Conflict of Interest Rules in Balancing Mechanism Operation

1. Introduction

A balancing mechanism is used to maintain equilibrium between electricity supply and demand in real time. When actual generation or consumption differs from forecasts, the system operator may need to increase or decrease generation, activate reserves, manage demand or take other corrective measures.

Because these decisions can affect prices, generators, traders and network users, conflicts of interest must be carefully regulated. A conflict may arise when the institution making balancing decisions, or its employees, has a financial or commercial interest in one of the market participants affected by those decisions.

The main objective of conflict-of-interest rules is to ensure that balancing decisions are based on system security, objective technical criteria and applicable market rules, rather than private commercial interests.

2. Nature of Conflicts in Balancing

Balancing mechanisms can create several possible conflicts. For example, a system operator may be connected with generation assets that can benefit when particular balancing actions are taken.

Potential conflicts may concern:

activation of balancing resources;

acceptance or rejection of balancing offers;

reserve procurement;

imbalance settlement;

congestion management;

access to system information;

emergency load reduction; and

decisions affecting affiliated generators.

These risks become more significant when one organisation performs multiple functions in the electricity supply chain.

3. Legal Basis for Independent Operation

In South Africa, electricity-system operation is regulated through the Electricity Regulation Act 4 of 2006 (ERA), licences and the applicable Grid Code. The regulatory framework gives the system operator responsibilities for maintaining the stability and reliability of the electricity system.

In Eskom Holdings SOC Ltd v Sonae Arauco (Pty) Ltd (2024), the Supreme Court of Appeal considered Eskom's responsibilities as system operator and the operation of the Grid Code during abnormal system conditions. The judgment confirms the importance of following prescribed technical requirements when taking system-security measures.

The case did not directly decide a conflict-of-interest dispute, but it is relevant by analogy because balancing decisions must be connected to the system operator's objective regulatory responsibilities.

4. Separation of Commercial and Operational Functions

An important regulatory principle is functional separation. Where an organisation performs both system-operation and commercial activities, procedures should prevent commercial interests from influencing operational decisions.

Possible safeguards include:

separate operational decision-making structures;

independent compliance officers;

information-access controls;

conflict registers;

employee disclosure obligations;

recusal requirements; and

independent regulatory monitoring.

These mechanisms reduce the possibility that confidential balancing information will be used for commercial advantage.

5. SIU v Mazibuko

The importance of conflict-of-interest controls can be illustrated by Special Investigating Unit v Mazibuko (2021). The case concerned an Eskom employee and undisclosed interests involving a business connected with an Eskom supplier.

The tribunal considered Eskom's Conflict of Interest Policy, including requirements concerning disclosure and employees benefiting from Eskom contracts.

Although the dispute concerned procurement rather than balancing operations, the principle is relevant: employees exercising important electricity-sector functions should disclose interests that could interfere with their official responsibilities.

6. Procurement and Balancing-Resource Selection

Balancing mechanisms may require procurement of reserves and ancillary services. If balancing resources are procured through competitive processes, conflict-of-interest rules become closely connected with procurement law.

Section 217 of the Constitution requires public procurement to be fair, equitable, transparent, competitive and cost-effective.

In Eskom Holdings SOC Ltd v Babcock Ntuthuko Engineering (2024), the Supreme Court of Appeal considered an Eskom procurement dispute involving, among other matters, probity assessments concerning potential conflicts of interest.

The case demonstrates the importance of safeguards against conflicts when electricity institutions make commercial decisions involving public resources.

7. Information Advantage and Market Integrity

Balancing operations generate valuable information. The system operator may know which generators are constrained, which reserves are available and when emergency actions may be necessary.

If such information is improperly shared with an affiliated trader or generator, it could create an unfair competitive advantage.

Therefore, conflict-of-interest rules should be combined with confidentiality, market-conduct and information-barrier rules.

8. Accountability and Review

Balancing decisions should also be capable of later review. Operators should maintain records explaining significant interventions, especially where balancing actions have substantial effects on market participants.

Constitutional principles of legality and administrative justice may become relevant where balancing decisions involve the exercise of public power.

In Eskom Holdings SOC Ltd v Vaal River Development Association (2022), the Constitutional Court examined Eskom's statutory position within the electricity regulatory framework and the consequences of electricity-supply decisions. The case reinforces the broader principle that electricity institutions exercising public functions remain subject to legal controls.

9. Conclusion

Conflict-of-interest rules in balancing-mechanism operation seek to protect the neutrality, reliability and integrity of electricity-system management.

The principal safeguards include functional separation, disclosure of interests, recusal, information barriers, independent oversight, transparent procurement and proper record-keeping.

Cases such as Eskom v Sonae Arauco, SIU v Mazibuko, Eskom v Babcock and Eskom v Vaal River Development Association provide useful legal principles concerning system-operation duties, employee