In this article, Energy Council of South Africa project delivery senior manager Vasanie Pather writes that, as South Africa's electricity sector moves toward a competitive market, tariffs must ensure full and sustainable cost recovery for system operation and network infrastructure.

South Africa continues to make positive and consistent progress on electricity reform implementation, unlocking growing competition and maturing delivery models.

As the sector moves from a vertically integrated monopoly system towards a competitive electricity market, tariffs are the “rules of engagement” for the transition. Tariffs must ensure full and sustainable cost recovery for system operation and network infrastructure, while providing certainty to support investor confidence and new market entry. It should promote fair competition by mitigating market power and delivering transparent, cost-reflective price signals that drive efficient production and consumption behaviour.

At the same time, it must enable clearly defined and transparent subsidy mechanisms to protect affordability without creating unsustainable cost burdens across the system.

As we move into detailed implementation of these complex and significant structural reforms, the Energy Council has developed a three-part Tariff Handbook series, specifically focused on unpacking wholesale tariffs, which underpin these evolving “rules of engagement”. This series aims to translate technical regulatory concepts into a clearer understanding of what is at stake for industry, municipalities, investors, market participants and consumers.

The transition to the South African Wholesale Electricity Market (SAWEM) introduces an entirely different market structure. Historically, electricity pricing was governed through a regulatory methodology, allowing specific costs, returns and revenues. The emerging market introduces a more complex hybrid system where regulated and unregulated electricity sales must co-exist through a combination of commercial mechanisms, unbundled cost recognition and market-based pricing.

Tariff rules and regulations now sit at the centre of multiple competing objectives and stakeholders. A clear example of these competing tensions is the progression of the Trader Rules, which was elevated into media following the legal challenge by Eskom. This process has elevated the competing tensions and gaps in reform sequencing but is making positive progress towards resolution

The National Energy Regulator of South Africa (Nersa) released the Wholesale Electricity Pricing Methodology and the Transitional Generation Pricing and Vesting contract framework for consultation which introduces vesting contracts, legacy contracts, generation capacity payments, and ancillary service mechanisms, but as transitional tools intended to manage risk and support market stability while competition develops.

The Council tariff series carefully unpacks how poorly designed transition mechanisms could unintentionally distort the market. For example, excessive reliance on fixed capacity payments may suppress the System Marginal Price (SMP), weaken investment signals for new entrants, and limit meaningful competition. Equally, insufficient protections during the transition could expose customers and distributors to excessive volatility and financial risk. These are the types of structural considerations that will ultimately determine when SAWEM evolves into a genuinely competitive and investable market.

The issue of fixed versus variable charges, which is key to the vesting contracts is particularly significant. While higher fixed charges may provide revenue certainty for utilities and network operators, they can also reduce the effectiveness of demand-side management, weaken incentives for energy efficiency, and shift financial risk directly onto consumers. For lower-income households and small businesses, this goes beyond a tariff design issue; it becomes a cost-of-living issue. The series also outlines other unintended consequences of excessive fixed charges such as accelerated grid defection and undermining of broader social energy transition objectives. These are critical considerations in a country already grappling with affordability pressures and unequal access to energy services.

Importantly, the Council tariff series highlights that electricity reform cannot succeed real transparency. The relationship between wholesale tariffs, retail tariffs, cost-of supply studies, cross-subsidies and market pricing mechanisms must be coherent and transparent if the market is to function effectively. Regulatory certainty remains fundamental but must go hand-in-hand with transparency to secure long-term investment and ensure confidence in the evolving market structure.

Once public consultation windows are closed, influencing regulations and “Rules of Engagement” become very difficult. The time to engage and influence these design choices is now.

The two Nersa frameworks are directly dependent and together establish the proposed structures for revenue recovery, market pricing, vesting structures and their transition to market exposure. Industry participants – all generators, large consumers, municipalities, investors and traders - all have a direct stake in how these mechanisms are designed. But that stake only translates into influence if there is active, informed engagement in the process.

Designing a fair and functional transitional market is not something regulators can do in isolation. It requires substantive input from the people who will operate within it. So, if your organisation hasn't yet engaged seriously with the SAWEM tariff framework, the wholesale market design, or the work being done by bodies like the Energy Council, now is the time.

Read the series. Understand the mechanisms. Participate in the process.