Use the Lexology Getting The Deal Through tool to compare the answers in this article with those from other jurisdictions.
Policy and law
What is the government policy and legislative framework for the electricity sector?
The government’s National Development Plan 2030 (NDP) was prepared by the National Planning Commission in 2012. The NDP envisages that, by 2030, South Africa will have an energy sector that promotes:
- economic growth and development through adequate investment in energy infrastructure;
- social equity through expanded access to energy at affordable tariffs and through targeted, sustainable subsidies for needy households; and
- environmental sustainability through efforts to reduce pollution and mitigate the effects of climate change.
In addition to the NDP, the Medium Term Strategic Framework 2014 to 2019 was introduced in August 2014 and articulates the government’s commitment to implement the NDP.
South Africa’s energy plan is largely based on the principles set out in the NDP in the form of the Integrated Energy Plan (IEP) and the Integrated Resource Plan (IRP). The IEP is the overarching energy plan of which the IRP forms an integral part. The purpose of the IEP is to ‘provide a roadmap of the future energy landscape for South Africa’ that guides future energy infrastructure investments and policy development. The focus of the IRP is on electricity supply that will allow the country to meet its forecasted electricity demand with the least cost to the country and other considerations such as environmental sustainability and water usage. Both plans are regularly updated by the Department of Energy (DoE) and the draft updated IRP 2018 was published for public comment in August 2018 (Draft IRP). The IEP and IRP are key policies that will guide South Africa’s future energy mix. Any new generation capacity under the IRP is procured in accordance with ministerial determinations issued by the DoE. It is expected that the Draft IRP will be placed before cabinet for approval by the end of 2018.
The White Paper on Energy Policy, 1998, was implemented to focus on the following key objectives:
- increasing access to affordable energy services;
- improving energy governance;
- stimulating economic growth;
- managing energy related environmental and health impacts; and
- securing supply through diversity.
South Africa’s energy policy is currently being updated through the aforementioned revisions to the IEP and IRP. The IRP is considered a ‘living plan’ that is intended to be updated every two years. The DoE has indicated that the Liquid Fuels and Gas Utilisation Master Plans will be released in 2018 that aim to introduce natural gas to the energy sector, whether imported via regional pipelines or liquefied natural gas (LNG) terminals at strategic port locations, which will contribute towards electricity generation.
South Africa’s electricity laws comprise of various acts, regulations and rules. The key legislation includes:
- the National Energy Regulator Act, 2004 (NERA), establishes a National Energy Regulator (NERSA) for the regulation of the electricity, piped-gas and petroleum pipeline industries;
- the Electricity Regulation Act, 2006 (ERA), establishes a national regulatory framework for the electricity supply industry, makes NERSA the custodian and enforcer of the national electricity regulatory framework, provides for licences and registration as the manner in which generation, transmission, distribution, reticulation, trading and the import and export of electricity are regulated and also regulates the reticulation of electricity by municipalities; and
- the National Energy Act, 2008, directs the DoE to ensure that diverse energy resources are available, in sustainable quantities and at affordable prices, to the South African economy in support of economic growth and poverty alleviation, while taking into account environmental management requirements.
In addition, the ERA makes provision for NERSA to publish certain guidelines and codes of conduct and practice, or to make rules under the relevant electricity regulations. Various municipalities have also adopted their own electricity by-laws for their specific areas.
2Organisation of the market
What is the organisational structure for the generation, transmission, distribution and sale of power?
The electricity sector in South Africa is still dominated by Eskom Holdings SOC Limited (Eskom), the integrated state-owned power utility. Eskom generates approximately 95 per cent of the electricity in South Africa. Eskom’s generation capacity is predominately through its fleet of coal-fired power stations and nuclear power station in Koeberg.
Eskom owns and controls the national transmission grid. The responsibility for distributing electricity to end-users is shared between Eskom’s distribution unit and various municipalities.
Electricity tariffs are regulated by NERSA. NERSA sets the tariffs that Eskom can charge for generating electricity and that Eskom and municipalities can charge for distribution. Municipalities enter into bulk supply agreements with Eskom, in terms of which the municipalities buy electricity and distribute the supply to customers. The sale of electricity contributes significantly to the revenue of municipalities owing to municipal surcharges added to the Eskom tariff.
The government took the decision to divide the power generation capacity between Eskom and independent power producers (IPPs). The introduction of IPPs was aimed at reducing the funding burden on government and to introduce new generation technologies that will diversify the future electricity supply options and to support South Africa’s international commitments to address climate change. This resulted in the DoE launching IPP procurement programmes such as the Renewable Energy IPP Procurement Programme (REIPPP).
Since 2011, the DoE has successfully procured approximately 92 renewable energy projects across various technologies under the REIPPP Programme with a total capacity of 6422MW. The most recent were the 27 power purchase agreements signed with the IPPs and Eskom in April 2018. Under the IPP procurement programmes, the DoE is designated as the procurer and Eskom the off-taker of the electricity through its single buyer office.
