David McDonald | CEO | SolarAfrica | mail me |
As businesses across South Africa explore alternative energy solutions, electricity wheeling has emerged as a promising option. It offers new opportunities but also presents challenges in selecting the right Independent Power Producer (IPP).
One of the main reasons for the growing interest in wheeling – which allows IPPs to generate power and sell it directly to businesses is that it eliminates the need for on-site solar installations.
Understanding wheeling before choosing the right IPP
On-site solar is limited by available roof or land space. This restriction limits how much power a business can generate. Energy-intensive industries, such as mining, manufacturing, or agriculture, often require far more power than what an on-site system can provide.
Wheeling allows businesses to buy power from distant renewable plants and use it at multiple sites. This holds true even if the sites are located in different regions. However, with an increasing number of wheeling proposals landing on business owners’ desks, identifying the right energy partner becomes difficult.
While price may be the deciding factor for many, it should not be the only consideration. Therefore, businesses should consider several important questions before choosing the right IPP and signing with them.
Will the price I sign today be the price I pay when power starts?
The biggest motivation for businesses to explore wheeling is cost reduction. However, not all pricing models offer the same level of certainty. Price transparency is crucial. A trustworthy IPP clearly communicates costs and guarantees that the price agreed upon stays the same from signing to the first day of power delivery.
Businesses should read the contract carefully to check for hidden price increases. This helps ensure the long-term savings they expect. Furthermore, businesses must consider how project timelines impact pricing.
An IPP’s proposed rate is tied to its position in the development process. If construction is delayed, rising interest rates, labour costs and import taxes on items such as solar panels could push up tariffs. This raises a critical question: Could an IPP delay the project deliberately to justify higher charges when it finally goes online?
The Commercial Operation Date (COD) serves as a vital safeguard – it marks the moment the plant starts generating power. If the COD is not firm or if delays are not addressed in the contract, businesses could face unforeseen costs.
A well-structured agreement should hold the IPP accountable, with clear provisions outlining what happens if the COD is missed. Therefore, choosing the right IPP with a realistic timeline and protections against price fluctuations is essential. This ensures a stable and cost-effective energy partnership.
How far is the project in the wheeling process?
Wheeling is not a simple or quick setup. An IPP must clear multiple regulatory and development milestones before delivering power.
Recent changes in grid allocation now prioritise fully prepared projects over those that applied first. This means only projects with secured approvals and demonstrated progress can access the grid. As a result, businesses are advised to assess an IPP’s development stage before signing an agreement. If construction has not begun, the project could still be two to three years away from delivering power.
Selecting an IPP that is further along in the process reduces delays and ensures quicker access to affordable energy. However, construction progress alone is not enough. Another key indicator of readiness is how far the IPP has gone in securing off-takers – the businesses that will buy the power. This is critical for reaching financial close because both Eskom and investors require proof of demand before a project moves forward.
Businesses should ask what percentage of the plant’s total energy supply is allocated to them. If an IPP has signed off-takers for only a small portion of its capacity, it likely hasn’t reached financial close. In such cases, further delays could follow.
Ensuring that an IPP has a balanced and well-structured off-take plan reduces risk. It also improves the chances of a smooth project rollout.
Is the IPP able to cater to my business’s evolving needs?
Businesses’ energy needs change over time. An IPP should, therefore, offer the flexibility to adapt. Some solar farms operate on a one-to-one model, supplying all their power to a single business. Others, such as SolarAfrica, follow a one-to-many approach by distributing energy to multiple businesses under different contract terms.
Companies should ask whether their IPP allows them to scale up energy supply as they grow. They should also ask whether they can adjust agreements if their needs change or sell unused power to other businesses to avoid unnecessary costs.
Another important question is whether an IPP can actually deliver more power if a business needs it. A solar-only IPP has natural limitations, as solar generation is restricted to daylight hours and peak tariff periods. This is where integration with an energy trader becomes valuable.
For example, we are building a trading business that allows clients to supplement solar with other sources like wind and hydro. Businesses should ask whether their IPP offers similar capabilities or if they are limited to a single energy source.
Contract flexibility is also critical. Many IPPs offer only long-term Virtual Power Purchase Agreements (VPPAs), typically lasting 10, 15, or 20 years. This is because their financial models depend on long-term agreements. However, some businesses prefer shorter contracts of five years or less.
An IPP that works with an energy trader can provide more flexibility. Traders pull from multiple sources and do not rely on a single solar farm. Businesses should clarify whether an IPP can accommodate both short- and long-term contracts or if they are locked into extended commitments.
Does the IPP have the right people, processes and plans in place?
Wheeling is not just about building a solar plant. It is also about ensuring the energy gets delivered reliably, efficiently, and with minimal hassle for businesses. That requires an IPP with expertise in engineering, compliance, legal processes and operational management.
Businesses need to confirm that their chosen IPP has the in-house expertise to navigate these requirements effectively.
A strong track record of building large farms is a good start. However, it does not guarantee operational success. Running a wheeling project requires ongoing infrastructure management, performance guarantees, and a clear system for tracking energy credits. These credits reduce Eskom bills and verify green energy usage.
An essential step in the process is securing environmental authorisation. Eskom requires this approval before it grants permission for a generation plant. Without it, projects can face long delays or even cancellation. Some businesses have signed agreements with IPPs, only to discover later that the project wasn’t fully approved. Ensuring that the IPP has all necessary permits from the outset prevents costly setbacks.
In addition to approvals, businesses should assess whether an IPP is investing in infrastructure to ensure stable energy delivery. If the grid fails, what safeguards are in place? For instance, SolarAfrica is installing a Main Transmission Substation (MTS) to secure reliable grid access. Businesses should ask whether an IPP is making similar investments to prevent disruptions.
Another critical factor is software and system integration. Wheeling requires tracking, billing, and credit allocation. Businesses should ask whether the IPP provides the necessary tools or whether they will need to appoint an internal team just to manage administration. A good IPP should make wheeling easier, not create more work.
Choosing the right IPP
Businesses should consider contract flexibility. Some IPPs focus solely on mega-users. Others, like SolarAfrica, cater to businesses with multiple facilities, allowing them to spread risk across different sites under one agreement. An IPP should adjust energy distribution based on usage needs without creating additional complexity for the client.
With wheeling gaining traction as a cost-effective and sustainable energy solution, choosing the right IPP is critical. Transparent pricing, project readiness, contract flexibility and regulatory expertise all play a role in securing a reliable energy partnership. Therefore, businesses should carefully evaluate their options before signing a VPPA.
Choosing an IPP with a strong track record, transparent pricing and the flexibility to accommodate evolving energy demands is key. This ensures a smooth and cost-efficient shift to wheeled power.
