Toolkit 6: Reforming the energy market

#Bring the Energy, Mzansi

We need market reform now

If we manage things properly, South Africa’s energy transition could unlock the largest ever capital investment programme in our history: R1.8-trillion over the next 10 years. This can be leveraged to rejuvenate local manufacturing, create meaningful jobs, and stimulate innovation and skills development for young people.

But “managing things properly” means dealing with two key issues:

  • Getting rid of uncertainty around the regulatory environment;
  • Reforming the way energy is bought and sold.

Market reform is needed in South Africa both to ensure a competitive electricity sector for the benefit of customers, and to attract private sector investment for new generation and transmission.

Some of the groundwork has been done

The recent signing into law of the Electricity Regulation Amendment Act (ERA) is a leap forward in reforming the market, because it makes provision for a multi-market power system with much more flexibility. This is much more attractive for businesses wanting to invest in energy projects, while also resulting in a better deal for consumers.

An independent Transmission System Operator (TSO) is a key enabler to a competitive multi-market. The TSO will have four functions:

  1. A market operator that operates a day ahead and intra-day power market.
  2. A central purchasing agency that holds vesting contracts with all legacy generators.
  1. A network operator that owns, maintains and generates revenues from the grid.
  2. A system operator that ensures technical system stability.

In this new model, all legacy power purchase agreements (PPAs) and Eskom coal-fired generators will be placed on 5 year vesting contracts that effectively push generation capacity from coal into a competitive market – where some coal capacity will be “out of the money”.

What do we need investment for?

South Africa needs an unprecedented generation and transmission infrastructure rollout to ensure its energy security and economic growth.

  • Installed utility scale generation capacity will have to increase by more than 5 times – to R1 500-billion.
  • Transmission infrastructure rollout will have to increase by more than three times – to R300-billion.

The State and Eskom have limited funds. They have high debt and a constrained balance sheet, and will not be able to fund the entire R1.8-trillion needed over the next 10 years.

There is also investment uncertainty. Developers will need to be sure that they will obtain a fair return on their investment if they’re to put such large amounts behind the expansion.

There is also a growing need for industrialisation and job growth. If we attract sufficient investment, we will be able to drive industrial investment, growth and sustainable job creation across a number of value chains

But there are risks involved in some of the changes to the market – for example, a reduced security of supply. If the market is fully competitive, investments might move away from reliable energy sources and focus on cheaper renewable options. This could make the energy supply less stable.

Price volatility is also a potential risk. In a competitive market, prices could fluctuate a lot. This means electricity could become very expensive when there’s not enough supply.

Finally, there are South Africa’s broader development objectives. Without some degree of market control, it might be hard to meet certain development goals. For example, programmes to help poorer areas or specific targets for energy types might not happen on their own without intervention.

So much still to do

Market reform is the most critical element of South Africa’s power system. But to ensure market reform happens successfully, we need more discussion on a couple of fundamental and inter-related issues:

  1. What is the new National Transmission Company South Africa (NTCSA)’s strategy, operational model and plan for building capacity?
  2. How will the NTCSA interface and interact with the National Electricity Regulator (NERSA), the Ministry of Electricity and Energy, and National Treasury?
  3. What sort of solutions are being developed in relation to Eskom’s vesting contracts, customer transition, procurement, competitiveness, non-energy markets, and price volatility?

#Bring the Energy, Mzansi

We need market reform now