It is anticipated that IPPs will contribute towards an increasing portion of South Africa’s electricity generation in future and to support the objectives of the NDP. The DoE has indicated that it intends releasing a further bid window under the REIPPP Programme, continuing with the first bid window of the Coal Baseload IPP Procurement Programme and commencing with the Gas to Power IPP Procurement Programme on a similar model to the other IPP procurement programmes.
Regulation of electricity utilities – power generation
Authorisation to construct and operate generation facilities
What authorisations are required to construct and operate generation facilities?
For the purpose of operating a generation facility, NERSA is responsible for issuing electricity generation licences and registrations for such facilities. No person may operate any generation facility without a licence, save for certain exemptions set out in Schedule II of the ERA or determinations made by the Minister of Energy. The exemptions mostly relate to the operation of smaller generation facilities of no more than 1MW and those generation facilities operated for own use or not connected to the national grid. NERSA is required to consider the IRP and the applicable ministerial determinations when granting licences for the operation of generation facilities.
The general authorisations for constructing generation facilities include environmental authorisations whereby the developer must conduct an environmental impact assessment (EIA) and secure an environmental authorisation in terms of the National Environment Management Act, 1998.
Some of the other key permits required for generation facilities include:
- water use licences in respect of certain water use activities under the National Water Act, 2008;
- atmospheric emissions licences under the National Environmental Management: Air Quality Act, 2004;
- waste management licences under the National Environmental Management: Waste Act, 2008;
- biodiversity permits under the National Environmental Management: Biodiversity Act, 2004;
- zoning consents and building plan approvals from the relevant municipal authorities;
- consents for obstacles in respect of the Civil Aviation Regulations, 2011; and
- permissions for certain activities affecting heritage resources under the National Heritage Resources Act, 1999.
Grid connection policies
What are the policies with respect to connection of generation to the transmission grid?
NERSA is the custodian of the South African Grid Code. NERSA’s role is to ensure non-discriminatory access to the transmission and distribution systems and the safe and reliable operation of the electricity infrastructure.
The South African Grid Code specifies the minimum technical and design requirements that customers must adhere to when connecting or seeking to connect to the transmission grid. A customer seeking to connect to the transmission grid or to modify an existing connection must apply in writing to the National Transmission Company (NTC).
NERSA has established a grid connection code specifically for renewable energy power generation plants connected either to the transmission or to the distribution system.
Alternative energy sources
Does government policy or legislation encourage power generation based on alternative energy sources such as renewable energies or combined heat and power?
The NDP identifies South Africa’s long-term plans to meet its economic, social and environmental needs. The NDP proposes diversity and alternative energy resources and electricity supply options. The IRP has also been developed to ensure that the preferred energy mix includes renewable energy and cogeneration technologies.
The Minister of Energy (in consultation with NERSA) is vested with the power under the ERA to determine the types of energy sources from which electricity must be generated. Various ministerial determinations for renewable energy have been issued in respect of the procurement of 14,725MWs from IPPs. The renewable energy technologies under these determinations include concentrated solar power (CSP), wind, solar photovoltaic (PV), biogas, biomass, landfill gas and small hydropower. The procurement of renewable energy technologies is also driven by South Africa’s international commitments to address climate change.
The determination for cogeneration was amended in 2015 to increase the capacity to be procured from IPPs from an initial 800MW to 1800MW. The types of generation sources were also amended to include:
- waste heat or furnace off gas;
- cogeneration (ie, the simultaneous generation of electricity and useful thermal energy from a common fuel source); and
- an energy source that is a co-product, by-product, waste product or residual product of an industrial process or sustainable agricultural or forestry activity.
The Draft IRP has a substantial allocation of wind (11,442MW) and solar PV (7958MW) that is planned to be installed by 2030. There is; however, no planned allocation for cogeneration technologies in the latest Draft IRP.
To date, the DoE has procured 92 renewable energy projects from IPPs, totalling over 6000MW, with just over 3500MW in full operation.
What impact will government policy on climate change have on the types of resources that are used to meet electricity demand and on the cost and amount of power that is consumed?
South Africa’s Nationally Determined Contribution (NDC) contains a target to limit greenhouse gas (GHG) emissions. The NDC pledge is consistent with South Africa’s long-term goal to constrain its emissions to follow a peak-plateau-decline trajectory. Based on this, South Africa’s emissions should peak between 2020 and 2025 before then plateauing for approximately a decade and then declining thereafter.
South Africa has signed and ratified the Paris Agreement. The NDC is premised on the adoption of comprehensive, ambitious, fair, effective and binding rules in accordance with the Paris Agreement. The NDC acknowledges that South Africa’s priorities include equity, economic and social development and poverty eradication.
