South Africa - Policy, Legal and Regulatory Framework in the Energy Sector

A. STRUCTURE AND OWNERSHIP OF THE SOUTH AFRICAN POWER SECTOR (i) The power sector and electricity market The power sector is narrowly defined as “a sector engaging in the production, processing, distribution and sales of electric power in forms suitable for feeding industrial processes and household equipment, and involved in the processing, distribution and sale of electric power from sustainable sources. (Baryla, et al., 2013). The term “power sector” includes the production, transmission, and trade of not just electricity, but also gaseous fuels, steam-extracted heat energy, hot water, or wind. In relation to electricity – power sector refers to the production and trade of electricity (i.e.: generation, transmission, and distribution), further subdivided into the professional and industrial segments. The professional industry/segment consists of companies whose primary activity is the production and distribution of power and the industrial segment generates power for their own use and surplus power may be delivered to the grid. A new area of the power sector that is gaining popularity and relevance is “presumption”. Thus, refers to entities that produce and consume their own electricity of smaller capacity than the industrial segment (e.g.: households, small farms). Power/electricity is a commodity. Therefore, there exists an exchange that enables purchases through different mechanisms termed as an electricity market. (ii) The case of South Africa Note worthily, S.A has started to recognize the importance of renewable power sources. Although IPP’s, who mainly uses renewable sources of energy, only provide 5%-10% of electricity generation. There is potential for the renewable energy IPP’s to play a bigger role, with SA’s Renewable Energy Independent Power Producer Programme (REIPPP) being lauded for its procurement design and private sector participation. The programme commenced in 2011 (known as “Round 1”) and in 2021 at “Round 5”. Furthermore, the president has relaxed licensing requirements for embedded generation, which is believed to induce more “prosumer” based renewable energy options. The power sector is structured as a combination of a natural monopoly and an single buyer model – the latter means that IPP’s can generate electricity which is to be sold to Eskom’s grid and distributed as Eskom's supply (Dyson, 2020). Recent amendments to regulations involving embedded generation (discussed in section 5) show slight movements away from this model. Currently, 173 municipal-owned producers and 13 private distributors are licensed to distribute and sell power to consumers. From a market perspective, Eskom uses its monopolistic position to supply power to other utilities, large industrial customers, commercial and residential customers, and also exports to the Southern African Power Pool (SAPP). B. THE REGULATORY ENVIRONMENT – ELECTRICITY ACT, POLICIES AND SECONDARY REGULATION Three key pieces of regulation govern the planning around electricity delivery. These are: the National Electricity Act No 34 of 2008 (NEA); National Regulator Act No 40 of 2004 and Electricity Regulation Act No 4 of 2006. Some of these were detailed in the preceding section. This section discusses each act as part of the overall regulatory environment for the sector. (i) The Electricity Regulation Act No 4 of 2006 (ERA) The ERA has a primary objective of establishing a framework for the supply of electricity. It also empowers National Energy Regulator of South Africa (NERSA) to be a custodian and enforcer of this framework. Additionally, it empowers the Minister of Minerals and Energy to, amongst other things, (1) determine the current amount of new energy to be generated as well as from which sources (2) state the requirement for new generation capacity, including procurement through a competitive and fair tender process and the extent of private sector involvement. From a NERSA perspective, the ERA defines the powers and the functions of the regulator, especially as it regards tariff setting and setting minimum technical standards for the process. Tariff setting and methodologies themselves are outlined in the Electricity Pricing Policy (2008).