Over the last few years, South Africa has faced a severe energy crisis characterized by frequent blackouts, skyrocketing electricity prices, and a struggling state-owned utility, Eskom. Over the same period, the national government has ramped up policy efforts to chart a path to transition from historical coal-based generation dependency to a low-carbon system as part of a broader effort to meet emissions targets in international Climate change mitigation efforts. Significant reforms have been proposed to solve the crisis, modernize the electricity system and attract private investment and ownership in renewable energy and gas power systems.

The bedrock of this reform process is the breaking up of the state owned enterprise Eskom into separate generation, transmission, and distribution entities to enable private participation in the generation segment of the industry. This process, referred to as unbundling, is closely tied to tariff reform steadily reducing public subsidies in electricity prices, transitioning to a pricing system that more closely reflects the total cost of delivery of electrical energy for each user. The evolution of this form process concludes with the establishment of an electricity market. However, a closer examination of electricity markets globally reveals that this approach has a history of producing socially regressive outcomes and has been unable to decarbonize energy systems in some of the world’s wealthiest nations after decades. 

The concept of electricity markets was designed to introduce competition into the generation and supply of electricity, with the assumption that this would increase efficiency, reduce costs, and promote innovation. In a typical electricity market, various generators—both public and private—compete to sell electricity to an independent system operator, which then dispatches electricity based on bids over different defined timescales at a price that reflects the marginal cost of production. Wholesale electricity prices are determined through a process known as spot pricing, where electricity is bought and sold in real-time or through contracts for future delivery. Internationally, electricity market designs vary widely, incorporating diverse contracting approaches. A typical market structure includes several key components: day-ahead and real-time markets, where generators bid to supply electricity, with prices varying based on supply and demand; capacity markets, which compensate generators for being available during peak demand to ensure reliability; ancillary services markets, focusing on grid stability through services like frequency regulation and voltage control, also subject to competitive bidding; and retail markets, where, in fully liberalized systems, consumers can choose their electricity supplier from companies competing on price and service quality. 

While this market-based approach is intended to drive down production costs and increase efficiency, the reality has been more complex, particularly when it comes to transitioning to low-carbon energy systems. Electricity markets have an even worse track record in addressing social equity issues associated with the price of electricity for low-income users. 

Electricity markets tend to prioritize profitability over affordability, leading to higher prices for consumers, especially during periods of high demand or supply constraints. In recent years, the world’s largest and most integrated electricity market in Europe has shown this dynamic has contributed to widespread energy poverty, with millions of households unable to afford basic energy needs. 

A study on electricity market reform in the European Union conducted by Trade Unions for Energy Democracy (for the European Public Services Union), reviewed the existing research and found that the average electricity bill for EU households rose by 28.2% between 2008 and 2018. During the gas supply crisis in the harsh winter of 2022, more than 41 million Europeans struggled to warm their homes adequately. 

Alongside the political and legislative reforms in the EU which led to the establishment of the electricity market in the early 1990s, a technology decarbonization strategy that sought to reduce coal use by increasing deployment of wind, solar, and gas plants created a situation where electricity generation from natural gas increased by 72% from 1996 and 2014 with combined-cycle installed capacity increasing by almost 100 GW. A technology pathway that is replicated in the existing plants for South Africa’s energy transition. 

Historically, the liberalization of electricity markets has often resulted in price volatility, with the most vulnerable—low-income households, elderly individuals, and those in rural areas—bearing the brunt of cost increases. 

The experience of European countries, particularly during the recent energy crisis, underscores the limitations of relying on market mechanisms for critical infrastructure like electricity. In the UK, for instance, the liberalized market has led to significant price hikes, especially during the global gas price surge in the aftermath of the Russia-Ukraine war. 