The 2011 National Climate Change Response White Paper also supports the use of carbon budgeting and carbon pricing measures.
The IRP is the key electricity sector policy to reduce emissions. The Draft IRP released for public comment envisages that the energy and capacity mix will be fairly comparable for the period up to 2030. The share of coal will then reduce as older power plants are decommissioned and GHG emission constraints are imposed. This implies that coal will contribute less than 30 per cent of the energy supplied by 2040 and less than 20 per cent by 2050. The share of renewables and gas will accordingly increase substantially under the Draft IRP with the imposition of the GHG emission constraints.
South Africa is planning to introduce a carbon tax covering fossil fuel combustion emissions. National Treasury published the Second Draft Carbon Tax Bill in December 2017, the first draft having been published for comment in November 2015. Under the current planning, a basic tax-free threshold of around 60 per cent of emissions and additional allowances for specific sectors might result in tax exemptions for up to 95 per cent of emissions during the first phase until 2022. The full carbon tax rate is proposed to be 120 South African Rand per tCO2e (US$8 per tCO2e), after exemptions. The effective tax rate is expected to be between 6 and 48 Rand per tCO2e (US$0.4 and 3 per tCO2e). Given the engagement still required with various stakeholders and the parliamentary processes, it is expected that the finalisation of the Carbon Tax Bill will be further delayed.
The Minister of Environmental Affairs has recently published the National Climate Change Bill for public comment. The purpose of the Bill is to build an effective climate change response and to ensure the long-term, just transition to a climate resilient and lower carbon economy and society.
The Bill provides for the appointment of a ministerial committee on climate change to be tasked with overseeing the necessary activities across all sector departments and spheres of government. The Bill aims to address all priority sectors, including the electricity sector, in order to align with national sectoral emission targets. Other provisions in the Bill include setting out and achieving national adaptation objectives, determining a national GHG emissions trajectory, prescribing sectoral emissions targets and determining a GHG threshold to inform the allocation of carbon budgets.
In 2017, a significant High Court judgment was handed down in the matter of Earthlife Africa, Johannesburg v The Minister of Environmental Affairs and others. The judgment was South Africa’s first climate change-related court case. The case is in respect of the environmental authorisation granted for the establishment of the proposed 1200MW Thabametsi coal-fired power station. The crux of the judgment is that climate change poses a substantial risk to sustainable development in South Africa and is a relevant factor for the Department of Environmental Affairs to consider when granting environmental authorisation for thermal power plants. The judgment requires the developer to undertake an assessment of the climate change impacts in the form of a professionally researched climate change impact assessment report (including mitigation measures) as part of the environmental authorisation approval process.
In addition, South Africa has a National Energy Efficiency Strategy, 2008 that aims to develop measures to promote energy saving, reduce the negative impact of energy use on the environment, reduce energy costs to the economy and to contribute towards sustainable development.
Does the regulatory framework support electricity storage including research and development of storage solutions?
There is currently a very limited regulatory framework for the adoption of electricity storage in South Africa.
The regulatory framework does encourage the use of renewable energy technologies however only pumped energy storage is addressed in the latest Draft IRP. The IRP mentions the need for research on thermal energy storage linked to CSP. The IRP does not mention energy storage in respect of wind and solar PV plants.
At a policy level, South Africa aims to introduce more renewable energy into the energy mix, therefore, adopting energy storage will provide support in this regard. The DoE and NERSA play an essential role in the adoption of energy storage onto the grid in that the development of energy storage policy and legislation will need to be developed and administered by the DoE and NERSA.
There are no incentives specific to the research and development of storage solutions. Section 12L of the Income Tax Act, 1962 does permit energy efficiency claims; however, these provisions are not specifically for electricity storage.
The Industrial Development Corporation, a state-owned development finance institution, together with various stakeholders, are evaluating potential energy storage technologies to increase access to reliable, affordable electricity in South Africa, encouraging policies to support the adoption of energy storage technologies and exploring opportunities to invest in energy storage projects.
Does government policy encourage or discourage development of new nuclear power plants? How?
The current assumptions in respect of new nuclear power plants used in the Draft IRP deviates materially from those employed in the existing IRP. The existing IRP assumed that 9600MW of new nuclear capacity would be installed by 2030. The Draft IRP does not include any additional nuclear power apart from the installed capacity provided by the Koeberg nuclear power station.
The current government policy accordingly does not encourage the development of any new nuclear power plants in the future.
Regulation of electricity utilities – transmission
Authorisations to construct and operate transmission networks
What authorisations are required to construct and operate transmission networks?
A transmission licence is required from NERSA in terms of the ERA for the operation of transmission networks. Eskom currently owns and operates the national transmission networks and holds a transmission licence issued by NERSA.
