SAWEM won’t replace PPA’s:
Why Bilateral Contracts Remain Central to South African Power Project Finance
SAWEM won’t replace PPA’s. The South African Wholesale Electricity Market (SAWEM) is often framed as a fundamental shift that will force generators to rethink their route to market. In the short to medium term, that framing overstates the change.
SAWEM is better understood as a portfolio-optimisation venue bolted onto a bilateral market. The Power Purchase Agreement (PPA) will not be fundamentally rewritten. It will simply be given new work to do.
The Core Function of a PPA
A bankable PPA does five essential things:
- It provides long tenor.
- It delivers a price known in advance.
- It supplies a single creditworthy counterparty.
- It creates volume certainty through take-or-pay or deemed-energy provisions.
- It allows a lender to size debt against contracted revenue.
These five elements are what make a project financeable. Test them against SAWEM as currently designed and the picture becomes clear.
Private bilaterals will still nominate physically and sit outside the exchange. Day-ahead participation remains voluntary. A new independent power producer (IPP) selling to a trader or corporate buyer will still sign a physical PPA and interact with SAWEM only through balance responsibility and imbalance settlement.
Tenor remains unchanged. The price mechanism remains unchanged. The counterparty remains unchanged. Volume provisions remain unchanged. The ability to gear against contracted revenue remains unchanged.
What does change is balance responsibility, imbalance settlement, settlement-grade metering and credit cover. Every one of those belongs in an annexure. The risk allocation inside the contract shifts. The function of the contract does not.
Why Bilateral Contracts Survive
This is structural, not cultural. A PPA exists to make a project financeable. A spot market cannot do that. A spot price is not a counterparty. It has no tenor, no credit standing and no obligation to anyone.
SAWEM will produce a reference price. It will not produce anyone willing to write a fifteen-year fixed-price commitment. As long as projects remain 70–80% geared, they will need contracted revenue. Nothing in the architecture of a wholesale market creates that revenue.
What True Merchant Exposure Would Require
For merchant revenue to become more than a token line in a financial model, one of three conditions must exist:
- A liquid forward curve against which generators can hedge.
- Creditworthy counterparties willing to warehouse price risk on a generator’s behalf.
- Scarcity pricing robust enough that lenders will underwrite a meaningful merchant tail.
South Africa currently has none of the three. SAWEM’s launch will not create them. A day-ahead price in a market still dominated by a single large generator, with no developed forward market and limited competitive ancillary services, functions as a settlement input — not a revenue strategy.
Merchant build occurs where deep forward markets and investment-grade hedge writers already exist. Their absence is not a transitional problem that liquidity will solve on its own. The hedge writers themselves are what the market cannot manufacture.
We Have Already Run This Experiment
The Southern African Power Pool (SAPP) day-ahead market has operated since 2009. After seventeen years across twelve countries, competitive markets still handle only a small fraction of traded power. In January 2025 just 7% of cross-border traded volumes moved through SAPP’s competitive platforms (71 GWh), against 888 GWh under bilateral contracts. Even at its peak in 2018/19 the competitive share reached only 32% of the traded volume — itself a minority of total regional supply.
A market that has had a generation to overturn the core tenets of the PPA, and has not done so, is not evidence that markets fundamentally change those tenets.
Zambia is sometimes cited as the leading indicator of a new model. What Zambia actually demonstrates is open-access wheeling to mining companies under bilateral contracts, catalysed by a utility in deficit. That is bilateral contracting plus grid access. It is not a wholesale market displacing the PPA.
How SAWEM Will Actually Be Used
In the near term SAWEM is likely to serve two practical purposes, both of which reinforce rather than replace bilaterals:
- Position trimming. A trader holding a portfolio of bilateral positions will buy or sell day-ahead to square up before gate closure. Doing so is cheaper than settling at the imbalance price. This volume is position management, not primary energy sale.
- Imbalance-driven intermediation. A single-asset IPP typically does not want Balance Responsible Party status, forecast obligations and imbalance exposure against a thin balancing stack dominated by one generator. It will therefore sell to a trader who can net forecast error across a portfolio and return a smooth, bankable contract.
SAWEM’s imbalance regime itself generates demand for intermediated bilaterals. The market does not displace the PPA; it creates a new commercial reason for a trader to stand on one side of it.
The result is portfolio optimisation bolted onto a market that remains bilateral at its core.
Addressing Common Objections
“Volumes will be large from day one.” They probably will — driven largely by the Central Purchasing Agency and the Eskom fleet. High volumes of state-fleet dispatch running through a market-shaped mechanism do not equal private-sector transformation. The relevant question is not how many megawatt-hours clear, but whose.
“Balance responsibility is a fundamental change.” It is a material change, and the strongest element of the transformation argument. Balance responsibility takes effect immediately. It will alter PPA drafting around forecast obligations, deviation bands and imbalance cost allocation. Generators are already restructuring around it. Yet it remains one change, lives primarily in the annexures, and points toward aggregation rather than pure merchant exposure.
“Liquidity will come; this is only phase one.” It may. That, however, is a claim about the 2030s. Assertions that route-to-market strategy must change now, or that the generation asset is already becoming the low-value part of the stack, are claims about the present.
Conclusion
SAWEM will change how imbalance risk is managed and how portfolios are optimised. It will not rewrite the fundamental economics of project finance in South Africa. As long as power projects remain highly geared and lenders require contracted revenue, the bilateral PPA will remain the central instrument.
The market is being layered onto a bilateral foundation. In the short to medium term, that foundation is what continues to make projects bankable.
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Credit: Frank Spencer LinkedIN
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