By Alexandra Felekis, counsel in Allen & Overy’s Projects team
South Africa has taken an important first step towards liberalising its energy market. The government noted its intentions when the minister of Mineral Resources and Energy published the 2nd Amendment Bill of the Electricity Regulation Act, 2006, for public comment earlier this year.
Alexandra Felekis, counsel in Allen & Overy’s Projects team. Image credit: Allen & Overy
In March 2023, the Amendment Bill was approved for submission to parliament. The bill outlines the planned transition from a monopolised, mostly single-buyer power market to a competitive multi-market, managed by a transmission system operator (TSO). The hope is that this shift will solve the electricity crisis and reduce electricity prices by promoting competition in the South African electricity industry in the medium to long term. This could also lead to changes across the continent.
With the lowest regional generation capacity in the world, improving the electricity supply is critical to socioeconomic development in sub-Saharan Africa. Alessandra Pardini, a Johannesburg-based partner from global law firm Allen & Overy, notes: “While some unbundling of utilities has occurred in Africa over recent decades, most countries still have vertically integrated utilities with little or no private participation. Of the 54 countries in Africa, only ten have unbundled utilities with either an independent TSO or a legally unbundled transmission system.”
South Africa is in a somewhat unique position, borrowing traits from both developed and developing countries as far as its electricity market is concerned. While there is potential for regional influence, South Africa may not intend to liberalise its own electricity industry in exactly the same way.
How will it work in South Africa?
The Amendment Bill presents three ways in which electricity can be bought and sold, namely:
- trading, through a non-discriminatory trading platform in which market participants may trade with each other on an hourly and daily basis
- private power purchase agreements, in which licensed or registered generators enter power purchase arrangements with direct customers and traders
- regulated power purchase agreements by generators with the single buyer office of the TSO, or buyers as determined by the minister and the Department of Mineral Resources and Energy
What is needed for success?
Implementation will be a major factor as to whether this transition works. Based on extensive experience in developed and developing electricity markets across Africa and the world, Allen & Overy’s analysis is that a successful market reform in any jurisdiction will hinge on these key elements:
- a clear intent and purpose for the reason for the restructure and developing a strategy around that purpose. The reasons could include the development of new generation capacity or the reduction of energy costs through transparency and competition
- the socioeconomic context of the jurisdiction. For example, in South Africa there is insufficient energy capacity to meet the demands of the country, requiring a fine balance between decarbonisation and ensuring security of supply for all citizens
- the interconnection capacity on the transmission and distribution systems and the appropriate management thereof
- the ability of a jurisdiction to attract funding to fund the restructure of the sector
- clear and robust legislation and rules of participation in the electricity market
- an impartial and capacitated system operator and energy regulator
- political will and buy-in at all levels of government
What is the potential in the rest of Africa?
The level of development in the electricity industry in Africa is disparate. There are varying degrees of grid infrastructure available across different countries to meet growing demand for electricity. Given the infrastructure differences that exist between South Africa and other countries in Africa, the transition towards a liberalised electricity market will probably look different throughout Africa. Countries housing a less-developed grid infrastructure are more likely to adopt a so-called ‘mini grids’ approach. For instance, Nigeria has a similarly sized economy to South Africa and a population of approximately three times more, yet it manages (by comparison to South Africa) with minimal installed grid generation and a large reliance on diesel. As such, liberalisation may not be given any impetus here as the decentralised grid infrastructure potentially meets Nigeria’s primary development goals.
Another consideration is that, despite a state’s failure to deliver adequate electricity services, governments in the region have adopted a protective approach in respect of the state utility companies. For example, in Botswana, to achieve the objective of becoming an exporter of electricity, the majority of both existing and planned generation assets are and will continue to be owned by the state utility company, with only a nominal amount of generation being allocated to independent power producers.
A further factor is whether there is a regulatory framework that allows for trading and wheeling of electricity in a country. For example, in Botswana, virtual supply of energy – in the way it is deployed in South Africa – is not permitted and electricity generated by private generators must be sold to the state utility company. In contrast, Zambia has a sophisticated private generation and virtual supply framework conducive to the evolution of a competitive sector.
Conclusion
When considering developed, decentralised electricity markets, it is clear that liberalisation is only the first step. Electricity markets, regulations and technical infrastructure will need to continually evolve to cater for the unforeseen issues that will arise. Ultimately, flexibility of the South African government and all other participants in the electricity market will be vital in order to achieve a successful market reform.