There is no closed list of authorisations that one needs to obtain in order to construct a transmission network. Refer to question 3 above for a general list of environmental and land related authorisations that are potentially applicable to the construction of transmission networks.
Eligibility to obtain transmission services
Who is eligible to obtain transmission services and what requirements must be met to obtain access?
A customer seeking connection to the transmission services or modifications to existing transmission service connections may apply in writing to the NTC. The South African Grid Code specifies the minimum technical and design requirements that customers must adhere to when connecting or seeking to connect to the transmission services. Accordingly, an applicant who wishes to have access to the transmission services must comply with the technical and design requirements as set out under the Grid Code.
Upon application, the NTC will issue cost estimate letters and budget quotations for new connections to the transmission system and for upgrades to existing connections in accordance with an approved tariff methodology. IPPs typically enter into transmission agreements with Eskom to regulate their access to the transmission network.
Government transmission policy
Are there any government measures to encourage or otherwise require the expansion of the transmission grid?
There are no direct incentives to promote the expansion of the transmission network by the private sector. As mentioned, Eskom owns and operates the transmission system. Eskom does have plans to expand and further develop the transmission grid. In accordance with its transmission licence, Eskom is required to publish an updated Transmission Development Plan (TDP) for a 10-year period.
The periodic TDP focuses on the need to connect IPPs to the grid, plans to develop large-scale transmission corridors at key points in the grid over the long term and plans for regional major transmission development schemes.
Rates and terms for transmission services
Who determines the rates and terms for the provision of transmission services and what legal standard does that entity apply?
In terms of the ERA, NERSA is tasked with the regulation of electricity charges and tariffs. A licensee may charge only the tariffs set or approved by NERSA. NERSA may, in prescribed circumstances, approve a deviation from set or approved tariffs.
The ERA provides tariff principles for economic regulation of the electricity supply industry. In terms of the principles, the licence conditions relating to the setting or approval of prices, charges and tariffs and the regulation of revenues must enable an efficient licensee to recover its costs and provide for or prescribe incentives for the continued improvement of the technical and economic efficiency with which services are to be provided.
In addition, the licence conditions must give end-users proper information regarding the costs that their consumption or use imposes on the licensee’s business and must avoid undue discrimination between customer categories (discrimination between different classes of customers for objectively justifiable and identifiable differences is allowed if approved by NERSA).
The South African Grid Code transmission tariff code sets out the transmission services and pricing and the procedure to be followed in applications to change revenue requirements, tariff structures or both.
Entities responsible for grid reliability
Which entities are responsible for the reliability of the transmission grid and what are their powers and responsibilities?
Eskom is responsible for the reliability of the transmission grid. As the system operator, Eskom is tasked with the responsibility to operate the interconnected power system to achieve the highest degree of reliability practicable. The South African Grid Code also requires the network system operator to co-ordinate voltage control and to operate with sufficient operating reserve capacity to carry its expected load as per the frequency control requirements of the Grid Code.
The network system operator must endeavour to retain international interconnections, to operate the transmission grid in such a way as to minimise adverse effects of disturbances on customers and may shed customer load to maintain system integrity.
Regulation of electricity utilities – distribution
Authorisation to construct and operate distribution networks
What authorisations are required to construct and operate distribution networks?
A distribution licence is required from NERSA in terms of the ERA for the operation of distribution networks. Eskom and certain municipalities are responsible for the distribution of electricity under such distribution licences.
There is no closed list of authorisations that one needs to obtain in order to construct a distribution network. Refer to question 3 above for a general list of environmental and land related authorisations that are potentially applicable to the construction of distribution networks.
Access to the distribution grid
Who is eligible to obtain access to the distribution network and what requirements must be met to obtain access?
Customers seeking a new connection to the distribution system must lodge an application to connect to the distribution system with the relevant distributor (ie, Eskom’s distribution unit or the relevant municipality). Customers are required to provide additional information on fluctuating loads, capacitor banks and reactors that could affect the performance of the distribution system.
Upon application, the distributor will issue cost estimate letters and budget quotations for new connections to the distribution system. The generator will enter into connection and use-of-system agreements with, or obtained approval from, the holder of the relevant distribution licence.
Government distribution network policy
Are there any governmental measures to encourage or otherwise require the expansion of the distribution network?
There are no direct incentives to promote the expansion of the distribution network by the private sector.
IPPs have the option to select a ‘self-build’ option with the relevant distributor. The IPP under a ‘self-build’ agreement is then responsible for and undertakes the connection works to connect to the relevant distribution system. Once completed, the IPP transfers the connection works to the relevant distributor.
The government has previously proposed the creation of an independent system market operator (ISMO) that will own, control and regulate the national transmission and distribution network. The proposed legislative changes required to implement the ISMO were introduced in 2012; however, the approval of these changes have subsequently stalled.
