The South African Local Government Association (Salga) opposes the decision by the National Energy Regulator of South Africa (Nersa) to grant electricity trading licences to private entities before finalising the necessary trading rules.

This poses a serious threat to the financial sustainability, constitutional mandate and operational integrity of municipal electricity distribution systems, the association argues.

It shares State-owned power utility Eskom’s apprehension about this move, which it says was undertaken without a comprehensive regulatory framework and adequate public consultation.

Finalised trading rules are essential to ensure the protection of redistributive and cross-subsidisation obligations embedded in municipal tariffs; provide clear definitions of customer eligibility and trader rights; and safeguard against predatory competition in licensed municipal areas of supply, says Salga.

Granting licences on an ad hoc basis without finalised rules or a defined trading market undermines regulatory certainty, erodes municipal powers under the Electricity Regulation Act and risks destabilising the sector, it avers.

Traders will be able to offer competitive tariffs to premium customers without the same universal service obligations that municipalities must uphold, thereby creating an uneven playing field and distorting competition, the organisation says.

A key risk to municipalities is the erosion of revenue and service delivery capacity, Salga points out.

“Electricity revenue is a critical income stream for municipalities, funding both energy services and other essential infrastructure such as roads, waste management, and water supply.

“Allowing traders to target only high-value, reliable customers will reduce cross-subsidisation and leave municipalities with a disproportionate share of defaulting customers,” it says.

Further, the decision to grant trading licences without the required framework will exacerbate the municipal debt crisis. Municipal debt to Eskom exceeds R100-billion, it notes.

Salga says it supports the call for trading rules that include debt-recovery mechanisms, such as clearing houses, restrictions in defaulting municipalities and trader contributions to subsidy pools. Without these measures, the debt crisis will worsen, thereby undermining Eskom and the national fiscus, it avers.

The granting of licences before finalising trading rules infringes on the constitutional mandates of municipalities. Municipalities are constitutionally empowered to reticulate electricity in their areas of jurisdiction. Allowing traders to operate in these same areas without coordination is a direct infringement of this right, Salga argues.

Based on its concerns, Salga calls on Nersa to suspend the approval of further trading licences until a transparent and balanced regulatory framework is finalised and consulted upon, and to engage municipalities in developing rules that uphold the developmental mandate of local government while ensuring market fairness.

“Electricity trading must be managed in a way that strengthens - not weakens - the ability of municipalities to deliver services. Nersa's current approach risks destabilising local government finances and undermining constitutional powers,” Salga president Bheke Stofile asserts.

“A well-regulated framework, developed with meaningful municipal input, is the only way to ensure sustainable competition and service delivery for our communities.”

Salga’s statement follows days after Electricity and Energy Minister Dr Kgosientsho Ramokgopa urged Eskom to stay or withdraw its court action to have Nersa’s licensing of five electricity traders in 2024 reviewed and set aside.

The Minister made reference to a joint statement by Business Unity South Africa and Business Leadership South Africa slamming Eskom’s legal challenge, but also acknowledging Eskom’s concerns regarding the “absence of a clear, rules-based framework to manage the transition to a competitive electricity market”.

Ramokgopa said Nersa had revised the indicative timeframe for the review and finalisation of new trading rules from 12 months to a three-month period.

This development reflects a recognition of the urgency of the matter and the need to provide policy and regulatory clarity to all participants in the electricity market, he said.

“A rules-based transition remains a core tenet of South Africa’s electricity market reform. A stable, transparent and predictable framework is essential to ensure investor confidence, system reliability and orderly liberalisation,” Ramokgopa noted.

“The revised timeframe announced by Nersa presents a valuable opportunity for all stakeholders, including Eskom and business, to engage constructively and substantively in shaping the future trading landscape.”