In 2021 South Africans faced a record 1,130 hours of load shedding in the midst of the Covid-19 pandemic. This prompted President Ramaphosa to confirm in the 2022 State of the Nation Address that the country faces a shortfall of around 4 000MW of electricity due to our “aging power stations, poor maintenance, policy missteps and the ruinous effects of state capture”. In response to this crisis, the President undertook that the South African government would implement fundamental changes to the structure of our electricity sector to enable a competitive market for electricity generation.

In February 2022 the Department of Mineral Resources and Energy (DMRE), under the leadership of Minister Gwede Mantashe, took the first step by drafting the Electricity Regulation Amendment Bill which was approved by Cabinet and published for public comment.

There is no doubt that it is a herculean task to transform a monopolistic electricity sector, dominated by Eskom for nearly 100 years, into a competitive multi-market in which various public and private sector producers and sellers of electricity all use the national grid to transmit and distribute power to consumers.

While we are encouraged by the Minister’s response to the critical and urgent need for legislative reform of the South African electricity regulation framework, and we laud the fact that this is receiving meaningful attention after years of much talk and little action, there may be serious challenges with the implementation of the current version of the Amendment Bill.

Some of the commercial and legal pitfalls and challenges we have identified with the Amendment Bill include a lack of clear governmental policy where that ought to have guided and informed the drafting process. This is especially evident when one considered the provisions (or lack thereof) in relation to the creation and operation of a competitive South African multi-market and private sector participation in this market. For example, the Amendment Bill grants the Minister wide-ranging powers in establishing and operating the market. He may, for instance, determine that persons carrying on a specified category of electricity-related trading require a trading licence. He will also decide whether generators, buyers and traders qualify as “market participants”. In essence, the Minister has the ability to determine if and when additional energy is to be procured through a section 34 determination, he also determines the type of energy resource to be procured, who the offtakers (purchasers) will be, and who the generators (sellers) will be (whether IPPs or a public entities). It is difficult to see how a truly competitive market can be created in these circumstances.

Equally challenging is the lack of clarity around the way in which different market participants, including generators, resellers, traders, and those running electricity trading platforms and electricity procurement processes, will be regulated going forward and how they are expected to run their businesses. For example, the National Energy Regulator of South Africa (NERSA) may determine tariffs charged by a licensee, including generation licensees and trading licensees, both in electricity procurement processes and in commercial arrangements. It is unclear why the market cannot in principle determine its own pricing between willing buyers and sellers – what is the point of running a competitive bidding process if participants are not competing on price for the ultimate benefit of consumers? There is also provision for NERSA to apply penalties where COD is delayed beyond Scheduled COD for private market participants and we cannot see a rationale for regulatory involvement in the contractual affairs of private individuals, especially in a free market system.

There is also some confusion around the regulatory requirements for generation licensees – especially in relation to private procurement of electricity. For example, it seems that owners of own use generation facilities cannot directly take advantage of the 100MW exemption created by amended Schedule 2 to the Amendment Bill, despite this being one of the key sources of additional generation capacity referred to by the President in SONA 2022. In addition, the Minister is empowered to amend Schedule 2 at any point in time and without Parliamentary oversight so there really is very little certainty around the position of IPPs.

Finally, there are a handful of instances in which the Amendment Bill appears to be at odds with constitutional principles, including the establishment of the Transmission Systems Operator as well as those principles governing public procurement, fair administrative action, the doctrine of the separation of powers, and expropriation.

SDG Legal has submitted these and other comments and questions to the DMRE. If you would like to receive our full set of comments please email Angela Chan at a.chan@sdglegal.africa.