Eskom implemented a revised business model to prepare for capacity requirements and the impending restructuring of the electricity sector by splitting its business into regulated and non-regulated divisions. It is proposed that Eskom’s transmission and grid access unit will become independent of its generation division and will take responsibility for the electricity grid.
Rates and terms for distribution services
Who determines the rates or terms for the provision of distribution services and what legal standard does that entity apply?
Refer to question 12 above for regulation of tariffs by NERSA.
In addition, the South African Distribution Code (tariff code), sets out the objectives for pricing and tariffs for distribution and network services. The tariff code applies to all regulated tariff structures and negotiated pricing agreements under the jurisdiction of NERSA.
The tariff code regulates the energy charges, network charges, connection fees and principles for tariff design and allocation of costs.
Regulation of electricity utilities – sales of power
Approval to sell power
What authorisations are required for the sale of power to customers and which authorities grant such approvals?
The ERA requires that any person involved in trading of electricity must obtain an applicable licence from NERSA. These trading licences are applicable both to the selling and the buying of electricity as a commercial activity.
The Minister of Energy has recently gazetted the Licencing Exemption and Registration Notice under the ERA. These exemptions will potentially simplify the licencing requirements for small scale embedded generation.
Power sales tariffs
Is there any tariff or other regulation regarding power sales?
In terms of the ERA, NERSA is tasked with the regulation of electricity charges and tariffs.
NERSA approves tariffs on submission by Eskom of a schedule of tariffs. A licensee may only charge the tariffs set or approved by NERSA. NERSA may, in prescribed circumstances, approve a deviation from set or approved tariffs.
In terms of NERSA’s tariff principles for economic regulation of the electricity supply industry, the licence condition relating to the setting or approval of prices, charges and tariffs and the regulation of revenues:
- must enable an efficient licensee to recover its costs;
- must provide for or prescribe incentives for the continued improvement of the technical and economic efficiency with which services are to be provided;
- must give end users proper information regarding the costs that their consumption imposes on the licensee’s business;
- must avoid undue discrimination between customer categories (discrimination between different classes of customers for objectively justifiable and identifiable differences is allowed if approved by NERSA); and
- may allow the cross-subsidy of tariffs between certain classes of customers.
The Minister of Energy may, in consultation with the Minister of Finance and by notice in the Government Gazette, make regulations in respect of norms and standards for the charging of tariffs.
Rates for wholesale of power
Who determines the rates for sales of wholesale power and what standard does that entity apply?
Refer to question 19 above.
Public service obligations
To what extent are electricity utilities that sell power subject to public service obligations?
The NERA obliges the Minister of Energy to adopt measures that will provide for the universal access to appropriate forms of energy or energy services for all the people of South Africa at affordable prices. These measures must take into account the country’s commitment to provide free basic electricity to poor households.
Currently, South Africa has an Electricity Basic Services Support Tariff (Free Basic Electricity) Policy, which requires the provision of 50kWh of electricity per month to existing qualifying consumers (ie, poor households that are legally connected to the national electricity grid or to a non-grid electricity system such as a solar home system).
The ERA allows a licensee, in this case Eskom, to terminate the supply of electricity to a customer if such customer is insolvent, has failed to honour an agreement for the supply of electricity or the customer has failed to comply with the payment conditions under the licence. Eskom is empowered by statute to disconnect defaulting customers, which includes municipalities. Accordingly, Eskom’s obligation to provide the public with electricity is subject to certain limitations.
Municipalities have a statutory duty to deliver electricity to consumers. According to the agreement between Eskom and municipalities, Eskom is obliged to supply electricity to municipalities at a prescribed rate or tariff. In turn, municipalities sell electricity to consumers at an increased rate and use the revenue to provide other services.
Eskom, as the national electricity supplier, remains responsible to ensure that should all else fails, it is the supplier of last resort.
Which authorities determine regulatory policy with respect to the electricity sector?
NERSA is the primary regulator in the electricity sector and assumes its authority pursuant to the NERA and the ERA.
There are various other authorities that establish policy frameworks within the electricity sector. The DoE together with the Department of the Presidency and National Treasury are responsible for the formulation of South Africa’s energy policies. Government’s overarching responsibility is to ensure that its electricity policies are integrated and work collectively towards the advancement of the country’s objectives. Inputs from various governmental departments are critical to the electricity policy including those departments that will be directly or indirectly impacted. The departments of environment, water and mineral resources usually have vested interests in the development of the electricity policies and regulations.
Scope of authority
What is the scope of each regulator’s authority?
The scope, powers and duties of NERSA relate to:
- applications for licences as well as to issue licences for the operation of generation, transmission and distribution facilities, import and export of electricity and the trading of electricity;
- regulation of prices and tariffs;
- registration of persons who are required to register with NERSA in instances where they are not required to hold a licence;
- issuance of rules designed to implement the government’s electricity policy framework, the IRP and the ERA;
- establishment and management of monitoring and information systems and a national information system, and to coordinate the integration thereof with other relevant information systems; and
- enforcement of performance and compliance and taking appropriate steps in the case of non-performance.