Despite multiple private suppliers, competition has not led to lower prices but rather to the collapse of several energy companies, where electricity prices are state-regulated and suppliers cannot recoup their costs fully. This has left consumers to pick up the costs through higher tariffs and effectively put pragmatic re-nationalization and the lack of strategic energy resources back on the table from a range of countries in the EU. By way of example, in 2022, German legislators passed amendments to a 1975 energy law creating a pathway for re-nationalization in the event of a future energy crisis, stating: the amendment, a company can be put under trust administration “if there is a concrete danger that without trust management the company will not fulfill its tasks serving the functioning of the community in the energy sector, and there is a risk that security of supply will be impaired.

Market-based electricity systems are also ill-equipped to drive the large-scale investment needed for decarbonization. The reliance on spot pricing and short-term contracts discourages long-term investments in energy systems, which require stable, predictable returns over decades. 

Cost-reflective electricity tariffs are a core principle necessary for the market reform process. They ensure that prices cover the actual costs of producing and delivering electricity, but they can be problematic due to their impact on affordability and social equity. Reformed tariff rates will be forced to incorporate the typically high cost of capital from private creditors, generous returns on investment, and other forms of project protections used to socialize risk to attract power sector investment. 

On one hand, in a functioning electricity market high tariffs are meant to signal to investors to encourage infrastructure investment, but this disproportionately burdens low-income households, leading to increased energy poverty. Additionally, in volatile energy markets, which become increasingly so with high penetrations of wind and solar resources, prices elevate to unpredictable spikes, making it difficult for consumers and businesses to plan financially. While they aim to ensure the financial sustainability of utilities, cost-reflective tariffs can exacerbate social and economic challenges.

A recent study by the UK-based think tank CommonWealth found that “the push for market-driven solutions has not resulted in the rapid decarbonization necessary to meet climate goals.”In fact, it has created a patchwork of renewable energy projects, often disconnected from broader, coordinated planning efforts. This ultimately limits the scope of industrial policy efforts, which could help develop a local industrial base and has produced a scenario where private developers are ceded too much decision-making power, and, unsurprisingly, have opted to favor cheap imported products in search of quick and often more lucrative returns. 

The South African government’s plan to unbundle Eskom and introduce electricity markets risks replicating the failures observed in Europe and other regions. The move towards a competitive market structure is predicated on the belief that private investment will flow into the sector, particularly in renewable energy. However, this assumption overlooks several critical challenges.

Unbundling Eskom, which involves separating its generation, transmission, and distribution functions, is intended to create a level playing field for private companies. However, this process is likely to further weaken Eskom, which is already burdened with debt, aging infrastructure, and operational inefficiencies. The fragmentation of Eskom’s operations could undermine its ability to leverage economies of scale and coordinate large-scale infrastructure projects, which are essential for a successful energy transition.

Moreover, as observed in other countries, the introduction of independent system operators can lead to conflicts of interest, where private generators push for higher prices during periods of scarcity, knowing that the system operator is obligated to purchase electricity to maintain grid stability. This dynamic could result in higher costs for consumers and further strain Eskom’s financial position, leading to more frequent and severe blackouts. It remains unclear what protections will be put in place to protect consumers from price gouging when the supply side of the system is constrained. 

The expectation that electricity markets will attract significant private investment in renewable energy will likely be disappointing. The volatility and unpredictability of electricity prices in competitive markets often deters private investors. In South Africa, where there is already significant public resistance to rising electricity prices, the energy regulator will be under severe pressure to keep prices affordable, reducing the market’s attractiveness for private investors.

The current looming 36% electricity price increase for 2025/26 currently under consideration is only the beginning. While business lobbies and conservative parties such as the Democratic Alliance rally against historical issues at Eskom, to argue against the pending increases, there remains silence in parliament on the potential impact of the reform process on pricing. The National Energy Regulator recently published a consultation paper for Eskom’s price increase applications stating: “Eskom also stated that this revenue application does not deal with any potential Eskom tariff structural changes. A separate approval process for restructuring of tariffs will be made to NERSA for implementation from FY2026.”

