By Jason van der Poel, Emma Bleeker and Kiera Bracher
On January 1, 2025, the Electricity Regulation Amendment Act 38 of 2024 (ERAA) came into effect, following extensive stakeholder engagement and multiple draft iterations. The ERAA aims to usher the South African electricity sector into an era of change, continuing the shift from Eskom's historically vertically integrated monopoly to the establishment of the Transmission System Operator (TSO) and the introduction of an open-market platform that enables the competitive trading of electricity.
The government legislative team displayed a high degree of responsiveness to industry feedback, and as a result, this new law has been largely welcomed by stakeholders.
This article provides a high-level outline of three key changes that everyone looking to participate in and capitalise on the South African electricity sector should know. It also flags some provisions of the ERAA that seemingly contradict the open and competitive market it intends to create.
Transmission System Operator
Arguably the most significant shift expected in the reformed electricity market introduced by the ERAA is the establishment of the TSO, which follows on from the unbundling of Eskom, which began in 2019. The TSO is intended to act as a system operator, market operator, transmitter, and central purchasing agency, ensuring the establishment of an open-market platform that facilitates competitive trading of electricity. In 2024, Eskom hosted a series of public consultations on a draft market code, during which the new rules for the operation of South Africa's new open and competitive electricity market were thoroughly canvassed.
However, some provisions of the ERAA seem directly to contradict the legislatively mandated purpose of the TSO. For example, the National Energy Regulator of South Africa (NERSA) has the power to "set and approve prices and tariffs" under the ERAA, except in relation to “direct supply agreements". Power purchase agreements between generators and traders (as customers) do not fall within the ambit of “direct supply agreements.” Section 15(4) of the ERAA states that "a licensee may charge customers tariffs which have not been set or approved by NERSA when the applicable tariff is charged pursuant to a direct supply agreement or arises as an outcome of a competitive market.”
This creates a situation where a willing buyer-willing seller relationship between a generator and a trader (as a customer) could be stalled without NERSA setting or approving the applicable tariff, due to the restrictive definition of direct supply agreements. This language undermines the open and competitive market that the ERAA aims to establish.
Reticulation and municipalities
The South African Local Government Association (SALGA) has been among the most vocal opponents of the ERAA, due to what it regards as putting the function of municipalities within the electricity sector into crisis. As a result of the criticisms levied by SALGA, the definitions of “reticulation,” (effectively distribution) and “distribution power systems” have not come into effect along with the rest of the ERAA. These definitions will come into effect at a date determined by the President through proclamation in the Gazette.
SALGA's primary concern revolves around the claim that the ERAA undermines municipalities’ right to reticulate electricity within their areas. However, while Schedule 4B of the Constitution grants municipalities the right to reticulate, it is not explicitly clear whether this right is exclusive.
The nature of municipalities' right to reticulate is an issue to be determined by our courts. In addition to legislative interpretation, the courts will hopefully be alive to the fact that half of South Africa's distribution grid is owned and operated by municipalities, meaning that their role in the market is important. Municipal debt to Eskom currently sits at over ZAR 95 billion and is growing, which could potentially frustrate the transformation Eskom needs to undergo. SALGA has threatened litigation over the ERAA, and the sooner clarity is provided on this delicate issue, the better for all involved.
The role of the Minister
The Minister of Mineral Resources and Energy (which we assume to refer to as the new Minister of Electricity and Energy) (the Minister) is afforded broad discretionary powers under the ERAA. According to section 34 of the ERAA, the Minister is entitled to make a determination for new or additional capacity if there is a "failure of a market", "an emergency," or "for purposes of ensuring the security of energy supply in the national interest."
Included in the provision is the power of the Minister to deviate from the Integrated Resource Plan (IRP), which serves as the national roadmap for meeting South Africa's energy needs. Reasons for deviating from the IRP should be few and far between, but, instead, the trigger events for a Ministerial deviation in the ERAA are undefined and broad in scope. Judicial intervention may eventually be needed to give greater certainty as to what the trigger events entail and to limit the far-reaching discretion afforded to the Minister.
Just as important as what has been included in the ERAA is what has been taken out. Under the previous Act, new generation capacity under section 34 was required to be established through a fair, equitable, transparent, competitive, and cost-effective tender process. However, no such requirement exists under the ERAA. Furthermore, section 34 empowers the Minister to make determinations regarding additional electricity, new generation capacity, and electricity transmission infrastructure, "after consultation" with NERSA and the Minister of Finance. Under South African law, "after consultation" means that prior consultation is required, but that it is not necessary to reach an agreement before a decision is taken. "In consultation" would require consensus.
These changes not only afford the Minister more freedom under the new legislation but seem contrary, in principle, to the competitive market the ERAA aims to facilitate and encourage.
The Minister is authorised to grant Ministerial deviations in respect of activities that require a license. License applications must be submitted through NERSA, including evidence of IRP compliance or reasons for any deviation from the Ministerial approval. Section 10(2)(g) of the ERAA retains this provision, despite concerns about the impracticality of obtaining Ministerial deviations. Fortunately, projects exempted from the legal requirement for a generation licence under Schedule 2 of the ERAA do not require a Ministerial deviation, avoiding this potential obstacle. However, for licensed activities, the result could be a bureaucratic deadlock, which is at odds with the creation of "an open market platform that allows for competitive electricity trading".
The ERRA heralds a bold new era for the South African electricity market and is to be welcomed. Stakeholders in South Africa's electricity market may need to rely on its judicial system to limit government power and provide clarity on certain issues arising from the ERAA. The challenges outlined above are not exhaustive, and more are likely to emerge as stakeholders navigate the new legislative landscape.
Jason van der Poel, Partner; Emma Bleeker; and Kiera Bracher are associates at Webber Wentzel
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