Energy experts stress need for broader reforms of SAWEM to benefit economy

Energy policy experts say the South African Wholesale Electricity Market (SAWEM), which is expected to unlock new investment in power grid infrastructure should be complemented by clarifications on contracts, tariffs structure and complemented by wider reforms such as the unbundling of Eskom.

South African Renewable energy and independent power producer, NOA, believes that SAWEM is a catalyst for the South African energy sector but reckons that more needs to be done for the platform to yield tangible benefits for South Africa’s wider economy.

“SAWEM is part of South Africa’s (energy sector) reform journey – it enables transparency, liquidity and efficiency. But wider reforms also matter (including) Eskom unbundling, NTCSA independence, vesting contracts, capacity markets, as well as industry, regulator and public sector collaboration,” said Andrew Taylor co-founder of NOA Group.

Financial advisory firm, Cresco believes that as South Africa shifts toward a grid increasingly powered by renewable energy sources, particularly inverter-based resources (IBRs) like solar and wind, grid management and balancing of power will become increasingly complex, extending beyond matching real-time supply and demand.

“Grid stability and resilience where flexible generation, including BESS, will play an important role in providing essential ancillary services to the system. As per Cresco’s model, renewable energy capacity will double between now and 2030, presenting new challenges to the System Operator (although) SAWEM is expected to facilitate new capacity procurement,” said Olga Suchkova, an associate director for Cresco.

This comes as new milestones have been announed for SAWEM. According to the National Transmission Company South Africa (NTCSA), the launch of SAWEM will be on 1 April, preceeded by public hearings for a market operator licence this month, with final approval scheduled for January or February next year.

Cresco believes nonetheless that there should be further tariff unbundling, as well as electricity market reforms to match a global market pathway especially at a time African peers such as Nigeria, Morocco, Kenya, Tanzania and others are already moving ahead.

“South Africa must not fall behind. SAWEM unlocks growth, jobs, and competitiveness for SA Inc,” said Suchkova.

In that regard, SAWEM can act as a catalyst for reform, bringing transparency, competition and investment confidence to South Africa’s electricity market and supporting transparency, competition and investment confidence. It also enables modernisation of the grid and fair cost distribution.

Jason van der Poel, an energy policy ecpert with law firm, Webber Wentzel, said SAWEM allows existing bilateral contracts to continue and to remain external to the market.

“Private public agreements between independent power producers and Eskom under the formal government procurement programmes will transact within the market through the CPA as a legacy contract, for which rules need to be defined. It will be mandatory for generators greater than 10MW to register as BRPs, even if selling or trading bilaterally,” said Van der Poel.

Offtakers will stay outside the market will not carry balancing obligations while SAWEM will introduce new cost reflective tariffs.

SAWEM, if properly handled, added Van der Poel, will “encourage investment in the electricity sector in South Africa, encourage generators of electricity to optimize their production of electricity and to innovate” and lead to greater cost transparency. This will be in addition to unlocking “new investment” in grid infrastructure.

However, Webber Wentzel has recommended a staggered approach to the launch of SAWEM, with an initial phase involving only Eskom Generation and Eskom Distribution / NTCSA. This will allow for confidence from the private sector to grow before they take the plunge into the market.

“The market needs certainty as to the form of vesting contracts, legacy contracts and their tariff structure, certainty as to the unbundled wholesale electricity tariffs and the proportion of fixed and variable charges and certainty as to the contractual mechanisms involved in becoming a market participant; and the creation of clear rules by Nersa, leveraging its Electricity Market Advisory Forum, to support the smooth introduction and functioning of SAWEM,” it said.

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