Better finance, better grid

AUGUST 2023

Rolling out new generation capacity: it’s not about privatisation or nationalisation, but partnership

South Africa needs to bring a huge quantity of new electricity generation capacity on to the national grid in the next decade, if it is to end load shedding, and ensure energy security and ‘green’ economic growth. Much of this will be new renewable solar and wind power. The trouble is that the national grid itself has become the biggest constraint to rolling out urgently needed new generation capacity.

Eskom estimates South Africa will need to build and connect 4 – 5 (four to five) Gigawatts of new renewable generation capacity a year to achieve a resilient power system by the early 2030s. That’s almost six times the rate at which new capacity has been coming on to the grid in recent years. But though government has opened up the market and the private sector has plenty of appetite to build new green power plants, the transmission grid is running out of capacity to connect these.

South Africa’s best solar and wind resources are in the southeast of the country, in the northern, western and eastern Cape, and that is where most developers seek to build. But the bulk of the demand is in the northwest. Transporting the power from where it is generated to where it is used is a critical challenge. It will require as much as R373bn of investment over the next decade to strengthen, modernise, upgrade and expand South Africa’s transmission infrastructure over the next decade. Much of that will have to come from the private sector, in partnership with the public sector. Appropriate financing models will have to be developed.

“The numbers are daunting but that doesn’t scare me. All of this is financeable and the private sector, from banks to pension funds, is ready to deliver,” says RMB Investment Banking Director Dario Musso, who cites the renewable energy independent power producer programme (REIPP) and the 1990s toll road concessions as examples of successful private sector financing of South Africa’s public infrastructure.

RMB and the Development Bank of SA recently hosted an event that brought together high level public and private sector players to discuss investment in South Africa’s transmission grid.  

The discussion built around a new report, ‘Better Finance, Better Grid”, which details how critical it is to strengthen the grid, and calls for a national strategic programme of investment to achieve this. The report, by researchers from Stellenbosch University’s Centre for Sustainability Transitions (CST) and the Blended Finance Taskforce, calls for urgent action to optimise the use of existing grid capacity and to accelerate the rate of new transmission infrastructure build.

There is a mismatch between where the best wind and solar resources are located and where the grid has capacity, which is primarily in the vicinity of the old coal-fired power stations in Mpumalanga. But even the least favourable regions for solar power in South Africa are still better than Spain and twice as high as the Netherlands, which has the most solar panels per capita.

Steering developers to capacity that already exists, and optimising the way this is used, can unlock significant capacity. Even this will need new investment; extending and strengthening the grid will need multiples more. Nationally, the build rate in transmission will have to jump to eight times what it has been in recent years if SA is to achieve energy security by the early 2030s and stay on track to meet its decarbonisation commitments. That will require R235bn-R373bn of investment in the next 10-12 years, with R48bn of this just in the next five years.

Eskom, with its R390bn debt burden, will not be able to finance this, even once its transmission arm is established as an independent company and unbundled from Eskom later this year. Off balance sheet financing models must be developed that can leverage private sector capital. The report zeroes in on Independent Transmission Projects (ITPs) as an appropriate model which has worked in countries such as Brazil, Peru, India and Chile.

The ITPs, similar to the REIPPs in generation, allow for selected projects with different ownership models and for different divisions of responsibility between private players and the transmission company. Importantly they allow for concessional public money – domestic or international – to be used to catalyse private investment to accelerate the build programme. The $8.5bn of Just Energy Transition Investment Plan (JET-IP) financing pledged by South Africa’s international partners could play a significant role in this.

Joanne Yawitch, who heads up the JET-IP office in the presidency, says the implementation plan for the JET-IP will be completed by October. Investing in the transmission grid is a critical part of the JET plan and, says Yawitch, is the biggest item of expenditure in the electricity sector as a whole. “It is a critical enabler for long term growth and development in South Africa. If we don’t do it we will go backwards as a country,” she says. Discussions with Treasury on concrete recommendations for how to do this, will go ahead in coming months.

There’s clearly massive interest in investing in transmission projects but plenty of political, regulatory and operational hurdles still to be cleared. There are no quick fixes, and no one size fits all model. The private sector will not invest until the rules of the game are clear, and there is certainty about future revenue flows. Ownership of the projects could be a contested issue politically. But Musso says it’s not about privatisation or nationalisation but about partnership, and the options set out in the report are easy to finance: “If the ground rules are clear, the private sector will adapt and deliver.”

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