Law firm suggests govt recognise role of storage in energy regulation

Linda D. Garrow

As South Africa takes its first steps towards a just transition and as decarbonisation becomes a strategic imperative for heavy electricity users, the role of energy storage and hybrid technologies is becoming more relevant, says law firm Allen & Overy South Africa.

Electricity storage paired with renewable energy generation can contribute to meeting many of the challenges faced by the country’s electricity infrastructure.

Allen & Overy partner Alexandra Felekis argues that it has the potential to speed up the integration of low-carbon generation by delinking renewable energy production from low consumption periods; increase security of supply and reduce reliance on the grid; and potentially defer or avoid network reinforcement costs.

She adds that the decreasing cost of storage technologies, especially batteries, has the potential to incentivise large-scale storage projects under bilateral private supply arrangements between heavy electricity users and independent power producers.

In October 2021, Mineral Resources and Energy Minister Gwede Mantashe published an amendment to the Electricity Regulation Act (ERA) allowing for self-generation licence exemption for projects up to 100 MW.

“It is clear from Section 3.1 of Schedule 2 of the ERA, that if a generation facility includes energy storage, and the installed capacity of the generation facility is under 100 MW, then such a hybrid facility will only need to be registered with the National Energy Regulator of South Africa (Nersa), rather than be fully licensed by the regulator.

“However, it is not clear if the operation of a standalone energy storage facility will require a licence in the same way that operating a generation facility above 100 MW does.

“As it stands, the ERA is silent on this and so is the Amendment Bill. This leaves a major question on how South Africa will proceed,” Felekis states.

Allen & Overy expects South Africa to follow the approach taken by the UK’s Office of Gas and Electricity Markets (Ofgem).

The UK regulator treats electricity storage as a form of electricity generation because it has determined that generation and electricity storage share similar characteristics and perform similar functions in terms of generating and exporting electricity to the grid.

As such, Ofgem treats storage as a subset of generation (rather than creating an entirely new licensable activity) and it has proposed modifications to the existing generation licence to introduce specific conditions that just apply to storage providers.

Ofgem has defined electricity storage in very specific terms as the conversion of electricity into a form of energy that can be stored, the storing of that energy, and the subsequent reconversion of that energy back into electrical energy.

The use of this definition potentially excludes some key technologies and solutions, Felekis notes.

Notably, this definition excludes transformers, inductors and thermal energy storage solutions where the stored energy is used directly as heat rather than being re-converted to electricity before being used.

Power-gas-power systems, such as those based on electrolysis to create hydrogen, are also excluded under this definition – unless the system involves the creation of gas from electricity, and the subsequent storage and reconversion of that gas into electricity on-site.

“But there is a concern that if South Africa follows the UK in defining storage in this way, investors may be deterred from financing these valuable storage assets due to an obvious confusion about how exactly Nersa will treat them.

“We believe the South African government needs to create an environment where the market can recognise and reward storage and the critical role it can play in decarbonisation.

“However, this can only be done if it provides real and clear certainty around the treatment of electricity storage under the ERA licensing framework,” Felekis concludes.

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