Looking to the future, to implement the reform process, South Africa will likely face four waves of significant electricity price increases over the next five to 10 years. First, Eskom must recover revenue to address its heavy debt burden and recent high diesel usage. Second, tariffs will gradually become cost-reflective as Eskom adjusts prices to better align with production and delivery costs. Third, the investment in the expansive 14,000km transmission project, mainly through the Northern Cape, will be recouped through tariff hikes. Finally, the introduction of electricity markets and gas-to-power plants, aligned with the Integrated Resource Plan, will expose prices to volatile international gas markets and US dollar fluctuations, leading to periodic price spikes. 

Furthermore, the infrastructure required to support high penetration of renewable energy—such as grid modernization, storage solutions, and ancillary services—requires large, coordinated investments that are difficult to achieve in a fragmented market. Without substantial public investment and planning, the transition to renewable energy will be slow, uneven, and ultimately insufficient to meet the country’s energy needs, severely constraining economic growth over the coming decade.

The labor movement has already raised these concerns at length through written and oral submissions to the Just Energy Transition Investment Plan and Integrated Resource Plan 2023 from the Congress of South African Trade Unions and the South African Federation of Trade Unions. There is little evidence to suggest that the reform path campaigned by President Ramaphosa’s government will ever achieve the required investment levels to deliver the high annual renewable deployment targets that have been set. 

The accompanying socially regressive tariff policies are also set to exacerbate the existing challenges with municipal financing. Higher electricity prices will reduce the margin of revenue available for municipalities to recoup through customer sales, and so too will the continued trend of wealthy residents reducing their demand through an uptake of embedded solar and storage projects.

Municipalities will remain unable to play a key role in realizing universal basic service delivery until their funding models have been revised and a significant increase in the share of national treasury appropriations is duly considered. Already high electricity prices are not resulting in the commensurate re-investment in local distribution infrastructure with some of the largest metros reporting very high total electricity losses in 2022/23, including the City of Johannesburg (30%), Nelson Mandela Bay (25.9%), City of Tshwane (21.46%) to name a few. 

In May 2023, leaders from African trade unions, national workers’ centers, global union federations, and allied research centers from across 15 countries convened by the Trade Unions for Energy Democracy (TUED) gathered in Johannesburg to chart a public pathway for the energy transition in Africa. Trade Unions from across the African continent are rallying behind a campaign to “Reclaim and Restore” electricity utilities, advocating for the restoration of public control over energy systems to address both energy poverty and climate change.

Given the significant risks associated with electricity market reforms, South Africa must consider alternative approaches that prioritize social equity, public investment, and coordinated planning. Already, the creation of new or complex legislative reforms is proving difficult to understand, weakening the prospects of social participation. 

The Reclaim and Restore initiative argues that public utilities are better positioned to lead the energy transition when properly funded and managed. We are calling on the state to take direct responsibility for ensuring that the benefits of the energy transition are shared broadly rather than captured by private interests. 

In fact, since the appointment of Electricity minister Kgosientsho Ramokgopa and new Eskom CEO Dan Marokane, process and management improvements at the state-owned enterprise (SOE) have resulted in tremendous public infrastructure performance improvements, realizing over 150 days without load shedding this August after two consecutive record years of rolling blackouts. This shift has shown that the SOE is by no means a dead horse and that competition and profit are not the only drivers of performance. Why not take this moment to consider an expanded role for Eskom in the energy transition? 

This approach would enable the country to pursue a more ambitious and equitable decarbonization strategy focused on expanding access to affordable, clean energy for all, provided alignment can be found with the National Treasury and the South African Reserve Bank to realign monetary and fiscal policy to support breathing life back into the nation’s SOEss. 

The turn to electricity markets in South Africa is unlikely to succeed in addressing the country’s energy crisis or advancing its energy transition. Instead, it risks deepening existing inequalities and actually delaying the shift to a low-emissions system. Building a state capable of extensive central planning functions may well be the greatest hope to achieve an ambitious decarbonization path that puts affordability and public good ahead of short-term thinking and the pursuit of quick profits.