The National Energy Regulator of South Africa (NERSA) was established by the National Energy Regulator Act, 2004 [Act No. 40 of 2004], Electricity Regulator Act, 2006. As an entity established by law, NERSA has strong credibility, which has a positive impact on investor and consumer confidence.
Clarity of Roles and Objectives
NERSA’s regulatory functions are set out clearly in the primary legislation establishing it, National Energy Regulator Act, 2004 [Act No. 40 of 2004], Electricity Regulator Act, 2006. Obligations of regulated entities are specified in License conditions. This thus eliminates overlaps in roles and ambiguities in the obligations of entities.
NERSA maintains a medium level of “arm’s-length” independence from government. The Chairperson, CEO and Commissioners/Board Members are appointed by the sector minister (Minister of Mineral Resources and Energy). The Commissioners/Board Members are appointed for a period of 5 years for Full Time Regulator Members (FTRM), and 4 years for the Part-Time Regulator Members (PTRM) which is renewable. Section 5 of the National Energy Regulator Act (No. 40 of 2004) requires institutional representation on the board. The CEO, Commissioners/Board Members are not allowed to hold any other government office during their tenure. However, a Commissioner/Board Member can be appointed even if she/he has held a position in the regulated utility. The Minister of Mineral Resources and Energy has the authority to dismiss the agency head/board members in accordance with Section 7 and section 9 of the NERSA Act.
NERSA rates low with respect to stakeholder independence. There are no restrictions on the appointment of former appointees of the regulated entities as commissioners or CEO of the regulatory authority and on commissioners from accepting employment in a regulated entity after their tenure as the end of their respective terms in office as commissioners. The CEO/board members are prohibited, by section 6(4) and 9(d) of the National Energy Regulator Act No.40 of 2004, from having any personal interest in the regulated utility during their respective terms. The majority of NERSA permanent staff is recruited through a competitive process.
NERSA’s rating in decision making independence is high. The regulator is the final decision maker on tariffs and on issuing and amending licences. The regulator plays a facilitatory role in resolving disputes between companies on the one hand, and between companies and their customers on the other, but the regulators’ decision is legally binding.
Furthermore, the executive arm of government cannot overturn regulatory decisions of the regulator and NERSA is not required to seek approval from the executive on regulatory decisions. NERSA is however required by section 10(d) of the Act to consult the public and stakeholders before taking regulatory decisions.
NERSA is rated substantial on financial independence. By law it relies on fees levied on regulated utilities to fund its activities but requires budgetary approval from the executive. The level of the fees is approved by the executive. The regulatory authority board determines the salary levels of regulatory staff which is determined according to market levels. This enables the authority to attract, maintain and retain qualified staff.
NERSA maintains a high level of regulatory development with regards to accountability. The authority reports to Parliament through the sector minister and has a legal obligation to produce an annual report on its activities, which it presents to the sector minister. Regulated utilities may challenge NERSA’s regulatory decisions through a Tribunal process.
NERSA rates high in transparency, as key regulatory documents like license procedures and tariffs are published on the regulator’s website. It is mandatory that all major regulatory decisions taken by the regulatory agency and the rationale/reasons behind them are published.
NERSA rates substantial in predictability. It has a documented tariff methodology, that has been reviewed within the last 5 years, which sets out the procedures for major tariff reviews. A timetable exists (in another document) for tariff reviews. NERSA has a documented procedure, with timelines for obtaining licences, which is published. Applicants are provided updates on the status of their licence applications from time to time. Key regulatory documents like licenses, contracts and authorizations may be modified by mutual agreement between parties to the regulatory instrument.
NERSA rates substantial in stakeholder participation. Stakeholder consultation is mandatory under the National Energy Regulator Act (NER) and Promotion of Administrative Justice Act (PAJA). The law provides for consultation with utilities, consumers, NGOs, civil society, government and stakeholders through public hearings and submission of written comments. The regulator takes into account stakeholders inputs and responses received during the consultations in arriving at regulatory decisions and publishes the comments. The regulator provides feedback on comments received from stakeholders.
Open Access to Information
NERSA is rated substantial in open access to information. The authority has a public website www.nersa.org.za which carries information on primary and secondary legislations, regulatory documents such as Tariff Methodology, Grid Code, Quality of Service Code/Regulations, License application procedure, consultation papers, regulatory decisions and reasons, forward looking action plan, annual reports of the regulator, operational service delivery of the regulated entities and compliance with legal obligations by the regulator.
