#BizTrends2025: The rapid transformation of South Africa’s energy sector

Grid access remains the most pressing bottleneck in South Africa’s energy transition, regardless of the Electricity Regulation Amendment (ERA) Act, which lays the groundwork for a fully independent Transmission System Operator (TSO).

The challenge lies not in the legislation itself but in the capacity and infrastructure of the grid, which requires significant expansion to meet the surging demand for renewable energy.

The current grid infrastructure is heavily concentrated in the coal belts of the northern parts of the country, where traditional power generation assets have been located.

Historically, this “pipeline” of transmission capacity has been wide at the top, where power is generated, and gradually narrows as it delivers energy to demand centres such as Cape Town, Durban and Bloemfontein.

The rise of renewable energy has reversed this dynamic, with much of the generation now concentrated in the Cape provinces, on the opposite ends of traditional coal-fired generation sites.

Unfortunately, this geographical flip of generation capacity doesn’t fit the design of the existing grid infrastructure, and its limits are quickly being reached.

Renewable complexity

Adding to the complexity, renewable generators require reserved grid capacity even if they are not producing power at all times.

A 100MW solar farm, for instance, may only reach full capacity during peak sunlight hours in summer, but is reserved 100MW of grid space.

This differs from coal generation, which can produce a consistent output and utilise the grid continuously.

This intermittent nature of renewable energy, combined with insufficient grid capacity, exacerbates the challenge of connecting new projects to the network.

New innovations such as Collector Grids are being driven as part of the solution to this problem.

Addressing this requires immediate investment in expanding transmission infrastructure and strategic planning to align grid development with the geographical distribution of renewable energy projects.

Without these measures, the full potential of South Africa’s renewable energy pipeline will remain untapped, hindering progress toward a sustainable energy future.

Traders take the lead

The traditional bilateral energy supply model is undergoing a seismic transformation. Independent Power Producers (IPPs), once reliant on direct agreements with large buyers, are increasingly turning to energy traders to manage their supply.

This shift reflects the evolving needs of the market and the growing advantages of trader-led models.

Energy traders offer much-needed flexibility, tailoring contracting terms to meet diverse customer requirements.

They also mitigate risk; their commercial models are seen as less risky than traditional bilateral agreements, an approach increasingly favoured by financial institutions.

As banks adapt their pricing models to reflect these lower risks, the cost of financing energy projects is expected to decline.

Traders are making energy more accessible to smaller businesses.

By leveraging trader platforms, these users can now benefit from utility-scale pricing in a “low friction” transactional environment.

This democratisation of access to affordable clean energy is a significant step toward a more inclusive energy market.

A paradigm shift in trading

The introduction of the Day-Ahead Market (DAM) marks a fundamental shift in South Africa’s energy trading dynamics, creating a pricing system driven entirely by supply and demand.

This new mechanism addresses a critical inefficiency in the current system.

For example, during periods of load-shedding caused by supply shortages, Eskom often has to rely on costly diesel generators, while continuing to sell electricity at a fixed regulated wholesale price.

This often leads to shortfall that must be ‘absorbed’ by Eskom, only to be recovered later through applications to Nersa via the Regulatory Clearing Account.

Under the DAM, however, real-time price signals will allow the market to respond dynamically and bid power into the market.

This market system will result in the lowest cost generation being dispatched ahead of more expensive capacity.

If there is a surplus of energy, the marginal cost of electricity on the DAM will decrease, and market participants will pay less.

IPPs to the rescue

Conversely, during shortages, independent power producers or traders could step in to provide electricity at a lower cost than Eskom’s diesel generators, ensuring the system remains balanced and more cost-effective.

The DAM also benefits suppliers by providing an immediate buyer for power, creating the much-needed liquidity to mitigate market risk.

It enables transparency and responsiveness, as pricing directly reflects the balance of supply and demand at any given moment.

This system incentivises efficient generation and encourages investments in flexible solutions like battery storage and demand-side response technologies.

Ultimately, DAM represents a significant step toward a modernised, resilient, and consumer-centric energy market.

By replacing retrospective adjustments with real-time market signals, South Africa can unlock greater efficiency, attract more players into the system, and provide market buyers with fairer pricing aligned with real-time conditions.

This transition positions the country to better manage supply and demand fluctuations, fostering a more stable and sustainable energy future.

Exporting energy security

South Africa is uniquely positioned to become a vital energy hub for the Southern African Power Pool (SAPP), with the potential to export electricity to neighbouring countries and solidify its role as the “power basket” of the region.

This opportunity, however, comes with significant challenges that need to be addressed to realise its full potential.

The creation of the National Transmission Company of South Africa (NTCSA) and the unbundling of Eskom’s transmission business represent a critical step in opening the grid to more participants and fostering fair competition.

These reforms are essential for facilitating cross-border energy trading and building a robust, interconnected regional energy market.

But bottlenecks in the form of interconnectors between South Africa and its SAPP neighbours, as well as between SAPP member countries themselves, pose a significant constraint.

Interconnectors – critical transmission links that carry power across borders – are currently limited in capacity.

This creates a bottleneck as multiple parties compete for the same space on these main electrical networks.

Handbrake on the economy

These constraints hinder the ability to seamlessly transmit power across the region, even when surplus energy is available.

Resolving these bottlenecks is essential for South Africa to unlock its potential as a major energy exporter.

Investments in upgrading and expanding interconnector infrastructure must be prioritised.

This includes increasing transmission capacity and ensuring that regional grid systems are better aligned to support cross-border energy flows.

A more interconnected SAPP will allow for smoother energy trading, enabling South Africa to send excess renewable power generated in provinces like the Northern or Western Cape to countries facing shortages, such as Zambia, Zimbabwe or Malawi.

Addressing these transmission challenges would not only boost South Africa’s ability to export electricity but also enhance energy security across the entire region.

A well- functioning, integrated power pool ensures that power is available where it’s needed most, smoothing out supply fluctuations and reducing the risk of outages.

By resolving interconnector bottlenecks, South Africa can capitalise on its renewable energy resources and stable investment environment to lead the region in clean energy generation.

These efforts would generate significant economic benefits, including foreign exchange earnings and stronger regional ties, while contributing to a more resilient and sustainable Southern African energy system.

A transformative future

By 2025, South Africa’s energy sector will be at the forefront of innovation and transformation.

From legislative reforms like the ERA amendment, to market advances such as the DAM and trader-led models, the industry is undergoing a profound evolution.

Challenges remain, but they are accompanied by immense opportunities.

As stakeholders navigate this changing landscape, the focus must remain on collaboration, strategic investment, and sustainable growth.

If we can harness the potential of these developments, South Africa will not only resolve its energy challenges but also emerge as a leader in regional and global energy markets.

The road ahead is ambitious, but the destination is clear: a dynamic, resilient, and inclusive energy system that benefits all.