� Green Industrial Policy for Investment-led Inclusive Growth for Africa 

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Energy Regulations for Industrialisation

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Dr Kenneth Creamer

Input to IDC and CSST Conference

Johannesburg

19 May 2025

Electricity an important part of South Africa’s competitiveness

• South Africa’s electricity planning is a key element of the country’s industrial policy and growth agenda.
• (This input does not provide comment on wider energy issues e.g. oil refining and importation of refined fuels, gas imports and exploration, electric vehicles and related infrastructure, green hydrogen – all of which are facing critical policy choices.)
• Historically coal helped to drive the growth of South Africa’s Minerals and Energy Complex as it allowed for the competitive production of electricity that underpinned certain beneficiation activities and industrial investment.
• In the current global environment South Africa must plan for a new secure, low-cost, low-carbon electricity profile.

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Sources of South Africa’s electricity supply 2020-2024 - theoutlier.co.za

Investment in electricity infrastructure

• Some initial steps have been taken to begin the transition of SA’s electricity sector and investment in electricity infrastructure is on the rise.
• South Africa has 6,505MW of installed renewable energy capacity according to Eskom. For comparison, Kusile, which is one of the biggest of South Africa’s 14 coal power stations, has installed capacity of 4,800MW.
• But it is important for policy makers and regulators to have a clear understanding of the what this transitions means for the structure of electricity market in order identify arising challenges that will have to be met and questions that will have to be answered

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What is driving investment in electricity sector?

• Investment in new electricity generation capacity in South Africa is being driven by a number of factors:
• (1) The IRP-endorsed public procurement of renewable and gas IPPs, backed by state guarantees (a programme that is struggling to sustain a steady tempo, largely because of grid-investment backlogs, but also because of changing market dynamics that have undermined the attractiveness of the programme in its current form);
• (2) The legal separation of the National Transmission Company South Africa (NTCSA) from other Eskom divisions as a precursor to the establishment of a fully independent transmission system and market operator within five years, and the development of a competitive electricity market;

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What is driving investment in electricity sector?

• (3) Rooftop and battery storage investment by companies and households that were seeking supply security during the intense loadshedding of 2023 and 2024 and are now seeking to save on their rising electricity bills.
• (4) Changes to the Electricity Regulation Act allowing private investment projects of any size to proceed without a license, including projects that use the grid to wheel electricity. Some investment is now also being supported by traders that are using wheeling and virtual wheeling to supply green electricity to multiple customers.

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Since 2021 energy sector reforms have unlocked over R400 billion in private investment to date

• Operation Vulindlela reports that over 9.5GW of capacity has been registered with Nersa since lifting of licensing restrictions in 2021 (as part of the response to loadshedding). The most recent SA Renewable Energy Survey shows a pipeline of 134 GW of projects in development.

Much of the new investment in electricity capacity has been in solar and wind generation capacity due to cost advantages and build time advantages

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SA’s electricity market is itself transitioning – market structure and dynamics are changing

• Electricity is being produced in new ways and electricity is being bought and sold in new ways.
• We are at the beginning of an electricity market transition and we are getting glimpses of the new, but much still remains opaque and is in the process of being revealed.
• The transition of the electricity market is being driven by new lower cost electricity production technologies which have the potential to make firms and factories more competitive.
• What are we seeing is that while households and firms are continuing to buy some electricity from Eskom and municipalities, they are also beginning to produce and store their own electricity, some are even beginning to sell the electricity that they produce back into the grid (producer + consumer = prosumers).
• Products are being developed for small business and spaza shops to access electricity more cost effectively. Some are having solar and battery systems installed linked to their spaza shop payment systems.
• Electricity trading entities are being set up whereby small businesses do not install any hardware they simply push down their electricity costs by buying wheeled low-cost renewable electricity that may even have been produced in another province.
• At a larger scale, mines and factories are cutting their electricity bills by entering into purchase power agreements with private electricity producers on site or wheeled to them.

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Electricity market transition

• Against these emerging electricity market realities government’s Integrated Resource Plan (IRP) continues to publicly procure electricity via a competitive bidding process.
• Unlike the purely market-driven investments, the IRP’s procured electricity enjoys a state-backed guaranteed purchase price to be paid by Eskom (ultimately customers) over a multi-year period.
• The IRP also seeks to plan the electricity system – outlining when aging coal power stations will be decommissioned, and how a mix of solar, wind, gas, nuclear, battery, hydro sourced electricity, as well as private power, will be used to balance the system.
• The IRP is meant to be a technical planning instrument that identifies the least cost, reliable electricity supply with explicit costing of any deviations from the least cost option.
• Fundamentally, these technological changes mean that electricity can be produced more cost-effectively across a range of sizes of solar and wind plants.
• This has a profound implication as the natural monopoly model is no longer the correct model for understanding minimum costs in electricity generation as lower costs can be achieved by a larger number of small generation units operating in a relatively competitive model.

