South Africa’s Power Market: Why Price Shape Will Matter More Than Price Level

By Iranga Mukendi, Investment Manager at African Infrastructure Investment Managers

South Africa is heading into the biggest shift in electricity price formation in its modern history yet too many underwriting models still behave as if we live in a regulated, coal-anchored world where averages are stable and tariffs are the story. That world is ending. What is replacing it is a market where timing becomes value, volatility becomes a feature not a flaw and the winners are those who understand price shape rather than fixating on headline price levels.

For decades, prices were shaped by a vertically integrated system dominated by coal and administratively determined tariffs. In that environment, investors could reasonably build models around a single long-run price path and treat the day as largely homogeneous. As the market opens to greater competition, that logic breaks. Marginal dispatch and the real-time balance of supply and demand will increasingly influence prices which means more non-linearity, sharper peaks and deeper troughs than the current framework suggests.

There is also a transition problem that many people are underestimating. In the 2030 to 2040 window, wholesale prices may show a pronounced hump. That does not necessarily mean the system is structurally short of power forever. It can simply reflect timing mismatches: ageing coal exits before replacement capacity, flexibility and lower-carbon alternatives arrive at scale. When higher-cost balancing resources set the marginal price more often, system prices can lift temporarily and then converge towards a lower equilibrium as renewables and flexibility deepen.

In the near term, coal availability is the lever that can move prices fast. South Africa’s coal fleet is old and large units are unforgiving: a small change in availability can create an outsized price response once the marginal generator shifts from coal to gas or diesel. That risk is not shared equally across technologies. Solar captures limited upside if scarcity occurs outside solar hours. Wind’s resilience depends on how well its profile lines up with high-demand periods. Storage, by contrast, is built to monetise dispersion: it thrives when the gap between low-cost hours and peak hours widens.

This is the heart of the new investment reality. As renewable penetration rises, value migrates away from the average system price and towards the intraday pattern of prices. More generation lands in abundant, lower-price windows, especially midday solar. Scarcity is pushed into fewer, sharper peak periods, often in the evening. Over time, long-term returns will depend less on the headline average and more on whether your asset is producing or discharging when prices spike.

Competitive markets make this even more explicit through capture price. An asset’s generation-weighted realised price can diverge materially from the system average. Solar can face cannibalisation risk as penetration grows and more output arrives at the same time. Wind outcomes hinge on profile. Storage earns on the spread, not the level. As the system scales, it is entirely plausible to see zero or near-zero price intervals during high-renewable periods. If you are still modelling a smooth average, you are not modelling the market that is coming.

This is not an argument for optimism without discipline. It is a case for better underwriting in a reforming market. Investors should be obsessing over profile alignment with peak demand windows, flexibility and optimisation capability including storage and hybridisation, structured revenue protection through transitional phases and explicit stress-testing of coal performance trajectories rather than assuming a benign glide path.

South Africa’s wholesale market is expected to launch in 2026. Until then, pricing remains administratively determined, but the forces that will reshape value are already in motion: coal decline, rising carbon costs, renewable scale-up and system reform. Waiting for the formal market switch before adapting models is a good way to misprice risk and miss opportunity.

The takeaway is simple. The future of power investing here will not be about chasing elevated tariffs. It will be about building portfolios that win on timing, capture and flexibility because in the market we are moving into, price shape will matter more than price level.

At AIIM, we have built our infrastructure investment approach around exactly this kind of market transition: turning reform, volatility and operational complexity into investable, risk-managed opportunity. With a long track record across power and broader infrastructure, we focus on assets and structures that can perform through cycles, whether that means flexible generation, storage, hybridisation or contractual protections that bridge the shift from administrative tariffs to competitive pricing.

As South Africa’s wholesale market opens, our role is to keep doing what we have always done: deploy long-term capital into essential infrastructure with disciplined execution, active asset management and clear-eyed views on how value will really be earned, not in headlines, but in timing, capture and flexibility.