It is understandable that few are fully aware of the South African Wholesale Electricity Market (SAWEM) and the likely significance of this complex reform, which represents an important evolutionary step in creating a competitive industry.

The launch is tentatively set for April next year, but is likely to be delayed, given the number of regulatory approvals still required.

Once completely operational, which will also take time because of the transitional arrangements required, the market will provide for price discovery and transparency. That price will be equal to the marginal cost of the last unit in the merit order needed to satisfy the demand for each hour of the trading day.

This is a marked change from the current way tariffs are set, whereby an allowable-revenue formula, based on forward-looking costs and demand estimates, is used.

While these costs and demand components are robustly debated during the contentious public hearings held periodically to adjudicate the tariffs, a serious trust deficit has emerged.

Most stakeholders believe that Eskom seeks to game the system to secure the highest outcome possible, while the National Energy Regulator of South Africa (Nersa) seeks ways to supress the hikes, which it has sometimes achieved by deviating from the approved formula.

The result is typically a large gap between what Eskom asks for and what Nersa approves, which has resulted in several legal reviews. These have generally gone the way of Eskom, which has been able to prove repeatedly that Nersa has not abided by its own rules.

The most recent dispute resulted in a R54-billion behind-closed-doors settlement, after Nersa acknowledged that it made errors in its calculation of Eskom’s regulatory asset base (RAB), resulting in big shortfalls in the allowable revenue approved for Eskom’s depreciation and returns.

Nersa has blamed junior employees for failing to correct the RAB error that it claims had been pointed out by a regulatory member. Yet, it’s startling that none of the regulatory members raised the alarm when a tariff of 12.74% was approved, given that it would have been closer to 23% had the correct RAB been applied.

Whether the SAWEM will be the catalyst for the tariff changes being called for by consumers, however, depends as much on the progress being made on other interrelated reforms as it does on the market launch itself, which is admittedly an important milestone.

The calculation of the ‘vesting contracts’ between the NTCSA and Eskom Generation and Eskom Distribition will be crucial. While these contracts are viewed as necessary during the transition to prevent disruption, they will need to be carefully concluded so as not to undermine the SAWEM, as well as future investments in generation.

Likewise, the full and unfettered independence of the National Transmission Company is viewed as vital for a level playing field, while the ratio between the fixed and variable cost components in the tariff will determine whether or not the incumbent’s grip on the market will be truly loosened.