KEY POINTS
- Eskom expects to spend R4-billion compensating renewable energy producers for curtailed electricity in the current financial year.
- Rising solar generation is creating daytime power surpluses, forcing the utility to restrict output from some wind and solar farms.
- Experts warn that increasing curtailment costs could push electricity tariffs higher, while gas-fired generation, battery storage and tariff adjustments are among the proposed solutions.
South Africa’s electricity utility Eskom is expected to spend about R4-billion in the current financial year compensating renewable energy producers for electricity they are instructed not to supply to the national grid, as growing solar generation creates a daytime power surplus.
The payments, known as curtailment compensation, are made to solar and wind farms when the system operator directs them to reduce generation to maintain the balance between electricity supply and demand.
Keith Bowen, senior manager of market operator at the National Transmission Company of South Africa (NTCSA), disclosed the projected expenditure during a panel discussion hosted by consultancy Cresco and law firm Fasken in Sandton.
Electricity pricing expert Deon Conradie warned that the growing cost could eventually translate into higher electricity tariffs, leaving consumers to bear the financial burden. Moneyweb
Rising solar generation increases curtailment
The increase in curtailment is being driven partly by the rapid expansion of solar power installations among households and businesses. More consumers are generating their own electricity during daylight hours, reducing their reliance on power supplied by Eskom.
At the same time, several large-scale solar farms are under construction and are expected to begin operating over the next two years, potentially adding to the daytime surplus.
Eskom cannot simply shut down its coal-fired power stations whenever solar generation exceeds demand because those plants must remain available to meet electricity needs after sunset, when solar output declines and households and businesses return to the national grid.
The system operator therefore instructs renewable energy producers to reduce their output when supply exceeds demand. However, under agreements covering projects procured through the government’s Renewable Energy Independent Power Producer Procurement Programme (REIPPPP), Eskom must compensate qualifying independent power producers (IPPs) for electricity they were ready to supply but were instructed not to generate.
This means the utility pays for energy it does not receive and also forfeits the revenue it could have earned from selling that electricity. Moneyweb
Experts warn of higher electricity tariffs
Although the projected R4-billion expenditure is relatively small compared with the R383-billion that the National Energy Regulator of South Africa (NERSA) allows Eskom to recover from consumers through electricity tariffs, Conradie warned that the cost could increase significantly if the underlying conditions persist.
He drew comparisons with Eskom’s diesel expenditure, which rose sharply as the utility increasingly relied on open-cycle gas turbines to supplement electricity supply and limit load-shedding.
In the 2018 financial year, Eskom spent approximately R320-million on diesel. By the 2024 financial year, the expenditure had climbed to almost R24-billion, placing additional pressure on electricity tariffs.
Conradie cautioned that curtailment payments could follow a similar trajectory if the growth in renewable generation is not matched by improvements in the electricity system’s ability to manage excess supply.
Curtailment creates uncertainty for renewable energy investors
The growing frequency of curtailment instructions is also creating uncertainty for renewable energy developers, project financiers and investors.
Under government-procured renewable energy agreements, Eskom’s compensation obligations apply to qualifying IPPs. However, projects supplying private customers operate under contractual arrangements that determine how curtailment risks are shared.
Olga Suchkova, associate director at Cresco, said the allocation of this risk is central to financing decisions because lenders need certainty about a project’s revenue before approving funding.
Mamoso May, CEO of Artemis Group Holdings, said the issue is increasingly influencing investment decisions and affecting the secondary market for renewable energy projects.
The absence of a uniform approach to private-sector contracts means the party responsible for absorbing curtailment-related losses often depends on the negotiating strength of the parties involved.
Danielle van der Vaart, a partner at Fasken, noted that developers and investors are now paying greater attention to curtailment provisions. Contracts signed five or 10 years ago did not anticipate that restrictions on renewable energy generation would become such a significant commercial risk.
Calls for greater transparency
Industry participants have also raised concerns about the way curtailment instructions are implemented, particularly the timing and volume of electricity producers are required to withhold.
Rob Futter, director and advisory partner at Cresco, said the time of day when generation is curtailed matters because it can affect the applicable electricity tariffs and increase the complexity of managing the process.
He called on the NTCSA to provide more transparent information about curtailment instructions to give renewable energy producers greater certainty and address concerns about whether the restrictions are being applied fairly.
Gas and battery storage proposed as solutions
The panel discussion identified additional gas-fired power stations and battery storage as possible ways to manage the imbalance between electricity supply and demand.
Gas-fired plants can be switched on and off relatively quickly, making them suitable for responding to fluctuations in renewable energy generation. However, the government’s latest attempt to procure gas-to-power capacity failed because there was insufficient clarity about the source of the gas required to operate the plants.
Battery storage could also help absorb excess electricity during periods of high solar generation and release it when demand increases. However, the additional storage capacity is expected to take at least another two years to become available.
Bowen also proposed reducing electricity tariffs during the middle of the day to encourage consumers to shift some of their electricity consumption to periods when solar generation is high. He said this could help reduce the daytime surplus, although securing NERSA’s approval for changes to the tariff structure could take up to 10 years.
Another option would be to adopt a less conservative approach to operating Eskom’s coal-fired power stations, allowing them to adjust generation in response to changing demand. Bowen cautioned, however, that frequently increasing and reducing output could damage plants that were not designed to operate in that manner.
He cited Eskom’s Majuba power station as an example, explaining that the utility previously adjusted its output throughout the day because of the high cost of transporting coal to the facility. However, the operating approach caused damage to the plant.
