The Electricity Regulation Act (ERA) 4 of 2006 has primarily governed South Africa's energy sector for nearly two decades without significant amendments. This act designates the National Energy Regulator of South Africa (NERSA), established by section 3 of the National Energy Regulator Act (NERA), as the custodian and enforcer of the energy sector regulatory framework.
The Electricity Regulation Amendment (ERA) Bill of 2023 (passed by Parliament in May 2024 and awaiting the President's signature) seeks to amend the ERA Act 2006 significantly. In clause 3, the ERA bill clarifies and extends the regulator's power to include issuing, amending, withdrawing, suspending, and revoking licenses and determining the registration, revocation, and deregistration of individuals and entities involved in the energy sector.
The Department of Mineral Resources and Energy (DMRE) plays a complementary role by overseeing energy policies and strategies development and implementation.
For over a century, Eskom, the state-owned utility, has dominated
Licencing Requirements: Embedded Generation
NERSA, the primary regulator of the energy sector, is responsible for licensing and regulation. The ERA Bill 2023 removes the need for licenses for embedded generation projects—small-scale power generation systems connected to the distribution network and operating in parallel with the main grid—regardless of size.
The licensing exemption was initially limited to 1 MW, then 100 MW, but was removed entirely in January 2023 under Schedule 2 of the Electricity Regulation Act 4 of 2006 following a presidential directive. The ERA bill now reinforces and anchors this exemption into law.
The exempted projects are only required to register with NERSA. To register, they must follow the steps below and meet the requirements:
As part of compliance measures, embedded generators must meet certain requirements, including technical codes and regulatory standards and pay the necessary fees to access the power network, such as wheeling charges.
Licencing Requirements: Utility-Scale Projects
While embedded power generation facilities are now exempt from licensing requirements, utility-scale plants still need generating licenses. NERSA must ensure that the registration of both embedded generation and utility-scale projects aligns with the Integrated Resource Plan (IRP). This long-term energy plan considers technical, economic, and social constraints for South Africa and relevant ministerial decisions.
Additionally, obtaining an Environmental Authorization (EA) under the National Environment Management Act of 1998 under the National Environment Authority (NEMA) remains mandatory for constructing energy facilities exceeding 10 MW capacity, excluding solar PV installations in urban areas or on existing infrastructure. This ensures responsible assessment and management of environmental impacts. The Department of Environment, Forestry, and Fisheries has reduced the time to obtain this EA from 107 to 57 days.
This authorisation is just one of several permits required to construct such energy facilities. For example, a company must pay R10,000 ($543.18) per application to obtain an atmospheric emission license. The specific permits and their costs can vary depending on the municipality and the energy project.
NERSA typically issues a generation license for 15 years but has the authority to determine a longer duration. The licence fee for electricity generators is adjusted annually, and for the current period from April 1, 2024, to March 31, 2025, it is set at R0.11524 cents per kilowatt-hour (kWh). Licensees can subcontract licensed functions like maintenance and operation of generation, transmission, or distribution facilities, which promotes flexibility and collaboration within the sector.
A fundamental improvement is the proposed amendment to section 13(1), which aims to expedite the licence application process by reducing the time the regulator has to either grant or deny an application from 120 days to 60 days. This change seeks to streamline the regulator's consideration and finalisation of applications.
Regulations: Power Generation Sources
South Africa plans to move away from coal and has outlined its preference for renewable energy sources, particularly wind, solar, and imported hydroelectricity. This preference is evident in various plans, including the Just Energy Transition Plan, the Integrated Resource Plan (IRP) 2019, and the National Development Plan 2030. The IRP 2019 allocates a substantial amount of capacity for wind (17,742 MW) and solar PV (8,288 MW) to be installed by 2030. Coal is expected to decline from the current 80% to contribute less than 30% of the energy supplied by 2040 and less than 20% by 2050.
The Carbon Tax Act further supports the transition to renewable energy by imposing a tax of R190 per tonne of carbon dioxide equivalent emissions on those generating electricity from carbon-intensive sources, either utility-scale or embedded generation. While the tax does not currently apply to emissions from electricity use (scope 2 emissions), this will change in 2026 when Eskom and other power generators become liable, resulting in higher electricity prices for consumers.
To ease the transition, the Carbon Tax Act allows power generators to offset the cost of buying renewable electricity against their carbon tax liability up to a maximum of 5-10% during the initial phase. Certain Clean Development Mechanism (CDM), Verified Carbon Standard, or Gold Standard-approved renewable energy projects are now eligible as carbon offsets under the new carbon tax regime.
In addition, the government provides renewable energy incentives to promote the adoption of embedded renewable energy solutions. Businesses can claim a 125% tax deduction in the first year for qualifying capital expenditure on all renewable energy projects, with no threshold on generation capacity. This incentive is available for two years for investments in renewable energy projects brought into use between March 1, 2023, and March 1, 2025.
Currently, there is a very limited regulatory framework for the adoption of electricity storage in South Africa. While battery energy storage facilities might require an Environmental Authorization (EA) under certain conditions, the National Environment Authority (NEMA) determines this on a case-by-case basis. The assessment depends on whether the chemical electrolytes in the batteries are considered dangerous goods under the EIA Listing Notices and whether they contain non-acid electrolytes. A draft "Battery Storage Exclusion Norm" is being developed to streamline the process, potentially exempting some battery energy storage systems from needing an EA.
Regulation: Power Generation Market Structure & Tariffs
Clause 20 of the ERA bill introduces a transmission system operator (TSO) to manage electricity delivery. This removes the current limitation of power generators being confined to a single buyer (Eskom). Instead, they can now participate in a competitive market with multiple buyers. However, where a trader buys or sells electricity as a commercial activity, they will acquire a trading licence from NERSA. The TSO is mandated to manage this transition and ensure fair dispatch and balancing of the system without discriminating between generators or customers, except for justifiable reasons approved by the regulator.
Section 4(a)(ii) of the 2006 Electricity Regulation Act gives NERSA, the regulatory body, the authority to control electricity prices and tariffs. However, directly regulating prices has proven difficult in practice. The ERA Bill 2023 proposed amendments aim to streamline this process by shifting the focus from price regulation to tariff setting. The ERA bill defines a tariff as a charge for electricity to a customer for a licensed or registered activity, excluding surcharges, taxes, levies, or duties.
While tariffs don't directly determine the final price of electricity, they play a crucial role in influencing it. The regulator sets tariffs by considering factors like the cost of generating electricity, operational expenses, and expected electricity demand forecasted to determine the volume of sales over which the fixed costs will be spread and the total revenue needed by the electricity provider to cover its costs and earn a reasonable profit.
However, in a competitive market, the forces of demand and supply determine the end prices, not the regulator.
NERSA, the regulatory body, oversees fair access and grid stability policies for connecting to the national power grid. The South African Grid Code outlines the technical requirements for connecting to the transmission grid, and applicants must formally request connection from the National Transmission Company that will be set up after the president signs the ERA bill. NERSA has also established a specialised grid connection code for renewable energy plants, regardless of whether they connect to the transmission or distribution network.
Market Outlook
South Africa's energy sector reforms will open the market to greater private sector participation in power generation. The exemption of embedded projects from licensing requirements is a positive step that will simplify and expedite the process. Additionally, establishing the transmission system operator as a separate entity from Eskom will make market processes more efficient by enabling powerwheeling from generators to end users.