Economic Regulation -Tariff Setting
The rating of NERSA in the development of its economic regulation framework is low. It has developed a well-documented tariff setting methodology, which includes a written formula that prescribes how end-user tariff levels must be set. Some of the drawbacks are that the regulator is yet to develop a model regulatory accounting framework for tariff applications and there are no mechanisms to compensate generators for the provision of ancillary services or payment for stranded assets. Furthermore the utility is not required to seek approval prior to making major investments and this can lead to tariff hikes or disputes between the utility and regulator. NERSA has developed a network connection policy but is yet to conduct or update a study on the cost of service, for the past five years. A lifeline block, cross-subsidy, direct subsidy and Free Basic Electricity (FBE) program are tariff mechanisms adopted to make tariffs affordable to support low-income consumers, the poor and vulnerable.
Technical Regulation - Quality of Service
NERSA is rated high in its technical regulation framework. It has developed quality of service regulations for monitoring the performance of the utility regarding technical performance, quality of service performance, grid connection and access to technical requirements. A grid code and a distribution code that were first approved in 2005 have been updated in 2021. Fines are however not imposed on utilities who fail to meet quality of service standards, which include time-based service provisions such as the time taken by the utility to respond to a customer request for a new connection, and the time for the actual connection to be made. It is a regulatory requirement for utilities to provide periodic reports on their performance indicators, including reporting on System Average Interruption Duration Index (SAIDI) and System Average Interruption Frequency Index (SAIFI), financial and non-financial performance reports to the regulator. The regulator conducts performance assessment of the quality of service which it discusses with the utility. Regulatory compliance audits are also conducted in order to monitor compliance.
The regulator receives a rating of substantial for the licensing framework which contains clear procedures and guidelines for applications. This is for both grid-connected and off-grid systems and there is a simplified and light-handed licensing framework and procedure for off-grid and small sized systems.
NERSA has adequate qualified and experienced staff to deal with regulatory issues, including tariff modelling and engineering analysis.
Renewable Energy Development
NERSA is rated substantial for its renewable energy development framework. There is a renewable energy (RE) policy and regulations that provide the legal framework for renewable energy development. The IPP Office of the DMRE is the specialized agency that is responsible for the formulation, development and implementation of South Africa’s renewable energy strategy and NERSA is in charge of renewable energy regulation. There are technology specific model contracts or PPAs for different RE technologies, which were produced by NERSA in conjunction with the DMRE and the National Treasury. The grid code guarantees access to the grid for RE and least cost RE has priority despatch. There are no special tariffs for RE but pricing is based on competitive tenders through successive IPP procurement programs
Mini-Grid and Off-Grid Systems
The framework for the development of mini-grid and off-grid systems in South Africa is rated medium. There is legislation to support mini-grid and stand-alone systems according to a program developed by the DMRE. Although privately own mini-grids can sell mini-grid energy into the grid, there are no regulatory policies that allow assets transfer when the national grid envelopes a mini-grid, and no fiscal incentives are in place to promote the development of mini-grids and stand-alone systems. The regulator is yet to develop technical/quality standards for mini-grids and connection codes specifying technical standards for connecting mini-grids to the national grid. Licensing Exemption and Regulation Notices provide for installers of small mini-grids and the National Rationalised Specification (NRS) 097 standard sets out the minimum technical and statutory requirements for the connection of embedded generators (larger than 1,000kVA) to medium voltage and high voltage utility distribution networks.
Although there are quality standards for stand-alone and individual systems, a licensing or certification scheme that ensures that autonomous/individual home system installers are licensed or certified is yet to be developed.
Energy Efficiency Development
The energy efficiency development framework is rated high. The Energy Efficiency Demand Side Management (EEDSM) regulatory policy developed in 2004 is aimed at improving the scale and scope of energy efficiency adoption. The Energy Efficiency Strategy for South Africa 2005, is a National Energy Efficiency Action Plan (NEEAP) that targets end-use efficiency and non-power sector operations. A separate strategy has been developed for the power sector with a target of 12% maximum network losses. The DMRE and South African National Energy Development Institution (SANEDI) are responsible for the formulation and development of energy efficiency strategy and NERSA is in charge of regulation. Fiscal incentives are used to support investments in energy efficiency.
