South Africa on the brink of a substantial evolution
In recent years, South Africa’s electricity market has been on a path of transition from a state-owned, vertically integrated monopoly to a multimarket structure. By Alexandra Cluver and Micaela Ferrier, Bowmans.
Starting in 2021 with the raising of generation licencing requirements for private power producers from 1MW to 100MW — a cap that in 2022 was removed altogether — this first step in the liberalisation unlocked investment by many of the country’s biggest power consumers, including Sasol, Anglo American and Sibanye among others, in the procurement of their own renewable power solutions.
Within the past year, new legislation and proposed draft regulations are paving the way for a fully transparent and open market, in addition to which the government is seeking private sector participation in the development of transmission infrastructure, seen as one of the major constraining factors in the development of more generation capacity. Both of these developments are likely to bring significant opportunities.
With the initial foundations laid, the market is now on the brink of substantial evolution, marked by the introduction of the draft Market Code in 2024 that will govern how electricity is traded, delivered, and settled through a day-ahead and intra-day pool across the country. The changes are expected to enhance transparency and competition and aim to further liberalise and diversify the sector.
The Electricity Regulation Amendment Act, which came into effect in January 2025, provides the legislative framework for the proposed Market Code, which is at the core of the South African Wholesale Electricity Market (SAWEM). Once fully operational — anticipated by 2031, following incremental stages of implementation beginning as soon as 2026 — SAWEM and the accompanying Market Code will completely reform the power sector.
Under the Market Code, entities such as participating generators, retailers, traders and eligible customers will buy and sell electricity on a short-term basis within a framework of medium and long-term energy security. The code will also formalise standardised rules for trading, settlement, and balancing — concepts that are key to competitive electricity markets worldwide.
In practical terms, a Balancing Responsible Party (BRP), which will include the majority of independent power generators, will have obligations in relation to the accuracy of generation forecasts and real-time balancing of supply and demand. This concept represents one of the most significant changes for IPPs: those with installed capacities of 10MW or more must submit forecasts of their electricity generation. Generators whose actual output deviates by more than 5% from their projections could incur financial penalties.
This shift imposes a new layer of financial risk on IPPs, which will not have been factored into initial modelling and may prompt renegotiation of power purchase agreements. Earlier PPAs did not incorporate the possibility of balancing penalties or account for the costs of mismatch between scheduled and real-time generation. To mitigate the impact of these changes, once implemented, some industry participants may look to introduce penalty-sharing mechanisms within PPAs to distribute risk more evenly between generators and offtakers, thereby creating incentives for both parties to adopt stringent forecasting practices.
Alternatively, battery energy storage systems may provide a solution to the potential inaccuracies in forecasting associated with intermittent renewable supplies such as wind and solar. IPPs may use batteries to help smooth out irregularities in generation, as well as potentially as an additional revenue source. Large-scale battery projects are already being used within government procured programmes to directly support grid stability and peak load supporting services.
A further key development relates to wheeling, wherein electricity generated in one location is transmitted across the grid to a user elsewhere. Under existing frameworks, wheeling agreements granted monthly reconciliation processes coupled with credits to compensate for transmission losses, thereby providing cost predictability for IPPs and offtakers.
Under the new Market Code, traditional wheeling mechanisms may be replaced with hourly reconciliation and fixed wheeling charges. Structuring PPAs to account for hourly forecasting and reconciliation, rather than monthly, could help manage risks associated with changes to the current wheeling framework as well as risks associated with forecasting deviation and changes to the wheeling framework.
Contract negotiations are likely to evolve, requiring new clauses around balancing responsibilities, penalty allocations, and ways to manage deviations in generation output. The code’s introduction likely will qualify as a “change in law” under existing power purchase agreements allowing parties to rework the relevant contractual provisions.
The role of storage solutions, participation in the intraday market, traders and financial hedging products that play in overall risk mitigation will remain to be seen and provide opportunity for proactive market engagement. The market operator is actively consulting with industry players in addition to which SAWEM’s phased introduction offers constructive lead-time to adapt business models.
During this window, IPPs, lenders, and other market participants should continue to engage in discussions with the market operator, industry associations and advisers. The Market Code represents a critical step in South Africa’s journey toward a liberalised, competitive, and efficient electricity market, yet such full-scale reform will not be without its challenges.
Stakeholders who navigate this landscape successfully stand to benefit from a more dynamic and diverse energy market. Whether through flexible contractual arrangements, robust forecasting models, or strategic investments in storage, market participants will need to embrace a more nuanced understanding of operational and financial responsibilities.
