and bigger wind projects, will be easier once the Renewable Energy Independent Power Producer Procurement Programmes (REI4P) get underway again.
There are various ways that IPPs can transact with municipalities with the idea of selling power and will need to be explored.  The first option is for IPPs to be selling directly to municipalities, in which case the consumer could connect directly to the municipality. The second option is that IPPs could be the municipalities’ virtual supplier from another point on the Eskom network.  And thirdly, IPPs could transact inside the municipalities through wheeling to customers that are on the municipal system, where the municipality becomes the carrier and not the direct off-taker. Any of these off-take arrangements could work, particularly if NERSA allows municipalities to establish a wheeling tariff.
Linked to the wheeling issue, is the question of how municipalities would deal with projects that are outside of their municipal boundaries.  If there were projects located outside municipal boundaries it would mean that the municipality would lose the associated economic benefit that comes with developing and building these projects. Some of the economic benefits include retention of investment, jobs, and socio-economic impact within municipal boundaries.
This also brings the question of whether the economic development elements of the REI4P such as socio-economic development obligations, enterprise development, and local empowerment support, would be carried through into a municipal procurement programme. Expert views seem to indicate that the municipal procurement programme will mirror the REI4P, but on a smaller and simpler scale.
Municipality’s capability to successfully undertake Public Private Partnership (PPP) procurement programmes, will be hampered by the limited number of solvent entities.  For this reason, a number of industry stakeholders would like to see the PPP procurement process expedited and supported by the IPP Office (IPPO). This way, the municipality then becomes the client of the IPP office, with support provided to both the IPP and the municipality to help them govern the contract, which will reduce risk of failure.
It is also worth noting that IPPs would have to take a long term view on the off-taker’s ability to pay, under the PPA or to pay for power that is generated. If the municipality fails to honour the PPA, assets would be left stranded, hence some form of guarantee is required to mitigate this risk. Alternatively, it is possible for IPPs to sell power directly to the municipality’s customers through a wheeling agreement, safeguarding them, should the municipality lose its ability to realise its commitment.