The Energy Regulation and Markets Review - Stikeman Elliott

South Africa
the funding mechanism for such energy feedstock or carrier; and the obligations to be
imposed, on producers of energy feedstocks, to supply to the nominated state-owned
entity the requisite energy feedstock, in a manner prescribed by regulation.
IV
ENERGY MARKETS
i Development of energy markets
Currently no organised markets for electricity or gas trading exist in South Africa. As
previously mentioned, under the ISMO Bill the ISMO will act as the sole market operator
in a single buyer market where it will aggregate all commercial generation purchases
and wholesale electricity sales to distributors. Electricity purchases by the ISMO will
be, at least over the short to medium term, subject to long-term take-or-pay power
purchase agreements with fixed tariffs, including existing power purchase agreements
concluded by Eskom as buyer which will be assigned to the ISMO by regulation. Under
the ISMO Bill, therefore, the ISMO will purchase electricity and then resell electricity to
distributors and large customers. The regulations and rules that will govern the ISMO’s
conduct as market operator have yet to be developed and it is therefore unclear at this
time when (or even if) South Africa will develop electricity markets to facilitate direct
sales among generators, traders and end-use customers.
ii Contracts for sale of energy
Electricity
Historically bilateral electricity purchases have not been precluded by law. Given the low
cost of electricity and high level of security of supply maintained by Eskom, 53 however,
South Africa did not offer any real opportunities for competing generators to engage in
the supply of electricity on a sustainable commercial basis.
By January 2008, South Africa’s reserve margin plummeted to 5 per cent.
Although by 2011, its reserve margin had increased to 14.9 per cent, it is generally
considered that the reserve margin will be under severe negative pressure over the next
five years given extended delays in the construction programmes for new Eskom baseload
generators, extended maintenance outages arising from the deferral of routine
maintenance on existing generators and increased demand. From April 2008 to March
2011 average wholesale electricity tariffs more than doubled (to 52 South African cents
per kWh) at an average annual escalation of about 23 per cent. According to information
presented in parliament, Eskom has assumed annual increases of 25 per cent for the
period April 2012 to March 2015 and increases of 6 per cent thereafter. Consequently,
many energy-intensive users, particularly in the minerals sector, have announced plans for
the procurement of IPP capacity under bilateral electricity sale and purchase agreements.
Recent proposed amendments to the electricity regulatory framework have
brought a measure of uncertainty as to the potential for the development of bilateral
energy markets operating outside the regulated single buyer market. As previously
53 Over the 1970s to 2007 South Africa enjoyed high reserve margins, generally in excess of 15
per cent.
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