NERSA has released Version 3 of its Draft Rules for Electricity Trading for public comment. The Draft Rules set out how South Africa plans to introduce competition into the retail electricity market. The rules will be implemented in phases, starting with large electricity users and eventually expanding to all customers.
The latest draft is more detailed and market-focused than the previous version with important concepts such as direct supply agreements, electricity trading agreements, virtual wheeling, top-up customers, and balance responsible parties now clearly defined.
The Draft Rules acknowledge that large commercial and industrial customers have different needs and capabilities from residential consumers. This is a positive shift from earlier drafts, which were largely focused on consumer protection.
The Draft Rules provide clearer timelines and procedures for reconciling energy transactions between traders and network service providers. In addition, the treatment of wheeling credits, top-up energy, and non-bypassable charges has been expanded.
Despite these improvements, several aspects of the Draft Rules may concern market participants including:
- The licensing position of Eskom and municipalities is unclear
The Electricity Regulation Act requires electricity trading to be licensed separately from electricity distribution. However, Eskom Distribution and municipal distributors do not currently hold separate trading licences. The Draft Rules continue to allow these entities to act as the default retailers during the first two phases of market reform, while full separation of distribution and trading activities is postponed until Phase 4 which will be at least six years after the launch of the South African Wholesale Electricity Market (SAWEM). This could allow incumbent distributors to retain significant competitive advantages for many years.
- Traders cannot participate in the wholesale market
Licensed electricity traders will not be allowed to buy or sell electricity directly in SAWEM during Phases 1 and 2 of market reform. Traders may only apply to participate from Phase 3, which cannot begin until SAWEM has been operating for at least three years. This restriction may limit traders’ ability to manage risk, access wholesale prices, and compete effectively with established distributors.
- Continued restrictions on virtual wheeling
Virtual wheeling will only be available once SAWEM goes live, only for customers with connections larger than 100 kVA, and only after various operational and regulatory requirements have been met. In addition, virtual wheeling cannot operate fully until further rules are developed. These limitations could make it more difficult for traders to offer flexible energy solutions and may reduce investment opportunities in new generation projects.
It is also worth querying whether it is in fact appropriate for wheeling, reconciliation, and virtual wheeling aspects to be regulated in these rules, as opposed to being dealt with in separate policies approved by NERSA.
- Significant reporting requirements
Traders will be required to submit reports, including copies of various commercial agreements, to NERSA every six months. Many market participants are likely to view these obligations as administratively burdensome and potentially intrusive, particularly where commercially sensitive information must be disclosed. A simpler reporting regime based on aggregated data may achieve NERSA’s oversight objectives more efficiently.
- Limited dispute resolution framework
The dispute resolution provisions remain relatively high level and parties are expected to try to resolve disputes themselves before approaching NERSA for mediation, arbitration, or investigation. However, the rules do not provide an expedited process for urgent disputes affecting market operations, data access, or security of supply, nor do they adequately address situations where a network service provider is itself a party to the dispute.
The revised Draft Rules represent a significant step towards opening South Africa’s electricity market to competition. However, the pace of market liberalisation remains cautious.
Stakeholders should use the consultation process to encourage refinements that support both an orderly market transition and meaningful competition, innovation, and investment in the electricity sector.
