Eskom’s monopoly is over, which is good news for electricity prices

Large electricity customers in South Africa can expect more certainty over prices through bilateral wheeling contracts and the open market for electricity trading, energy sector analyst Chris Yelland says.

The National Council of Provinces passed the Electricity Regulation Amendment bill in mid-May 2024, and it will effectively end Eskom’s 100-year monopoly in the generation space.

Following its passing, electricity minister Kgosientsho Ramokgopa said he hopes the open market for electricity trading, which the bill aims to establish, will lead to a “semi-price war”.

MyBroadband spoke to the managing director at EE Business Intelligence, Chris Yelland, about the minister’s comments.

Yelland explained that Eskom’s electricity tariff hikes have been somewhat unpredictable and that the move to an open market will provide certainty.

“You need some degree of certainty, and that’s what wheeling of power, trading of power, or buying on an electricity market is going to provide you,” he said.

“Right now, customers have an account with Eskom, or they have an account with a municipal distributor, and they buy their electricity from them.”

Yelland explained that once the open market for electricity trading is established, these customers will be able to buy a portion of their electricity through bilateral wheeling contracts with an IPP, a trader, or the market.

“Let’s say you enter into a five-year offtake agreement with a trader or IPP; it may be that prices are initially higher than Eskom’s,” he said.

“In subsequent years it could become a lower price because Eskom’s prices are increasing at more than two times the inflation rate.”

Yelland explained that purchasing power through a five-year contract linked to CPI is very attractive for various reasons, one of which is certainty on electricity prices.

“There’s a clear sight of what your price of electricity is going to be. You would know that in real terms, your price of electricity is constant,” he said.

He added that the electricity sold or traded will generally be greener than that produced by Eskom.

“So, it’s one way of decarbonising stage II emissions,” said Yelland.

Stage II emissions are those produced by an electricity supplier such as Eskom. With the impending carbon border adjustment mechanism, South Africa must reduce stage II emissions to export carbon-intensive goods.

Yelland said the European Union has already implemented the mechanism, and several other countries are set to do so.

“Unless South Africans decarbonise the industry, they will be penalised if they try and export their product to regions like the European Union and the US,” he said.

On 21 May 2024, Ramokgopa told reporters that the passing of the Electricity Regulation Amendment bill could mark the end of “extraordinary” tariff price increases in the country.

The minister said the open market for electricity trading will lead to more investment in South Africa’s electricity generation space and greater technology adoption.

“Greater levels of investment because now there’s regulatory and policy certainty once the president signs,” he said.

“Secondly, there’s going to be greater technology adoption because people competing in the space want to come in at the best price to attract off-takers.”

“So, there’s going to be investment in technologies leading to better efficiencies,” the minister added.

However, he noted that electricity consumers in South Africa will likely be the biggest winners. “Hopefully, we’ll get to a situation where there’s a semi-price war,” said Ramokgopa.