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Electricity generation is no longer based on a natural monopoly model

• Natural Monopoly
• Generation efficiencies are no longer secured by large natural monopoly suppliers that invest in large-scale plant (typically coal, nuclear and hydro) and achieve falling average costs with larger and larger output.
• Cost falls as output increases from 1 to 2 to 3 so one producer is best to supply the whole market demand.

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• Relatively Competitive Market
• With the new technologies, such as wind and solar, lowest costs are produced by smaller, distributed generation facilities that can operate with many producers in a relatively competitive market.
• Cost falls as output rises from A to B, but production facilities of different sizes B, C, and D can all compete in meeting market demand, at E diseconomies of scale begin to set in so production facilities of that size will not be competitive.

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Transmission and distribution systems

• In addition to planning for the electricity generation system, there is planning of the electricity transmission and distribution systems. Given its size and capabilities, Eskom has a key role to play in this process.
• Due to changing technological and market dynamics, the world-over vertically integrated electricity systems are being restructured into separate generation, transmission and distribution systems each with their own logic, governance, market structure, and regulatory requirements.
• Transmission and distribution systems need to be expanded in order to move electricity from lowest cost production areas (such as the Northern, Eastern and Western Cape) to where it is needed. Against this, strong arguments are also made to use existing grid capacity in areas like Mpumalanga even if renewable energy production assets are superior in other provinces.
• Investment is also required in new digital control and balancing systems to ensure stability of the grid.
• All of these grid investment costs must be taken into account in quantifying the cost of the electricity transition, but generally the transmission and distribution infrastructure costs are a small fraction of the cost of investment in new generation capacity.

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Transmission and distribution systems

• Ultimately, transmission and distribution systems provide a platform for competitive trading among electricity producers who need to pay fees to be connected to and to make use of the transmission and distribution systems.
• Transmission and distribution systems are essential facilities for the operation of the country’s electricity system and are likely to maintain natural monopoly the characteristics and may need to be regulated as such.
• National Transmission Company South Africa (NTCSA) is being restructured as a separate operating entity and will be responsible for expanding and modernizing the electricity grid as well as being the system and market operator of the country’s electricity system.
• NTCSA has plans to build over 14 000 km of transmission lines and related infrastructure in the years ahead, and in an attempt to accelerate this process private companies will be invited to bid to build some of the planned transmission infrastructure on a build-own-operate-and-transfer (BOOT) basis as has been done in a number of countries including India and Brazil.

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Demand for steel, concrete and components linked to transmission grid investment

• The National Transmission Company South Africa (NTCSA) is tasked with mobilising public and private investment to expand and modernise the national electricity transmission grid by over 14000km, and related transformer infrastructure, over the next decade. Although progress has been slow (74kms built in 2024).
• This should boost demand for concrete, steel, pylons, transformers, batteries, electricity meters, engineering, construction, legal and financial skills, and other goods and services that this investment will stimulate.
• The Minister of Electricity and Energy has announced an inaugural concessioning programme across seven corridors to facilitate private sector investment in building over 1 000km of South Africa’s new transmission grid.

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Emerging regulation challenges in electricity generation and trading

• Nersa’s role in regulating electricity tariffs has been based on the assumption that electricity is generated and sold by a natural monopoly (Eskom).
• While Eskom’s dominance in electricity generation is likely to continue for some time, increasingly competitive pricing dynamics will enter the market as large and small firms can purchase lower cost electricity than what is produced by Eskom.
• It would be important to review what impact this should have on Nersa’s role in regulating electricity tariffs with reference to relevant comparative international best practice.
• Emerging wheeling and trading models are complex and virtual – as such effective requirements must be put in place to promote openness and transparency in order to avoid the inherent risks associated with opaque, financialised markets and derivate markets.
• For example, there needs to be reliable transparent mechanisms to ensure audits of Renewable Energy Certificates being used in wheeling and trading electricity to limit the risk of fraud and misrepresentation.

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Emerging regulation challenges in transmission and distribution

• With regard to transmission and distribution systems which are likely to maintain certain natural monopoly characteristics – it will be important ensure that a fair prices is used for access to these essential facilities so that there is enough ongoing capital for investment in the systems including maintenance and modernization.
• The regulation must avoid a situation where electricity users – as well as traders and wheelers – are not paying, or are ‘free riding’, or are not paying enough for required growth and maintenance of the transmission and distribution systems.
• Equally, the regulation must avoid a situation where electricity users – as well as traders and wheelers – are paying too much for connecting to and using transmission and distribution systems as this will push up electricity prices and and impact negatively on the economy’s overall competitiveness. 
• The regulation and pricing of the transmission and distribution systems will be a complex matter as the dynamics of a more competitive, distributed power system, with a mix of electricity sources with different characteristics will be a complex matter.
• This complexity will be further impacted by the need for transfers to ensure that there is effective subsidisation of the electricity costs of poor and indigent households, as well as problems such as illegal connection and the poor state of local government electricity infrastructure and finances.
• Particular attention is required at the local government level including the possible role of distribution companies and the use of Eskom’s distribution capabilities. Again, reference to relevant international best practice will be advisable.

