Given the current initiatives to promote private investment in the South African electricity market, the execution of the power purchase agreement between BMW South Africa and Bio2Watt’s biogas plants that will bring “renewable energy” to BMW’s manufacturing plant in Rosslyn, Pretoria is sure to blaze the trail for new private power generation and offtake markets in South Africa.
Projects like the Bio2Watt biogas plants are providing the template for future renewable energy projects that will invigorate South Africa’s undeveloped carbon trading market at the same time as reducing the carbon footprint and the Eskom electricity bill of private offtakers such as BMW South Africa.
The power is being generated by two biogas power plants developed by Bio2Watt. Norton Rose Fulbright advised the Industrial Development Corporation of South Africa in relation to the financing, construction and operation of the first of the two plants.
The biogas plants rely on feedstock predominantly from animal manure and some organic waste (including ice cream!) supplied from a number of sources pursuant to long term supply agreements. Energy will be supplied to BMW by wheeling the energy from the power plant through Eskom and municipality grids. Wheeling is the flow of energy generated by a power plant across the grid to a third party buyer. The available grid system between generator and offtaker transmits the power in return for the payment to the system operator of specified wheeling or connection charges. Wheeling contemplates the financial flow of energy between the parties and not the actual electrical flow.
Deregulation and unbundling
The infamous Independent System and Market Operator (ISMO) Bill continues to inch its way through the legislative process. Its objective is to create an autonomous state-owned company that will be responsible for the operation of the grid, planning for new generation capacity, purchasing energy from various generators, including independent power producers, and electricity trading at a wholesale level. Eskom will no longer assume these roles and the ISMO will be independent from activities related to energy generation to ensure equal treatment of all generators and fair access to the grid. When the ISMO finally arrives it will be a bold move towards the unbundling and deregulation of the South African electricity market. The electricity market will hold numerous opportunities for private offtake of energy by way of wheeling arrangements which have previously been frustrated.
Projects such as these are ideally placed to benefit companies like BMW and Bio2Watt under proposed developments in the South African carbon trading market. The Carbon Offsets Paper, released by the South African Treasury in April 2014, anticipates that from January 2016 a carbon tax will be applied on all companies with a carbon footprint above specified thresholds.
Those companies that expect to be hit by the carbon tax are already starting to focus on the options available to them to mitigate their carbon tax exposure. The Paper also provides for the creation of a market for and trading of carbon emissions credits between companies to offset their carbon tax liability and to generate additional revenue streams.
To date, South Africa has not actively participated in international carbon reduction initiatives (such as the Kyoto Protocol) through the implementation of mandatory carbon offsetting schemes and the application of emissions targets on South African companies. The Kyoto Protocol has led to the development of sophisticated global carbon emissions trading markets under mandatory and voluntary carbon offset schemes. Carbon credits can be sold to companies wishing to offset their carbon emissions in order to meet mandatory targets and avoid penalties. The South African carbon trading market is still very underdeveloped with only voluntary carbon trading schemes currently in place. But this looks all set to change if the government goes ahead with its plans under the Carbon Offsets Paper.