At the beginning of the year, the Electricity Regulation Amendment Act 38 of 2024 (ERAA) came into effect, promising to facilitate “an open market platform that allows for competitive electricity trading.“
By Jason van der Poel, partner, Danielle van der Vaart, senior associate and Kiera Bracher, associate from Webber Wentzel
The ERAA establishes the Transmission System Operator SOC Limited (TSO), which is responsible for developing the MC. The MC governs short-term power exchanges in a competitive electricity market.
This represents a shift from competition for the market to competition within the market. The MC proposes a five-year transition period, with a target commencement date of April 2026. Therefore, if all goes according to plan, there will be a fully operational competitive electricity market by May 2031.
The MC defines three primary market players:
- Party: Any signatory to the MC, including anyone using the Eskom grid.
- Balance Responsible Party (BRP): Anyone who, in addition to adhering to the MC, consumes or generates power in South Africa, and submits forecasts a day ahead. The default is for generators and consumers to be balance responsible.
- Market Participant: Those trading through multi-market platforms, which is an additional choice while still being subject to the MC and balancing.
The development of the MC is ongoing. Comments on the first draft were due by 29 October 2024, and a revised draft is expected in early 2025. Both the MC and ERAA will continually adapt to market changes and challenges.
The first draft outlines foundational rules for South Africa’s transition to a competitive electricity market, allowing stakeholders to make decisions that capitalise on available opportunities.
The multi-market model
A competitive electricity market refers to trading platforms managed by the Market Operator within the TSO. The Market Operator ensures fair and transparent financial settlements between buyers and sellers, balancing electricity production and consumption through four platforms: the Day-Ahead Market, the Intraday Market, the Day-Ahead Reserve Market, and the Balancing Market.
- Day-Ahead Market: Consumers submit their predicted hourly consumption levels as demand orders and generators offer available capacity to the Market Operator, who then matches generator bids and consumer demand for the next day on an hourly basis. This is where the most energy will be traded. The System Operator then formulates dispatch instructions for the next day, relying on order volumes that have been recalculated to include network constraints.
- Intraday Market: This market effectively functions in the same way as the Day-Ahead Market, by balancing production and consumption throughout the day with frequent reconciliations, allowing intraday adjustments.
- Day-Ahead Reserve Market: This platform allows generators to provide reserves and consumers to reduce consumption to assist the System Operator with the operation of the grid a day ahead. Generators and consumers are compensated at higher rates for availability and dispatchability.
- Balancing Market: The System Operator consolidates forecasted and actual electricity production and consumption. A BRP is held responsible for any imbalances caused due to the difference between real and scheduled supply or demand through balancing costs. There will be a penalty payment to incentivise accurate forecasting, which ultimately contributes to a balanced system.
These markets work together to maintain a balanced and efficient electricity system. The multimarket is not obligatory and existing power purchase agreements (PPA) will not be affected. Trading on the Day-Ahead or Intraday Markets is voluntary and can also be used to supplement existing PPAs or sell additional energy.
Market concerns
A key focus for stakeholders is how South Africa’s electricity market will transition to a competitive trading market. Central to this will be the vesting contracts between Eskom generators and the Central Purchasing Agency (CPA), a critical function of the TSO role.
These contracts hedge fixed capital, operation, and maintenance costs throughout the plant’s lifetime and will gradually transition energy and reserve capacity prices to market prices over five years.
Each year, the hedged volume will be reduced by 20%, ensuring that, by the end of the transition period, market participants will be dealing with the market price. The hedge price will not be a flat rate that ignores the market completely, it will instead follow the market but provide protection from market price fluctuations. Eskom generators will be the BRP for all their generations.
The legacy contracts entered into between Eskom and independent power producers as a result of the Renewable Energy Independent Procurement Programme (REIPPPP) are protected by the CPA becoming the financially responsible party.
The CPA will participate in the Day-Ahead Market on behalf of generators, acting as a price-taker and spreading legacy charges among consumers. As market prices rise, legacy charges will decrease because the CPA will be able to recover more. Spreading legacy charges amongst consumers is an acknowledgment of the key role REIPPPP has played in developing the South African electricity market.
Read an insights article about the ERAA here.
This article focuses on providing a roadmap for the competitive, multi-market electricity trading platform that the ERAA intends to establish. The article also explores the Market Code (MC) and market role players, the meaning of multi-market platforms and a few prevailing market concerns around the changes to the South African electricity sector in order to provide a high-level outline of what has the potential to be a very exciting, opportunity-filled and transformative six years.
This roadmap provides a high-level outline of the exciting transition for South Africa’s electricity sector. If properly implemented, the MC will assist in achieving greater energy security and affordability, which will ultimately drive economic growth.