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Service Issue 88

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Service - leadership in Government is a quarterly magazine addressing key issues related to government leadership and service delivery in South Africa.

SpowerCompetition in

SpowerCompetition in SA’s electricitymarket: new law paves the way, butit won’t be a smooth rideGovernment has attempted to overcome the country’s energy problems, including new Eskom boards, new CEOs, bailoutsfor Eskom and a National Energy Crisis Committee that includes the private sector. Now it’s trying legislative reform.By Rod Crompton*SSouth Africa endured an electricity crisis from 2008 branded by rollingblackouts and a growing culture of non-payment. The state-ownedutility, Eskom, was the single largest risk to our economy. At the end ofMarch 2020, its debt stood at R488-billion (US.4-billion).In mid-August 2024, President Cyril Ramaphosa approved a newlaw that marks the most significant change to date in the electricitysupply industry. The Electricity Regulation Amendment Act is thebeginning of the end of Eskom, the near state monopoly that hasdominated South Africa’s electricity sector since the 1950s.The law paves the way for Eskom to end its transmission businessover the next five years. It seems likely to be a generator for a longtime, however; its new coal-fired stations are designed to operate for50 years. The new Act envisages a hybrid market model, designed toaccommodate various kinds of transactions.Competition and market prices are expected to emerge over time.New kinds of businesses are emerging, such as traders in electricity,“prosumers” (consumers that also produce electricity for sale intothe grid), electricity market operators and system operators.Ramaphosa promised that the Act will lead to long-term energysecurity, a more competitive energy system, more rapid uptake ofrenewable energy sources and ultimately lower energy prices forall South Africans. The new law is indeed groundbreaking, andan important step along South Africa’s zig-zag, stop-start path toelectricity market reform. But electricity market reform is a processthat evolves over years as technologies and markets change. It is nota destination.Based on my 40-odd years in the energy sector, including six onthe Eskom board, I believe that on balance, the new law is good newsfor electricity market reform. However, there are some matters to beconcerned about.Change is hard in South Africa. It has taken 26 bumpy years sincethe 1998 White Paper to get to this entry point to market reform.It would be naive to expect a smooth ride from here on. Vestedinterests in and around Eskom and the municipalities will want tocling to their powers. New technologies are disrupting the old wayof doing things.A long, hard roadElectricity market reform in South Africa has its origins in a WhitePaper on Energy Policy published in 1998. The first round of effortsto implement this policy and to begin the unwinding of Eskom’smonopoly led to:• Eskom being separated into divisions in 2000.• The establishment of Electricity Distribution Holdings to ownthe new Regional Electricity Distributors in 2003.• The establishment of the National Energy Regulator of SouthAfrica in 2005.• The establishment of the Independent Power ProducerProcurement Programme Office in 2006.• An Independent System Operator Bill in 2012.But this first attempt at reform petered out by 2015. After a lullof some years, a second round of attempts at market reform wasinitiated by the Eskom Roadmap published in 2019. This, along withpublic pressure from increasing power cuts, led to the ElectricityRegulation Amendment Bill being released for public comment in20 | Service magazine

powerSElectricity market reform is a processthat evolves over years as technologiesand markets change.March 2021. After 42 months, the president signed the act on 16August 2024.What changes are envisaged?Within the next five years a new juristic person, the TransmissionSystem Operator SOC Ltd, is to be created. The foundations of thisexist in the form of the National Transmission Company of SouthAfrica, which Eskom has already set up as a wholly-owned subsidiary.The role of the new entity will be as follows:As a system operator, it will have the task of keeping demand andsupply in balance every second of the day and deciding where poweris drawn from first. This is where it runs into “player and referee”challenges as it must ensure fair competition between multipleelectricity generators: Eskom and privately-owned ones.It will be a market operator. This will involve providing a platformfor competitive, wholesale or retail buying and selling of electricity.It will have to establish rules to govern the market (much like stockmarkets have rules for buying and selling shares). It must ensurethat financial settlements between buyers and sellers are settled in afair, neutral and transparent manner.It will be a central purchasing agency that will provide marketsupport functions.Eskom has been a near monopoly for a long time and is unlikelyto give up its market dominance without a fight. There are someprovisions in the new Act that are intended to protect the market fromEskom dominance. As usual, the devil will be in the detailed regulationsand codes. On 19 April 2024, Eskom launched a draft market codefor public comment. At the same time, the National Energy CrisisCommittee launched its description of the market model.A 20-year cap is introduced for the duration of generation,transmission or system operation licences (or a lesser period decidedby the national energy regulator).Large power infrastructure such as transmission lines, coal andnuclear generators typically have useful lives of more than 20 years.Investors will want to recover their investments within the 20-yearlicence period through higher tariffs. After 20 years, customers willhave something of a “free ride” as the asset will have been paid for.In contrast, the licence period for long-life distribution assets is leftto the regulator to decide.Another major concern is that the act gives the responsibleminister new and wide-ranging powers. The minister can decide,for example:To deviate from an integrated resource plan or a transmissiondevelopment plan if it is in the national interest and when it is“reasonable and justifiable”, without public consultation. (Previouslythe national interest was only invoked in land expropriation.)To establish an “energy infrastructure project”, which is not defined,but can include “gas infrastructure”. This curious new type of projectappears to contemplate cross-border trade in gas (type unspecified)for gas-to-power but might also be used for new nuclear capacity.As South Africa’s power system increasingly moves to privateownership, investor confidence becomes more important. Widerangingministerial discretion contributes to investor uncertainty.There is a risk that the new Act or parts of it may be stillborn as theSouth African Local Government Association has objected to certainprovisions and threatened legal action. Media reports suggest thatRamaphosa has left the door open to excluding certain provisions. S*Rod Crompton is a visiting adjunct professor at African Energy LeadershipCentre, Wits Business School, University of the Witwatersrand.Article courtesy of The ConversationPossible brakes on progressAccess to transmission and distribution infrastructure will becrucial for a market to operate. Independent generators will needto transport their electricity to their customers. Initially, customerswill remain with their existing suppliers but as the electricity marketsevolve, retail customers will be able to choose their suppliers.The new Act grants “third-party access” to such infrastructure.But that access is not defined. Usually, the first party is the owner ofthe infrastructure and the second party is its customers. The thirdparty is anyone else.Third-party access usually means that the owner of a naturalmonopoly can serve its customers first and that any capacity leftover can be used by others. The Act makes this clear – access canbe refused “where it lacks the necessary capacity”. This provisionprotects incumbents like Eskom and municipalities and could slowdown the evolution of market competition.ConcernsThe new act raises several concerns:Service magazine | 21

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