NERSA has the authority to act as mediator in disputes arising between generators, transmitters, distributors, customers and end users. NERSA also has the authority to undertake any investigations and inquiries arising from activities of licensees.
Establishment of regulators
How is each regulator established and to what extent is it considered to be independent of the regulated business and of governmental officials?
The NERSA is the juristic person responsible for the regulation of the electricity sector in South Africa.
NERSA is established in terms of the NERA and its mandate is derived from the Act. The NERSA is an independent body. The principles of NERSA include: independence from political influence and avoidance of regulatory capture by some customers in order to ensure long-term stability of regulatory practices.
Challenge and appeal of decisions
To what extent can decisions of the regulator be challenged or appealed, and to whom? What are the grounds and procedures for appeal?
NERSA is a public body and any decision may be challenged by way of judicial review of an administrative action as provided for in the Promotion of Administrative Justice Act, 2000. Any person may institute proceedings in the High Court of South Africa for judicial review.
The grounds for judicial review include that the decision taken was tainted by bias (or there is a reasonable suspicion of bias), was procedurally unfair, was materially influenced by an error of law, took irrelevant considerations into account or failed to take relevant decisions into account, and was either capricious, irrational or taken in bad faith or all of these.
An application for judicial review must be made without unreasonable delay and within 180 days of either: internal remedies being concluded; or, if no internal remedies exist, the applicant becoming aware of the action and the reasons for it (or when the applicant might reasonably have been expected to become aware of the same).
Acquisition and merger control – competition
Which bodies have the authority to approve or block mergers or other changes in control over businesses in the sector or acquisition of utility assets?
IPPs under the REIPPP Programme are required to conclude implementation agreements with the DoE that contain specific change in control provisions. In accordance with the implementation agreement, the consent of the DoE is required in certain circumstances for a change in control of the IPP. The generation licences issued by NERSA to IPPs under the REIPPP Programme also have restrictions on changes in control of the licensee that have not been approved by the DoE under the implementation agreement.
Competition law in South Africa is governed by the Competition Act, 1998.
In terms of the Competition Act, specialised competition authorities, being the Competition Commission, the Competition Tribunal and the Competition Appeal Court, have been granted exclusive jurisdiction over the interpretation and application of the Competition Act’s provisions. The Competition Act states that these authorities each have jurisdiction throughout South Africa. The competition authorities also have jurisdiction over ‘all economic activity having an effect within’ South Africa, including the electricity sector.
The Commission is the primary executive and investigative competition agency. The Commission acts as the main medium of interaction for the public and has the power to investigate, consider and pass rulings on any contravention of the Competition Act, approve or prohibit small or ‘intermediate’ mergers and refer its recommendations to the Tribunal in relation to ‘large’ mergers. In addition, the Commission can grant exemptions, grant leniency in terms of the Corporate Leniency Policy and conduct market inquiries.
The Competition Appeal Court is the final court of appeal for competition law matters.
Review of transfers of control
What criteria and procedures apply with respect to the review of mergers, acquisitions and other transfers of control? How long does it typically take to obtain a decision approving or blocking the transaction?
With respect to mergers, the Commission conducts merger investigations in compliance with the Competition Act. Firms entering into ‘intermediate’ or ‘large’ mergers are required to notify the Commission and may not implement that merger until it has been approved with or without conditions by either the Commission (for intermediate mergers), the Tribunal (for large mergers) or the Competition Appeal Court.
A merger is considered:
- intermediate if the value of the proposed merger equals or exceeds 600 million rand (calculated by either combining the annual turnover of both firms or their assets) and the annual turnover or asset value of the target firm is at least 100 million rand;
- large if the combined annual turnover or assets of both the acquiring and target firms is valued at 6.6 billion rand and the annual turnover or asset value of the target firm is at least 100 million rand; and
- the Commission has the discretion to require parties to a small merger to notify it if the merger may substantially prevent or lessen competition or cannot be justified on public interest grounds. Similar to the other mergers, merger parties may not take further steps to implement such merger until it has been unconditionally or conditionally approved.
When providing notification of a merger, a filing fee must be paid.
The Commission has:
- an initial period of 20 business days within which to investigate intermediate and small mergers. The Commission can, however, extend this investigation period by 40 business days; and
- an initial period of 40 business days to investigate large mergers, which can be extended for a period of 15 business days at a time upon application by the Commission to the Tribunal. No limitation is placed on the number of extensions that the Commission can apply for.
Prevention and prosecution of anti-competitive practices
Which authorities have the power to prevent or prosecute anti-competitive or manipulative practices in the electricity sector?
