Industry experts have welcomed the Electricity Regulations Amendment (ERA) Bill, which aims to liberalise South Africa’s electricity generation and distribution markets by making room for more private sector participation in the sector.

But the bill has been criticised for lacking critical details regarding its implementation, which may take some time to come, delaying what has already been a decades-long process even further amid the ongoing load shedding crisis.

“We face various problems in the energy sector in South Africa. Existing infrastructure is poorly maintained and inefficient, new generation capacity is needed, and the transmission infrastructure needs to be expanded to accommodate additional generation capacity,” said Alessandra Pardini, partner at law firm Allen & Overy, in an interview with TechCentral on Thursday.

“What we can’t see is what the government is trying to solve through this amendment bill. It seems that they are trying to do all of those things and it’s a lot to achieve in one amendment.”

A key component of the ERA Bill is the proposed introduction of the transmission systems operator (TSO). This entity will initially be spun out of Eskom in an unbundling that splits the state-owned utility into three units: generation, transmission and distribution.

According to Pardini, the ERA Bill suggests that the TSO could be privatised five years after its establishment, something which she believes may not be the most practical approach.

Key details

“The liberalisation effort should be focused on generation capacity and not transmission. Some 85% of generation is controlled by Eskom. We want one person to manage transmission and have many people contributing towards the generation of electricity,” said Pardini.

“Direct privatisation would lead to the optimisation of power stations. And, if Eskom sold off its generation units, it would have the money to invest into expanding transmission capacity.”

One of the key details missing from the document is how the market will operate under the new system. This is the purview of a market rules document, which Allen & Overy believes could be published in the next six to 24 months by government. But the law firm said the draft market rules should have been published along with the ERA Bill to give the market a clearer picture of government’s vision for the electricity market.

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Pardini cited the UK as an example of how a liberalised electricity market could work in South Africa, even though the liberalisation of that market took place more than 30 years ago. In the UK, the state owns the transmission infrastructure, while generation units are privately owned. A bidding system, in which the transmission operator asks generation entities to propose their pricing a day ahead of supply, is used to determine how many units of electricity would be sourced from which producers at what price. This open-market system has driven the cost of electricity for consumers down significantly, although it is not without its imperfections, she said.

Pardini foresees a similar kind of system operating in the South African context, but is concerned that Eskom’s dominance in the generation market might lead to a conflict of interest where market-based price determinations are concerned.

The bill keeps the role of the national energy regulator, Nersa, the same in terms of its tariff setting powers, but extends Nersa’s responsibilities as an arbiter in the electricity market, responsible for resolving disputes between the various utilities.

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Another key aspect of the new market rules that lacks detail, Pardini said, is how the new balancing rules are going to work. Balancing the grid is about ensuring that electricity supply meets demand at any moment in time. Part of what the ERA Bill proposes is that industrial users such as factories and mines will be penalised if they do not use the electricity they say they will, while entities that buy any unwanted capacity will be rewarded through cheaper rates.

A welcome aspect of the bill, and something that is already being done in practice, is the allowing of private power purchasing agreements that make it possible for private entities to source generation capacity from independent power producers and have it wheeled to them by the transmission operator.

The bill envisions an even more robust “electricity trading platform” where buyers and sellers can negotiate day-ahead and even hour-ahead power purchasing agreements, but again, the details of how this will be implemented are yet to be provided.

‘Long overdue’

The bill has been passed by the national assembly in parliament and must now go through the national council of provinces. If it passes there, it will then await the president’s signature, a process Allen & Overy believes could be concluded before the election.

“The change into a liberalised market is long overdue; we need to make sure that somebody is managing how we do it and that we have the right reasons for doing it,” said Pardini. — (c) 2024 NewsCentral Media