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Private sector may have to foot R200bn for expanding SA’s electricity grid

Eskom estimates it will cost R200-billion within the next 10 years to expand South Africa’s electricity infrastructure to accommodate renewable energy projects and end blackouts. The private sector will probably foot this bill.

By Ray Mahlaka

The lack of grid capacity and aged electricity infrastructure in South Africa are significant impediments to addressing Eskom blackouts and are delaying South Africa’s transition to renewables. There is no capacity in the existing infrastructure, mainly high-voltage lines, in the Western Cape, Eastern Cape and Northern Cape to connect to the grid the renewable energy produced by private players. These areas, with abundant natural resources, have many renewable energy players waiting to generate electricity (mainly wind and solar photovoltaic) and connect it to the grid, but they cannot do so because of the lack of grid capacity and access.

Eskom estimates that it will cost at least R200-billion within the next 10 years to expand the grid with 14 200km of high-voltage lines and 170 transformers to accommodate new electricity generation capacity. This is money that the power utility and the government do not have. Research by the think tanks Meridian Economics and Krutham has suggested that Eskom and the government will have to embrace the private sector to fund investments aimed at expanding the grid.

Two funding models

Meridian Economics and Krutham have suggested two funding models, which involve private sector players financing the expansion of the electricity grid. After all, private capital remains ready to potentially end Eskom blackouts by investing in renewable energy projects (as seen in the past two years after the government allowed companies to build power plants of any size to meet their own electricity needs). 

The first funding model is premised on a build, own, operate and transfer model for private sector investments in the grid. The state, through the National Transmission Company (recently unbundled from Eskom to manage the national electricity grid), could run a procurement auction process to appoint companies on a 20- to 30-year period, whereby they will undertake the financing, construction and operations of the grid (or transmission lines).

Under an agreement with the National Transmission Company, companies would be obliged to maintain and operate the transmission infrastructure for a specific period after construction. After the 20- to 30-year period, the ownership and operational and maintenance responsibilities would be transferred back to the National Transmission Company. During this period, it is assumed that the private sector would also be able to use the expanded and improved infrastructure to generate electricity and potentially supply it to the national grid, ending blackouts in the process. 

The two think tanks said this funding model would transfer the capital or funding requirements (and risk) to the private sector and away from the government or Eskom. 

“It [the first funding model] is developed from two key observations: Eskom is not creditworthy in its current state and does not have adequate execution capacity given the size of the challenge. Therefore, innovative ways of containing costs and allocating risk will be required to limit the reliance on sovereign [public finance] support,” Meridian Economics and Krutham noted.

Eskom’s financial situation remains dire. The power utility incurred a whopping R23.9-billion financial loss in the year ending March 2023 — the largest in its 100-year operational history. 

Another pressure point is Eskom’s inability to recover electricity payments from municipalities. Municipal debt has continued to escalate to unsustainably high levels, amounting to R58.5-billion in 2023. Debt and interest costs are still a big problem for Eskom, weighing on its money-generation potential. Its debt stock swelled to R423.9-billion, with the National Treasury taking over a portion of it. 

The involvement of independent power producers 

The second funding model for the electricity grid that Meridian Economics and Krutham have proposed would be backed by independent power producers (IPPs), such as those producing wind and solar photovoltaic energy. With the help of a private grid company, IPPs would be part of building and operating electricity infrastructure such as grid lines and substations.

The private grid company would connect “multiple [or other] IPP projects that pay to use grid and substation infrastructure. These IPPs have their own private off-takers for the energy that they provide either through PPAs [power purchase agreements] or through selling on to the market.”

This model is premised on the fact that IPPs already spend a lot of money on electricity infrastructure to set up their renewable energy projects, and are exposed to the risk of infrastructure investments. 

“IPPs currently absorb the costs of building 132kV [kilovolts] lines to connect to substations on the 400kV network and then hand over the assets to Eskom with no reimbursement of the cost.”

The issue of grid expansion will have to be decided by many players. There is the Eskom management and board. Then in the government, there is Electricity Minister Kgosientsho Ramokgopa, Public Enterprises Minister Pravin Gordhan (in charge of Eskom’s governance affairs), Mineral Resources and Energy Minister Gwede Mantashe (who has powers to procure additional electricity from coal, nuclear and renewable energy sources), Minister of Forestry, Fisheries and the Environment Barbara Creecy (responsible for the impact of Eskom and renewable energy affairs on the environment), and Finance Minister Enoch Godongwana (responsible for Eskom’s exposure to public finances). 

A source close to business and the government said that Godongwana and the National Treasury were warming up to proposals for the private sector to take on the cost of expanding the national grid. 

Article courtesy of Daily Maverick