Executive Summary

• Significant Legislative Reform: The ERA represents the most substantial change in South Africa’s electricity supply industry, aiming to dismantle Eskom’s monopoly and introduce a competitive multi-market system. Eskom will become a player competing in the market against other generators.
• Establishment of the Transmission System Operator (TSO): The amendments mandate the creation of a new entity, the Transmission System Operator SOC Ltd (TSO), within five years. The TSO will manage roles such as System Operator, Market Operator, Transmitter, and Central Purchasing Agency to ensure a balanced and competitive electricity market.
• Promotion of Third-Party Access and Transparency: The TSO will facilitate third-party access to the transmission and distribution system based on published tariffs, ensuring non-discriminatory and transparent market operations. This includes establishing market codes and rules for fair financial settlements and infrastructure management.

Introduction

On 16 August 2024, President Cyril Ramaphosa signed into law the Electricity Regulation Amendment Act (‘ERA’) which, arguably, marks the most significant change in the South African electricity supply industry. The new amendments to the ERA mark the culmination of at least 26 years of efforts by various administrations to reform the electricity market given that the White Paper on Energy Policy was first published in 1998. While some progress has been made over the years to unwind Eskom’s monopoly, open pathways to greater competition and less energy costs, address the current realities that plague the electricity market and increase investment in new generation capacity to ensure energy security, none of those past interventions compare to the far-reaching reforms that the ERA amendments hold.

These amendments contemplate a multi-market system which, loosely defined, is a hybrid market model designed to accommodate various transactions such as market transactions, physical bilateral transactions and regulated transactions. The new law is indeed ground-breaking and marks a seismic shift from South Africa’s visceral rather than rational approach to the issues at Eskom and the electricity market.

This article discusses the new ERA law and provides insight on the significant amendments that have been introduced and the implications that will reconfigure the generation, transmission, and distribution of electricity in South Africa.

The ERA Amendments: A Brief Background on Electricity Market Reform

It would be remiss to discuss the ERA amendments without providing context of the scenarios and factors that have necessitated the legislative intervention. In 1998, a White Paper on Energy Policy was published, and it outlined 5 key objectives that included increasing access to affordable energy services particularly to meet the basic needs of the poor, improving energy governance, stimulating economic development, managing energy related environmental impacts particularly focusing on poor households and securing energy supply through diversity. This was an important document and, in many respects, set the scene for some of the policies and strategies that followed. A brief timeline of events is highlighted below:

2000 – Eskom is separated into divisions;
2003 – Electricity Distribution Holdings is established, and it owns Regional Electricity Distributors;
2005 – the National Energy Regulator of South Africa (‘NERSA’) is established;
2006 – the Independent Power Producer Programme Office is established;
2012 – the Independent System Operator Bill is introduced;
2019 – Eskom roadmap is published;
2023 – the Electricity Regulation Amendment Bill is introduced; and
2024 – the Electricity Regulation Amendment Bill is signed into law

The above timeline of events must be read together with the following context; South Africa has been enduring an energy crisis characterised by erratic electricity supply and rolling intermittent blackouts since 2008. The state-owned energy utility, Eskom, has often been regarded as the single biggest risk to the South African economy and at the end of October 2023, Eskom’s debt stood at ZAR399 billion.

Various administrations have employed several measures to overcome the challenges crippling Eskom. Such interventions have included a revolving door of different Eskom board members, new CEOs, bailouts from National Treasury and a collaboration with the private sector through the National Energy Crisis Committee. All these interventions have yielded limited returns and Eskom is still a threat to the South African economy. Now the Ramaphosa led administration is trying legislative reform to address the country’s energy crisis and this has manifested itself through the amendments to the ERA.

The Introduction of a New Role Player in the Electricity Market

A key takeaway from the new law is that the ERA amendments provide for the establishment, duties, powers and functions of a new juristic entity, the Transmission System Operator SOC Ltd (“TSO”), within 5 years from the law being assented to. The foundations for this entity already exist in the form of the National Transmission Company of South Africa which has been set up by Eskom as a wholly owned subsidiary and the National Transmission Company of South Africa will in the interim serve as the TSO and the National Energy Regulator of South Africa will oversee this transition.

