Integrating market and bilateral power trading in the South African Power Pool

High levels of inflexible bilateral trade in southern Africa have limited the participation in the competitive short-term markets, leading to inefficient use of energy infrastructure and blocking the South African Power Pool's long-term goal of transitioning from a cooperative to competitive market. Under the current supply and investment climate, governments and market participants are unlikely to forego their preference for long-term contracts owing to concerns about security of supply and risk mitigation. In this paper, we demonstrate that the current method for integrating bilateral and market trading introduces inefficiencies in the use of generation and transmission infrastructure, reduces total trade, and increases system costs. We propose and test an alternative method based on contracts for differences and implicit auctions to ensure the same level of security of supply for contract holders while minimising market distortions.