Vesting agreements under the draft SA Market Code

Vesting agreements under South Africa’s draft Market Code play a crucial role in the transition from a vertically integrated utility model to a competitive, multi-market system. These agreements aim to ensure financial stability and predictability.

Vesting agreements are contractual arrangements that secure specific terms, such as prices and volumes, for electricity transactions over a defined period. These agreements primarily involve the NTCSA’s Central Purchasing Agency (CPA) and Eskom generators.

They will:

• Provide revenue certainty for Eskom generation units.
• Facilitate a seamless transition to market-based pricing mechanisms.
• Mitigate risks associated with price volatility during the market’s formative years.
• Facilitate a smooth transition to market-based pricing mechanisms.
• Mitigate risks associated with price volatility during the market’s formative years.

The vesting agreements are designed to span a five-year transition period, aligning with the broader market reform timeline.

Key features include:

• Fixed energy and capacity prices: Agreed-upon prices that mitigate the impact of market fluctuations.
• Gradual transition to market prices: Mechanisms to implement market-based pricing progressively over time.
• Coverage of fixed costs: Ensuring that Eskom Generation’s fixed and capital costs are adequately covered.

These vesting agreements are intended to be gradually phased out as the market matures and competitive pricing establishes itself as the norm.

Vesting agreements under the South African Market Code serve as transitional tools that offer stability and predictability as the country progresses towards a fully competitive electricity market. They strike a balance between the need for market liberalisation and the imperative of sustaining a reliable and financially sound electricity supply system.

For further insight into the draft Market Code in preparation for establishing an energy market from 1 April 2026, schedule a session with LnP Beyond Legal’s Ricardo Pillay.