The role of the TSO sprawls across its duties and responsibilities as a ‘System Operator’, ‘Market Operator’, ‘Transmitter’ and ‘Central Purchasing Agency’. These duties and responsibilities are in line with the core of the amendments which aspire to create a competitive electricity market through the promotion of third-party access to the transmission and distribution system based on published tariffs. These tariffs will be applicable to all customers and applied without preference.

To further explain the above, the TSO will be tasked with the following:

System Operator – this is a multifaceted role, and the TSO will have charged with keeping the demand and supply of electricity within the integrated power system in balance. This means that the TSO will decide where power is drawn from first and plan in respect of the development, strengthening, upgrading and refurbishment of the national transmission power system. Additionally, the TSO is obligated to collaborate with the Minister and procurer to facilitate the establishment of new generation capacity or electricity transmission infrastructure.

Market Operator – as a Market Operator, the TSO will be responsible for providing a transparent and non-discriminatory platform for competitive, wholesale or retail buying and selling of electricity. It will have to establish a market code and rules to govern the market and must ensure that financial settlements between buyers and sellers are settled in a fair, neutral and transparent manner. The market code shall include provisions relating to the different types of markets necessary to ensure effective and secure operation of the industry, the method of operation, as well as development of systems, processes and procedures for the implementation of these markets and governance of the market code, including mechanisms for power market participants and stakeholders to propose changes to the code.

Transmitter – this role is charged with overseeing and implementing the infrastructure plans for the transmission network and the development and implementation of transmission use of system charges, maintain and operate the transmission grid and coordinate outages and provide non-discriminatory access to the transmission power system to third parties.

Central Purchasing Agency – this agency will be responsible for the procurement of electricity and ensuring adequate capacity and energy supply. In line with South Africa’s international obligations, the Central Purchasing Agency will conclude import and export agreements that ensure a reliable and stable supply of electricity for customers and accommodate the interests of South Africa in the long term. Further to that and regarding regulated transactions, the Central Purchasing Agency will be the buyer for existing Independent Power Producer power purchase agreements, as well as new Independent Power Producer power purchase agreements. The Central Purchasing Agency will also be tasked with concluding power purchase agreements with each Eskom generator to cover capacity payments and ancillary services for a period approved by the Regulator.

Registration and Licensing

Registration and licensing requirements have been streamlined and mandatory registration for activities not requiring licensing has been introduced. However, facilities solely providing standby or backup electricity, those without a point of connection, and small-scale facilities under 100 kilowatts are exempted, if they register with NERSA and comply with specific conditions.

Following the amendment, registrants will be required to comply with the applicable technical codes, regulatory requirements and payment of fees imposed for granting registrants access to their network.

NERSA’s Powers

NERSA has been empowered further, granting it authority over a broader range of activities and giving it the power to issue, amend, withdraw, suspend, and revoke licenses. The registration, revocation, and deregistration of entities or activities will also be under its purview.

It appears that previous licensees, such as generation facilities will be required to follow this process to deregister.

Additionally, the new law broadens NERSA’s powers to act as an arbitrator, in addition to its mediatory function. NERSA will also be empowered to investigate, either following a complaint or of its own accord, any matters pertaining to licensing or registration.

Pricing and Tariffs

The new ERA law redefines NERSA’s role regarding pricing. NERSA will no longer be required to regulate pricing but will take on the responsibility of setting and approving tariffs.

In setting approved tariffs, NERSA must allow licensees to recover their costs, including a reasonable margin or return. Additionally, NERSA needs to take into account the promotion of renewable energy and consider the need for security and diversity of supply.

The new law provides an exception allowing a licensee to charge a tariff not approved or set by NERSA which is a result of a competitive market or a direct supply agreement.

Conclusion

The new ERA law is anticipated to bring significant changes in the electricity sector and promote the growth of a competitive market with independent power producers competing against Eskom. As South Africa’s power system increasingly moves to private ownership, investor confidence becomes more important, and the new ERA law seems poised to bolster such confidence.

Co-authored by Davin Olen (Associate) and Mthabisi Khumalo (Candidate Attorney) in South Africa.