Electricity Regulation Amendment Act ‘transformational’ for South Africa

The Electricity Regulation Amendment Act 38 of 2024 (the Act)is expected to transform the country's energy sector from a vertically integrated model that was completely dominated by Eskom to a multi-market structure, but the impact of the Act, which South Africa’s president Cyril Ramaphosa assented to on 16 August 2024, will depend on the nature and speed of its implementation.

The purposes of the Electricity Regulation Amendment Act

The Act aims to transform South Africa’s energy sector by providing:

• for the establishment of a Transmission System Operator (TSO) to develop, maintain and operate, and provide non-discriminatory access to, the country’s transmission grid;
• the National Energy Regulator of South Africa (NERSA) with powers to play a regulatory oversight role during the transition to a competitive electricity market, and;
• for an open market platform to be operated that allows for competitive electricity trading.

Establishment of the TSO and NERSA’s oversight role

Section 34A of the Act provides for the establishment of the TSO, which will execute the role of a transmitter, system operator, market operator, and central purchasing agency. Section 34B of the Act outlines the powers and functions of the transmitter, system operator, market operator, and central purchasing agency. As a transmitter, the TSO will be responsible for the development of the transmission development plan, implementing infrastructure plans, maintaining and operating the transmission grid, and providing third parties with non-discriminatory access to the transmission grid.

The System Operator will be responsible for operating the integrated power system in a manner that is safe, secure, efficient and sustainable. It will also have to establish new generation capacity or transmission infrastructure in cooperation with South Africa’s minister of mineral resources and energy (the minister) and a procurer in terms of section 34 of the Electricity Regulation Act – the  principal Act that the new law has amended.

The Market Operator will, subject to a license issuance by NERSA, provide a transparent and non-discriminatory trading platform, which will enable power market participants to trade. The Act defines the market operator as a person licensed to operate a trading platform for power market participants and who takes no ownerships of the energy traded. In addition, the Market Operator must develop a market code and rules together with the qualifying criteria for power market participants, subject to approval by NERSA.

Amongst other things, the market code will contemplate the qualifying criteria, including financial and prudential requirements, for power market participants. The market code will also look at the different types of markets to ensure the successful operation of the industry, including both physical and financial transactions between power market participants. 

The Central Purchasing Agency will conclude transaction agreements with a view to procuring energy, including sufficient capacity and energy supply. Additionally, the Central Purchasing Agency must:

• be the buyer of power from existing independent power producer (IPP) power purchase agreements (PPAs) and new IPP PPAs, subject to ministerial determination;
• conclude PPAs with Eskom generators with a view to covering capacity payments and ancillary services;
• conclude vesting contracts with Eskom generators and distribution licensees to manage the transition to a competitive market, and;
• trade the power purchased under legacy IPP contracts and act on behalf of the legacy IPP contracts as the balance responsible party.

Transitional provisions in the Act, under section 35C, provide that, from the effective date of the Act, the National Transmission Company South Africa (NTCSA) will assume the role of the TSO, subject to approval by NERSA. The Act states that the TSO must be legally established within five years of the Act’s enactment. According to the Act, during this period of transition, the NTCSA will perform the functions of the TSO subject to the regulatory oversight of NERSA whilst NERSA facilitates the transition to a competitive market.

The NTCSA is a separate and wholly owned subsidiary of Eskom Holdings and will operate under the leadership of an independent board. On 1 July 2024, Eskom announced that the NTCSA officially commenced trading, and will look to increase transmission grid capacity to enable the connection of additional generation capacity.. The NTCSA has officially assumed the role of the TSO and buyer under the current legislation. In its role as the TSO, the NTCSA will operate and manage the transmission grid and as a buyer the NTCSA will buy energy from Eskom's generators and IPPs as procured by the minister. Additionally, the NTCSA will also play the role of Market Operator, which means that it will provide generators, traders and retailers with a platform to trade with one another.

According to section 5 of the Act, which is an amendment of section 4 of the principal legislation, NERSA has been granted additional powers. In addition to considering and issuing licenses for the operation of generation, transmission, and distribution facilities, trading, import and the export of electricity, NERSA is also empowered to consider and issue licenses for the Market Operator and System Operator. In addition, NERSA will not only mediate disputed matters between generators, transmitters, distributors, customers or end users, and traders, but will also arbitrate disputes between those parties. NERSA is also empowered to mediate and arbitrate disputes between the System Operator and any other licence holder or customer.   

Creation of an open market platform and multi-market structure

The Act provides for the creation of an open market platform by a Market Operator for purposes of facilitating the competitive trading of electricity between qualifying participants. The Act envisages the open market platform to be a competitive multi-market structure, which provides for market transactions, physical bilateral transactions, and regulated transactions.

The establishment of a multi-market structure as contemplated by the Act will signal a significant departure from the vertically integrated model monopolised by Eskom as the Act coincides with the separation of Eskom into three independent businesses comprising of generation, transmission, and distribution.

The multi-market structure envisages multiple IPPs, in competition with each other and Eskom, that will be able to sell generated energy to multiple buyers, which include individual, commercial and industrial consumers. Currently, in the private sector, multiple IPPs sell generated power to multiple industrial or commercial consumers. The enactment of the Act serves to formalise the status quo from a legal perspective as far as the private sector is concerned.

The TSO is expected to provide a fair and transparent platform which will be conducive for contracting and trading electricity whilst being disconnected from Eskom's generation interests. This is intended to rid Eskom of the conflict of interest that exists in relation to its dual role of being a generator and owner-operator of the transmission grid. Granting IPPs non-discriminatory access to the transmission grid is expected to boost investor confidence and attract greater investment towards the independent development of energy generation projects.

In addition, the creation of an open platform is intended to resolve problems associated with information availability. Currently, ‘wheeling’ – where electricity is produced in one area and connected to a grid, but sold to an end user in a further remote area of the grid – occurs through bilateral agreements in the absence of a centralised market, and as such there is already competition in the market between IPPs. In addition, currently, abundant new generation capacity is produced and supplied to customers without central market mechanisms, which would allow the System Operator to know where generated power is coming from. In the absence of central market mechanisms at the moment, the System Operator does not know, for a large percentage of the network, where the power is being generated.

It is envisaged that the establishment of an open market platform will come with central market mechanisms, which will enable the System Operator to better understand what is happening on the network and plan accordingly. Additionally, the information will be available to the Market Operator and enable it to facilitate trade more efficiently.

The Act’s transformational potential

Previously, there were three ministers that provided ministerial oversight over the energy sector in South Africa – the minister of mineral resources and energy; the minister of public enterprises, and the minister of electricity and energy. This slowed the implementation of energy reforms. Currently, president Ramaphosa has appointed one minister – the minister of electricity and energy – to provide ministerial oversight over the energy sector. This development will hopefully lead to reduced timelines in relation to implementing the reforms envisaged in the Act. However, the Act is not operational yet as the president has delayed issuing a proclamation on the commencement date.

Additionally, empowering regulations and rules still need to be published. These include market participant rules in relation to the trading platform, revised methodology for the calculation of tariffs, and rules regarding the categorisation of trading licenses.

The Act has the potential to transform the country's energy sector and help to resolve the longstanding energy crisis and achieve the just energy transition. However, the success of the Act hinges on government's political willingness to carry out the reforms envisaged within the Act and the speed at which the president proclaims the commencement date together with publishing the empowering rules and regulations to ensure better implementation of the Act.

Co-written by Njabulo Gumede of Pinsent Masons.