Refer to questions 26 and 27.
Determination of anti-competitive conduct
What substantive standards are applied to determine whether conduct is anti-competitive or manipulative?
Where a merger occurs, the test is whether the merger is likely to substantially prevent or lessen competition and, if so, whether there are any technological, efficiency or other pro-competitive gains that are likely to result from the merger that may offset the lessening of competition. The relevant factors considered include:
- the strength of competition in the market;
- the probability that firms in the market will behave competitively following the merger;
- the actual and potential level of import competition;
- ease of entry into the market, including tariff and regulatory barriers;
- the level and trends of concentration and history of collusion in the market;
- the degree of countervailing power in the market;
- the likelihood of the merged firm having market power;
- the dynamics of the market, including growth, innovation and product differentiation;
- the nature and extent of vertical integration;
- whether the business of a party has failed or is likely to fail; and
- whether the merger will result in the removal of an effective competitor.
Thereafter, it is considered whether the merger can be justified and so conditionally approved, or must be rejected on substantial public interest grounds. Public interest grounds include the effect of the merger on a particular industrial sector or region, employment, the ability of small businesses or firms controlled by historically disadvantaged persons to become competitive and the ability of national industries to compete in international markets
The Competition Act prohibits restrictive vertical practices (between suppliers and their customers) if they substantially prevent or lessen competition in the market unless a party to the agreement can raise demonstrable efficiency, pro-competitive or technological gains as a defence.
Certain restrictive horizontal practices deemed to constitute cartel conduct are also prohibited, including:
- directly or indirectly fixing a purchase or selling price or any other trading condition;
- dividing markets by allocating customers, suppliers, territories or specific types of goods or services; and
- collusive tendering and retail price maintenance.
Competitors cannot raise pro-competitive or technological gains as a defence as cartel conduct is absolutely prohibited.
The abuse of dominance provisions is a key element of the framework for control of anti-competitive conduct by firms with market power. The provisions apply to a broad spectrum of conduct that has, as its main objective, the effect of substantially lessening or preventing competition in a relevant market. The abuse of dominance provisions relate to excessive selling prices or extracting excessive buying prices by a dominant firm, various forms of exclusionary acts, refusal of access to an essential facility and price discrimination. In certain circumstances dominant firms can raise demonstrable efficiency, pro-competitive or technological gains as a defence.
Preclusion and remedy of anti-competitive practices
What authority does the regulator (or regulators) have to preclude or remedy anti-competitive or manipulative practices?
The adjudicating body must attempt to find an appropriate remedy to counter the anti-competitive effects of the merger. Conditions may be imposed that oblige the merged entity to divest part of its assets or comply with specified behavioural conditions.
In order for a divestiture to cure an anti-competitive merger, the purchaser must be able to manage the assets efficiently and compete effectively.
Behavioural conditions may include:
- ring-fencing conditions to prevent exchanges of information as well as the establishment of compliance programmes to prevent collusion;
- conditions to ensure supply to vertically related firms where there are dangers of upstream or input vertical foreclosure;
- conditions to protect the public interest. In this regard, moratoria on retrenchments are often imposed in order to protect employees and the Competition authorities have taken particular care to protect unskilled jobs by means of conditions.
The competition authorities may require senior executives to submit affidavits, written statements or detailed financial statements on an annual basis attesting to the firm’s compliance with the conditions.
The Tribunal may impose an administrative penalty on the parties to a merger if they fail to give notice of the merger as required under the Competition Act, or if they implement the merger before it has been approved. The Tribunal may impose a penalty of up to 10 per cent of the firm’s annual turnover in South Africa and their exports from South Africa during their preceding financial year.
The Tribunal may also grant an interdict if the parties to a merger attempt to, or intend to, implement the merger without notification to the Commission. The Tribunal may further order a divestiture or declare void any provision of an agreement to which a merger was subject if the parties fail to give notice of the merger, or implement the merger without approval by the competition authorities or in contravention of a condition imposed.
The amount of the penalty imposed may not exceed 10 per cent of the merging parties’ turnover in South Africa and their exports from South Africa for the preceding financial year.
The Competition Act sets out in detail the types of restrictive practices prohibited (both horizontal and vertical) as well as prohibited conduct that constitutes abuse of dominance, provisions dealing with merger control and exemption provisions. It should be noted that the provisions relating to horizontal and vertical restrictive practices apply to all firms, whereas the provisions relating to abuse of dominance and price discrimination only apply to dominant firms.
The Commission may initiate a complaint on its own accord if it has a reasonable belief that a firm has committed a prohibited practice or is abusing its dominant position in a market. It may also conduct a market inquiry into anti-competitive market conditions, without any complaint having been initiated.
