Regulation and tools for a more sustainable power sector in South Africa

Challenge

South Africa’s electricity sector is undergoing a transformative shift. Key reforms include the unbundling of the state-owned utility Eskom, the establishment of the South African Wholesale Electricity Market (SAWEM), increased competition in electricity generation, and the emergence of electricity trading and wheeling mechanisms. These changes are driven by the urgent need to address systemic challenges - most notably, the country experienced its worst year of load shedding in 2023, largely due to insufficient generation capacity and operational inefficiencies.
The regulatory framework needs to evolve at pace to support the transformation of the industry – from market platforms through to electricity rate design.

Approach

Since 2020 we have been involved with several transformative technical assistance programmes commissioned by the German Corporation for International Cooperation (GIZ) under the South African-German Energy Programme (SAGEN) to support South Africa’s electricity sector reforms, with an emphasis on the distribution segment.

Ricardo played a key role in the delivery of several strategic workstreams throughout those programmes, including but not limited to:

Review of Electricity Pricing Regulatory Frameworks

Ricardo conducted a comprehensive review of South Africa’s electricity distribution tariff regulations and policies. This included benchmarking against international best practices, identifying gaps and inconsistencies, and providing actionable recommendations to update and harmonise the regulatory environment.

Development of a Standardised COS Tool

In the past four years, Ricardo has worked closely with GIZ, SEA, and local and national stakeholders to develop and continuously update a standardised approach and excel-based tool (standardised COS tool) to determine the ‘Cost of Service’ of supplying customers with electricity and calculate cost-reflective rates. This model, now used by numerous utilities across the country, places municipalities in a more financially resilient position whilst carefully considering affordability constraints and the emergence of distributed energy across the board. It also helps utilities to identify where the key efficiency bottlenecks lie and thereby improve their technical and financial position over time.

Municipal Support for COS Studies

Ricardo supported two metropolitan municipalities in conducting COS studies using the standardised tool. This involved data collection, stakeholder engagement, and capacity building through in-person workshops. Municipal staff were trained to use the tool effectively, interpret results, and apply findings to design cost-reflective tariffs.

Capacity Building for the National Energy Regulator of South Africa (NERSA)

Ricardo supported the regulator’s transition to a COS-based approach for evaluating tariff applications. This included training NERSA staff on the use of the COS tool and sharing international best practices for tariff evaluation and approval. Ricardo provided over 20 hours of support to NERSA staff both through in-person capacity building and online workshops and engagements.

Review of Market Design

As part of South Africa’s ongoing electricity market reform, Ricardo reviewed the SAWEM Code and provided detailed input during the public consultation process. Our review focused on identifying potential implementation risks and addressing areas that may present regulatory or operational uncertainties as the market transitions toward competitive trading. We submitted a commentary which highlighted specific gaps and aspects of the Market Code that warrant further clarification, assessment or consideration. In addition, we formulated targeted questions to assist the regulator in strengthening key areas of the Market Code. Our contribution formed part of a wider cooperative effort between industry stakeholders, the National Transmission Company of South Africa and NERSA.

Support to the Central Purchasing Authority

Ricardo has actively supported the Central Purchasing Authority (CPA) in preparing for its critical role within SAWEM through various strategic activities. This included facilitating a workshop to clarify the CPA’s key roles and responsibilities and collaborating closely to develop essential processes and systems that will underpin its operations. Our work focused on establishing robust management and oversight frameworks for energy procurement contracts and defining the CPA’s position as the counterpart to Eskom Generation and Distribution vesting contracts. We designed an operating model outlining the CPA’s roles, responsibilities and functions. To complement this, we developed a draft organogram and indicative job profiles, providing a clear foundation for staffing and governance aligned with the initial market opening requirements.

Development of a Pilot Training Course for SAWEM School

Ricardo contributed to the design of a pilot training programme for future participants in the SAWEM. The course covered market fundamentals, market operations, balancing and settlement processes, market surveillance, and dispute resolution mechanisms.

Virtual Wheeling

Ricardo provided expert input and commentary on NERSA’s Wheeling Rules to support their development drawing on our experience in electricity markets across multiple countries. The standardised COS tool is fully compatible with NERSA’s wheeling rules. To help utilities, municipalities and energy traders apply the tool effectively, we have developed detailed user guidance on reconciling cost of service with tariff setting with virtual wheeling arrangements. This approach ensures that all procurement costs, use of system charges and physical energy flows are accurately captured and fairly allocated – supporting financial integrity and regulatory compliance.

Results

Ricardo’s work has contributed to the reform of South Africa’s electricity distribution sector. The review and recommendations on regulatory documents, particularly those related to COS frameworks, have been well received and are influencing ongoing policy development.

The standardised COS tool has become a cornerstone of tariff reform, endorsed by NERSA and widely used by municipalities across the country. It has supported the tariff applications of numerous licensees, ensuring a more transparent and equitable pricing system.

In some cases, the standardised tool revealed that the municipality’s existing tariff structure would result in a revenue shortfall of nearly 10% when compared to the actual cost of serving its customers. This data-driven assessment formed the foundation for a robust tariff application submitted to NERSA for an increase in tariffs that would lead to recovery of their total costs. By providing this technical expertise and transparent methodology, Ricardo assisted municipalities in making financially sustainable decisions that support reliable service delivery and regulatory compliance.

Ricardo’s involvement has positioned it as a trusted advisor in South Africa’s energy transition, with continued engagement from stakeholders across the sector.