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Risks to South Africa’s Energy Transition

• A number of risks have emerged that are threatening to derail and delay South Africa’s Just Energy Transition:
• The pace and scale of new generation investment that is not sufficient to ensure future security of supply and help address the health risks and costs of non-compliant coal plant emissions, as well as decarbonisation goals;
• The investment backlog in transmission and distribution grids has emerged as a major risk to connecting new generation plants. SA is seeking to address through the unbundling of the NTCSA and the opening of the transmission market to private sector participation, with the first tender expected by year-end; and initiating a review of the Electricity Distribution Industry structure, as municipal arrear debt to Eskom climbs to above R100bn.

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Risks to South Africa’s Energy Transition

• Electricity planning has become increasingly opaque, with major changes integrated in the latest draft IRP (which is before Nedlac) having not been fully consulted and with indications that it is not guided by low-cost, low-carbon objectives, but is rather influenced by vested interests – e.g. there is the prospect of to much imported gas being used electricity source (driven by the ‘gas cliff’ being faced by factories that have used diminishing Moz gas to power their operations), rather than as a flexible source of power to address gaps in supply that will arise as more variable renewable energy is integrated into the system – this will increase the cost of electricity as lower-cost renewable generation is crowded out or sterilised in favour of dollar-denominated gas-to-power;
• The extension of life of old coal-power plants threatens to continue to push up risk of unplanned outages in the system and put upward pressure on electricity prices as these plants become more expensive and unreliable to run, while also compromising low-carbon commitments and related financial concessions, as well as the health of near-station communities;

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Risks to South Africa’s Just Energy Transition

• There should be no further delays in Eskom’s restructuring plans as ongoing private investment requires the creation of a competitive electricity generation system, as well as a fully functional and independent state-owned national transmission company and system and market operator;
• It is concerning that Eskom has decided to take to court the award of trading licenses in an attempt to enforce Eskom’s distribution monopoly (although Eskom has said that it supports the principle of competition, but does not regard competitors’ use of distribution grids to be allowed under current regulations).
• There are also questions about the way Eskom is intending to treat those customers that invested in rooftop solar and batteries to overcome loadshedding, with changes to the tariff structure likely to have a potentially chilling effect on existing customers, who may defect entirely as a result, as well as on new investment.

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Risks to South Africa’s Just Energy Transition

• The rising municipal arrear debt has not been arrested through various interventions and the distribution sector is looking increasingly unsustainable. Far-reaching restructuring is urgently needed, but the solution also need to be aware of the Constitutional rights of municipalities in the area of electricity distribution;
• There is also global uncertainty that will have to be navigated regarding international commitment to SA’s JET-Investment Plan (the US has pulled back), to the future of global cooperation on the reduction of carbon emission (US pulling out of Paris Accord), and on the EU’s implementation of CBAM;
• The ITAC review of tariffs on renewable energy inputs needs to take account both of the opportunities to spur green industrialisation through tariff policy and the risk that such intervention could have on electricity prices.

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Conclusion: Appeal for a wider view of the Just Energy Transition

• A wider economic perspective is required in defining ‘winners’ and ‘losers’ resulting from the energy transition.  Up to now the just energy transition has been defined too narrowly. 
• The focus has been on ensuring that workers and communities from coal-producing areas and around coal-fired power stations should be supported through the creation of new economic opportunities and training as end-of-life coal operations are decommissioned or repurposed.
• While the interests of such workers and communities must clearly be taken into account in the process, the question needs to be asked as to who are the ‘losers’ if the energy transition is not taken forward? 
• Efforts to slow down the restructuring of Eskom and the energy transition on the grounds of ‘justice’ will have negative effects on growth, investment, and job creation. 
• In the longer run, the economy will be less competitive if it fails to decarbonize and go with least cost electricity solutions, again this will result in lower levels of growth, investment and job creation.  
• A full cost-benefit analysis would show the overwhelming net economic benefit of an accelerated energy transition that achieves energy security, widens access to electricity, decarbonizes, contains electricity costs, stimulates growth and investment, and reduces unemployment across a wide range of economic activities. 
• A successful energy transition is a necessary condition for increased competitiveness, and higher rates of economic growth and job creation.�

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Historical economic growth rates in South Africa

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