The Tribunal has the power to make an appropriate order in relation to a prohibited practice, including the following:
- interdicting any prohibited practice;
- ordering a party to supply or distribute goods or services to another party on terms reasonably required to end a prohibited practice;
- imposing an administrative penalty;
- ordering a divestiture of shares, interest or assets;
- declaring the conduct of a firm to be a prohibited practice so that a person who has suffered loss or damage as a result thereof, may institute an action for civil damages;
- declaring the whole or any part of an agreement to be void; and
- ordering access to an essential facility on terms reasonably required.
The Competition Amendment Act of 2009 introduced criminal sanctions for cartel offences. It is a criminal offence for directors and managers of a firm to cause the firm to engage in cartel conduct or to knowingly acquiesce to such conduct. Any person found guilty of such an offence shall be liable for a fine not exceeding 500,000 rand, imprisonment for a period not exceeding 10 years or both.
Acquisitions by foreign companies
Are there any special requirements or limitations on acquisitions of interests in the electricity sector by foreign companies?
There are currently no set limitations with regards to foreign investment in the electricity sector. However, the DoE introduced economic development requirements relating to ownership interests under the REIPPP and Coal Baseload IPP procurement programmes. The requirements include setting out thresholds of equity interests in the IPPs. Bidders are required to illustrate the total local shareholding in the project company and each of the contractors and the percentage of equity interest in such entities held by black people and local communities.
Authorisation to construct and operate interconnectors
What authorisations are required to construct and operate interconnectors?
Interconnectors must hold valid licences issued by NERSA in respect of the operation of the generation facility and in respect of the transmission or distribution activities as detailed above. The generation can be through an IPP procurement programme issued by the DoE or through a private willing seller or willing buyer commercial arrangement. Once a power purchase agreement, generation licence and use of system agreement is in place, the IPP can interconnect its generation facility to the end users.
Interconnector access and cross-border electricity supply
What rules apply to access to interconnectors and to cross-border electricity supply, especially interconnection issues?
There are currently no rules in place for private interconnector operations because Eskom is solely responsible for the transmission of electricity in South Africa.
The only cross-border supply of electricity in South Africa occurs at a national level pursuant to the Southern African Power Pool (SAPP), which primarily comprises of the national generation, distribution and transmission companies of each of the 12 Southern African Development Community members.
The SAPP coordinates the planning and operation of the electric power system among member utilities and provides a forum for regional solutions to electricity supply issues.
Transactions between affiliates
What restrictions exist on transactions between electricity utilities and their affiliates?
There are no legislative restrictions on transactions between Eskom and its affiliates. Eskom is however subject to the provisions of the Public Finance Management Act, 1999.
Enforcement and sanctions
Who enforces the restrictions on utilities dealing with affiliates and what are the sanctions for non-compliance?
There are no restrictions on utilities dealing with affiliates.
Update and trends
Update and trends
Are there any emerging trends or hot topics in electricity regulation in your jurisdiction?
A new bid round (Bid Window 5) under the REIPPP Programme was announced by the Minister of Energy and is expected to be launched in the first quarter of 2019 after the approval of the Draft IRP 2018. It is anticipated that 1000MW of solar PV and 1600MW of wind will be procured based on the allocations set out in the Draft IRP. The announcement of the latest bid round under the REIPPP Programme is inconsistent with the timing for new renewable energy capacity under the Draft IRP. It is therefore unclear if the DoE will release the Request for Proposals for Bid Window 5 in 2018.
The DoE issued a Request for Information (RFI) in 2015 in respect of the proposed Gas to Power Programme. The RFI is in line with the Minister of Energy’s announcement that it will release the Liquid Fuels and Gas Utilisation Master Plans in 2018 that aims to introduce natural gas to the energy sector, whether imported via regional pipelines or LNG terminals at strategic port locations, which will contribute towards electricity generation. The Draft IRP indicates that the nascent gas market will add up to 11,930MW of installed capacity by 2030. The Gas to Power Programme can potentially initiate the introduction of gas into South Africa’s energy mix.
NERSA has withdrawn its proposed rules to govern the registration of Small-Scale Embedded Generation (SSEG) below 1MW. The proposed SSEG rules were published by NERSA in April 2018 for public comment. NERSA is required to develop the rules in terms of the ERA. The Minister of Energy has recently amended the gazetted Licencing Exemption and Registration Notice under the ERA. This has necessitated the review of NERSA’s draft SSEG rules in order to align the rules with the amended Licencing Exemption and Registration Notice. The Draft IRP has an annual allocation for embedded generation of 200MW for generation between 1MW to 10MW, starting in 2018.
The Draft IRP notes that with the changing electricity landscape and advancements in technology, there is an increasing number of own generation facilities in the form of rooftop solar PV and other smaller installations. There is also an increasing number of commercial and industrial facilities that are installing solar PV installations to supplement electricity from the grid.