Huge electricity price cuts coming – with one catch 

South Africa’s electricity market is set to undergo significant changes with the unbundling of Eskom, a move that will lead to increased competition and lower power prices.

However, it will take time for the increased competition in the market to lead to these lower prices, with Eskom set to remain the dominant supplier for some time.

This is according to Martin Meyer, head of Investec Energy And Infrastructure Finance, and Rudi Dicks, the Project management head in the office of the Presidency, who shared their insights on Eskom on Investec’s podcast, The Current.

One initiative the government has taken to resolve the electricity crisis is the unbundling of Eskom into three separate entities handling generation, transmission, and distribution. 

This is intended to help with the utility debt crisis, promote transparency, improve governance and efficiency, and allow space for competition. 

One key step in this process is the creation of a new company, the National Transmission Company of South Africa (NTCSA), which will handle the transmission of electricity. 

The NTCSA will also take over Eskom’s role in buying electricity from independent power producers (IPPs), which are companies that generate electricity independently of Eskom.

This change is important because it will allow more companies to sell electricity to the grid, which should increase the overall electricity supply and reduce the chances of load-shedding.

According to Dicks, this unbundling will also have a positive impact on the price of electricity in South Africa. He explained that the first step is to separate transmission from Eskom and make it a subsidiary. 

Legislative reforms under the Electricity Regulatory Act will grant significant powers to the NTCSA.

“One of the more fundamental powers is giving it the power to purchase on an open competitive market,” he said.

Globally, such market reforms generally lead to lower electricity prices. This is because power is purchased based on the lowest cost and highest reliability.

As more generators enter the market, competition increases, which tends to drive prices down. 

“We’ve seen that from all sets of studies global. It shows us that electricity pricing comes down when you set it up in that way. We’re moving in that direction,” he said.

However, Dicks emphasised that this move is not privatisation – the transmission infrastructure will remain publicly owned, and generation will operate in a competitive market being developed through new legislation.

“Generation, again, is the risk that you take. You invest in it. You assume there’s a competitive market space which we are developing on the basis of the legislation. And you compete on a market,” he said.

The new system will involve a central purchasing agency under the National Transmission Company, responsible for buying energy based on cost-effectiveness and reliability.

This approach aims to avoid continued load-shedding and represents a significant shift from the previous single-buyer model, where Eskom was the sole purchaser of electricity. 

“All we’ve had for all these years is a single buyer model, and a single buyer model means that electricity is guaranteed by Eskom buying the purchase,” Dicks said.

“Now, we have an independent transmission company that will buy it, and Eskom will compete with everybody else.”

“If the price is not competitive enough, you lose that, so you have to become competitive, which means we have to drive down the price.”

Meyer added that five or six trading licenses have already been awarded. These traders will buy electricity from Independent Power Producers (IPPs) and sell it into the market. 

The market is currently dominated by long-term Power Purchase Agreements (PPAs), but he said this will change quickly. 

“It’s going to become a day ahead, merchant-type market where if there’s excess power during the day, you’ll be able to pick up power for next to nothing,” he said.

However, during peak hours when power is in short supply, prices will be much higher. 

“So you’re going to see a much more balanced market,” Meyer explained.  

While this is encouraging, Meyer and Dicks warned that South Africa will remain dependent on Eskom for the foreseeable future. 

“In the short term, Eskom will still be responsible for baseload power,” Meyer said. “You’re not going to get away from that.”

While the market for renewable energy – such as wind, solar, and eventually batteries – is growing, it will take time for these sources to become more integrated and capable of handling storage needs.

“85% of our powers Eskom generated, and you have to transition from that,” Dicks added. “It’s going to take time, and that’s the thing.”