Minimum energy performance standards (MEPS) and a labelling scheme have been established for major household appliances including refrigerators, HVAC, lighting, and industrial electric motors. NERSA also conducts annual audits on the Eskom Energy Efficiency and Demand Side Management Program. Importers and manufacturers of electrical appliances are required to report on the energy efficiency levels of their appliances and verification is conducted by the National Regulator for Compulsory Specifications (NRCS). The South African Building Code has provisions for energy efficiency in buildings and is enforced by the South African Local Government Authority (SALGA).
South Africa is a signatory to the Paris Agreement on Climate Change and a monitoring, reporting and verification mechanism for GHG is in place for the power sector as well as a carbon pricing mechanism.
Financial Performance and Competitiveness
The level of development of the regulatory framework for the financial performance and competitiveness of the utility from the perspective of the utility, is rated medium. Although there is a transparent procedure for reviewing end-user tariffs, there is no schedule and the regulator does not always follow the procedure. A Cost of Service Study (CoSS) has been conducted by the utility and approved by the regulator within the last 5 years. The actual loss level is reported to be 9.89% but only 0.5% of allowable revenue is factored into the tariffs. At the prevailing loss level and collection rates, the utility is not covering its actual cost of operations through the tariffs. A Regulatory Clearing Account (RCA), which is a monitoring mechanism, compares certain uncontrollable costs and revenues assumed in the tariff decision made by NERSA to actual costs and revenues incurred by Eskom. This is to allow for changes in the actual conditions for specifically identified cost items when compared to assumptions made when the MYPD application was considered. Should there be a difference between the decision and actual costs, RCA balances are either recovered by Eskom (if overspent) or given back to the customers (if underspent). NERSA disallows unreasonable costs by disregarding cost differences deemed to be imprudent and therefore not taken into account in the calculation of the RCA balance.
Although the current level of the average end-user tariff does not cover the utility’s prudent cost of operation, there is no agreed transitional plan between the regulator and the utility to attain a cost reflective tariff. PPAs are approved before signature and price adjustment clauses in PPAs are recognised for tariff adjustments.
Quality of Service Delivery (Commercial and Technical)
The level of regulatory development on quality of service delivery is rated high. The regulator has developed Quality of Service Regulations to guide the operations of the utility and it covers metering, systems operation, etc. The utility is required to undertake annual technical audits or a valuation of its assets to establish the true state of the facilities. It is also required, to calculate and publish its System Average Interruption Duration Index (SAIDI) and System Average Interruption Frequency Index (SAIFI). The utility discusses the SAIDI and SAIFI reports with the regulator and the utility’s performance is factored into the electricity tariff setting. The utility is also required to compensate the consumer if the utility records SAIFI and SAIDI above the regulated ceilings. Time-based customer service requirements such as time from request for a new connection and actual connection are some of the customer service requirements from the utility.
Facilitating Electricity Access
The level of regulatory development in terms of facilitation to electricity access is rated low, as there are no regulatory mechanisms aimed at further enhancing access to electricity. Electrification is funded by government and there are no provisions in the tariffs to recover the investments (from Eskom) in rural electrification.
The regulatory law should be amended, or secondary legislations developed to make provision for:
- Staggering of terms of commissioners to ensure maintenance of institutional memory and knowledge transfer;
- Aapproval of the levels of fees/levies charged by the regulator by Parliament.
- Restricting the appointment of former appointees of the regulated entities as commissioners or CEO of the regulatory authority and commissioners from accepting employment in a regulated entity after their tenure as commissioners.
- Adjusting the average level of salaries of regulatory authority staff to at least equal to those of utilities.
- A network connection policy should be developed as part of the tariff methodology or as a separate document to address related issues of commercial access to the grid.
- A model regulatory accounting framework should be developed for the use of utilities in tariff applications.
- A mechanism should be developed to compensate generators for the provision of ancillary services and for stranded assets.
- A Cost of Service Study should be conducted by the regulator and the findings implemented.
Develop technical standards for mini-grid and stand-alone systems.
Establish a procedure/ mechanism for compensation to mini-grids.
Develop and implement a transitional plan towards cost-reflective tariffs.