President Cyril Ramaphosa’s announcement on the 10th June, liberalising a significant part of the electricity supply industry, was as unexpected as it was welcome. Ramaphosa announced that the regulatory cap on electricity self-generation (also referred to as ‘embedded generation’) in South Africa would be lifted from 10 Mega Watts (MW) to 100 MW, opening the way for private firms to proceed with long-delayed projects without having to comply with onerous licensing requirements.

The proposed reforms, which require an amendment of the Electricity Regulation Act, will also allow companies which generate electricity to ‘wheel’ supply. Wheeling allows independent producers to generate power at the point where resources are located (solar in the Northern Cape province for instance) and then to sell it to a specific end user – typically a big company like a mine or industrial plant – in a different part of the country.

Some indication of the pent-up appetite for embedded generation among private sector players in South Africa is demonstrated by Amazon’s arrangements around its recent investment in Cape Town. The company, the world’s largest cloud computing firm, opened an African data centre in Cape Town last year. Not only is this an energy-hungry operation, like all data centres around the world, but Amazon has pledged to be using 100 percent renewable energy by 2025. Eskom’s ‘dirty’ coal-based supply is anathema to the global information technology giant.

The solution is to commission a 10 Mega Watt (MW) solar energy plant in the Northern Cape, currently under construction. Significantly, Amazon was given permission (by the National Energy Regulator of South Africa [NERSA]) to ‘wheel’ power through the Eskom transmission system to supply the data centre one thousand kilometres away.

It is important to note that this reform is only one part of what South Africa’s energy sector needs and that, beyond energy, there are bottlenecks which require action in other key areas, including information and communications technology, rail transport, harbour operation and the availability of scarce skills. Eskom plans to retire 13 000 MW of generation capacity within the next decade and embedded generation alone is not going to make up the difference.

But the near universal enthusiasm (from organised business, trade unions, commentators and political opposition parties as well as electricity parastatal Eskom itself) that has greeted the President’s announcement suggests that it has been perceived as a signal that a wider reform agenda is on the table. It is widely interpreted as the first success for Operation Vulindlela, the recently established investment climate reform unit which is located in the Presidency.

It was only six weeks prior to Ramaphosa’s announcement that Energy Minister Gwede Mantashe had tentatively lifted the cap from 1 MW to 10 MW. But Mantashe had been prickly and defensive about not going much further towards the 50 MW limit suggested by the President’s Economic Advisory Council. Mantashe, who was at Ramaphosa’s side during the 10 June announcement, suggested that the reform only happened after Ramaphosa had ‘twisted his arm‘.

Limited electricity supply capacity has bedevilled the South African economy ever since the power outages of January 2008 led to widespread production shut downs. Rolling outages (referred to as ‘loadshedding’) have been a feature of the South African landscape even since and have been perhaps the biggest hurdle to the country’s growth prospects. In March this year, the Bank of America identified electricity supply ‘challenges’ and the 4 000 MW shortfall in generation capacity as main risk to recovery from the Covid-19 recession.

Raising the cap on self-generation is widely seen as the most rapid way to bring additional generation capacity on stream. Mining companies have long argued that they were ready to do so but prevented only by red tape administered by the National Electricity Regulator of South Africa. At the Mining Indaba held in Cape Town in early 2020, Minerals Council of South Africa CEO Roger Baxter said the industry was awaiting precisely this sort of reform before installing 1 500MW of capacity. Other commentators have suggested that embedded generation could add 5 000 MW over the next couple of years.