A further pivotal juncture in South Africa’s energy transition and similarly underpinned by the Electricity Regulation Amendment Act is the move to private sector participation in electricity transmission, one of the areas that has become an increasing constraining factor to the ongoing development of private generation.
In recent months, the Department of Electricity and Energy has unveiled specific programmes that actively invite private companies in the construction and maintenance of new transmission lines. These moves build upon commitments set out in the Draft Integrated Resource Plan 2023 (IRP 2023) and the 2024 Transmission Development Plan (TDP 2024), both of which detail substantial changes to the country’s generation and transmission landscape, including the planned construction of approximately 14,000 kilometres of new high-voltage power lines by 2034.
A central focus of South Africa’s new strategy is the introduction of Independent Transmission Projects (ITPs) involving private investors in the designing, financing, and building of transmission facilities before transferring ownership to the National Transmission Company South Africa (NTCSA) upon completion of a concession period.
The NTCSA, newly established as a legally separated subsidiary of Eskom, is expected to manage, operate, and buy transmission capacity from these private providers. The legislation enabling this ownership and transfer structure is contained in the Electricity Regulation Amendment Act, with further clarifications expected in regulations that the Ministry of Electricity and Energy has indicated will be opened for public comment later this year.
In line with the overall liberalisation of the energy sector, the emphasis on private sector procurement for transmission lines marks a historic departure from Eskom’s long-held monopoly. A pilot procurement has already been announced for approximately 1,164km of 400kv lines, covering corridors in the Northern Cape, the North West Province, and Gauteng. The request for proposals is anticipated to be presented in November this year, preceded by a request for qualification in July. The Independent Power Producer Office — which has led South Africa’s competitive renewables bidding programmes since 2011— will oversee this pilot.
Legally, these developments raise several considerations. For example, whether long-term procurement contracts signed by NTCSA could trigger contingent liabilities for the state — while NTCSA has been legally separated from Eskom’s generation and distribution businesses, it remains under Eskom Holdings and investors remain aware of Eskom’s broader liquidity issues.
On previous government-led procurement programmes, the obligations of Eskom have been guaranteed by the Department of Electricity and Energy, however the Minister of Electricity & Energy, Kgosientsho Ramokgopa, speaking at the Africa Energy Indaba in Cape Town, indicated the fiscus won’t be able to carry the obligations of an independent transmission programme. In order to ensure the financability of private transmission, structures will need to ensure certainty of repayment and stakeholders have emphasised the need for tariffs and/or ring-fenced revenues sufficient to repay lenders and investors in these projects.
Secondly, there are numerous practical and legal hurdles in implementing large-scale transmission projects of this nature. Although the legislative framework allows for expropriation of land needed, proposed reforms to expedite these acquisitions can be complex. Some projects that have private sector transmission infrastructure attached to them have already been significantly delayed as a result of increased landowner contestation and the difficulty of obtaining environmental authorisations on a tight timetable.
Investors and contractors participating in the pilot must be mindful of regulatory compliance under the National Environmental Management Act (NEMA) as well as global environmental and social standards. These approvals processes, while essential to safeguard the public interest, remain time-consuming in practice.
In commercial terms, the pilot programme could be transformational for both the national grid and broader energy security. Transmission capacity constraints have, for many years, prevented wind and solar developments in high-resource areas from achieving full output, leading to significant economic losses and undermining investor confidence. Nevertheless, cautionary tales from other markets highlight the importance of balancing speed and quality.
While the government’s focus on accelerating transmission roll-out is commendable, it must be accompanied by comprehensive contractual risk management. This includes clarifying the scope of obligations carried by private developers, the NTCSA’s responsibility for securing permits, and the recourse available to independent transmission projects and their lenders should the government fail to meet its contractual commitments.
South Africa’s new approach to private sector involvement in electricity transmission — via such mechanisms as ITPs — represents a promising solution provided implemented appropriately. These efforts build on an existing track record of public-private partnership in renewables procurement, which have widely been lauded as a successful blueprint for other markets, and mark a significant next step in the broader pursuit of energy security and low-carbon growth.
We will be watching the pilot programme, along with our clients and other stakeholders with interest. Should the legal and financial architecture prove workable, it may well integrate new renewable energy sources more effectively, chart a path for future infrastructure developments in sub-Saharan Africa, and stand as a case study of cross-sector collaboration in the face of enduring energy challenges.
The coming into effect of the amendment to the Electricity Regulation Act, as well as the publication of the Market Code usher in new opportunities for investment and participation in the liberalisation and transition of the South African energy market. While not without hurdles, ongoing consultation with government stakeholders as well as continued innovation within the private sector will assist in ensuring appropriate mitigants are put in place to encourage successful implementation of both.
