South African high energy consumers should consider installing their own “off the grid” private renewable energy power plants as a potential solution to the power supply deficit and the increasing price of electricity in South Africa.

China-based entities have been chosen to construct and commission South Africa’s first decentralised utility-scale diesel/photovoltaic hybrid captive power plant to provide power to a chrome mine in Limpopo.  Given the government’s current focus on alternative energy sources and its interest in moving electricity off-grid, there is little doubt the development and operation of captive power plants will become increasingly popular in South Africa.  We have already seen increased interest from various international players in developing these generation facilities. 

South Africa faces capacity constraints due to increasing energy demands.  The government aims to alleviate the problem through its integrated resources plan.  Despite the use of other electricity forms, the price of electricity may increase dramatically for consumers.  Eskom has applied for a 16% annual increase in average electricity tariffs over the next five years, from as early as April 2013.

Electricity is a large cost component in the mining industry, for instance, and if tariffs are increased, many South African mines will face negative economic implications.  Relying on off-grid or captive power plants to generate electricity allows large users to enter into a private power purchase agreement.

The benefits of installing a captive power plant include having access to a reliable, consistent and uninterrupted power supply, reducing dependency on diesel driven power with a more predictable output, a reduction in the cost of electricity given that it is off-grid and a price can then be set independently. More accurate forecasting of energy spending ensures better control over profit return and growth.

A captive power plant agreement is likely to be rigorously negotiated.  Negotiations will include whether to build a private transmission line or to negotiate with Eskom to connect to the grid. How to structure the ownership and financing of the captive power plant for satisfactory risk allocation to all parties is relevant.  So is the question of whether it will be viable to store any excess electricity for use during peak hours or for sale back into the national grid.  The Electricity Regulation Act, 2006 will regulate the generation license.

Written by Katia Mengel, director and Amy Sandys, associate designate, Norton Rose Fulbright South Africa