South Africa’s lack of grid capacity and aging power infrastructure are major obstacles to Eskom’s ability to deal with power outages, slowing South Africa’s transition to renewable energy.
The existing infrastructure (mainly high voltage lines) in the Western Cape, Eastern Cape and Northern Cape does not have the capacity to connect renewable energy produced by private operators to the grid.
These natural resource-rich regions have many renewable energy producers waiting to generate electricity (mainly wind and solar) and connect it to the grid, but lack of grid capacity and access prevents them from doing so.
Eskom estimates that expanding its power grid with 14,200km of high-voltage lines and 170 transformers to accommodate the new generation capacity will cost at least R200 billion over the next 10 years. This is money that power companies and governments don’t have.
Eskom and the government need to bring in the private sector to fund investments aimed at expanding the grid, according to a study by think tanks Meridian Economics and Crutham.
Two funding models
Meridian Economics and Crutham propose two financing models for private sector players to finance grid expansion. After all, private capital is poised to potentially end Eskom’s blackouts by investing in renewable energy projects (as we have seen over the past two years since the government allowed companies to build power plants of any size to meet their own electricity needs).
The first financing model assumes a build-own-operate-transfer model for private sector investment in the electric grid. The state could conduct a procurement auction process through the National Transmission Company (recently separated from Eskom to manage the country’s electricity grid) to appoint a company for a period of 20 to 30 years to undertake the financing, construction and operation of the transmission network (or transmission lines).
Based on agreements with national power transmission companies, companies are obligated to maintain and operate power transmission infrastructure for a certain period of time after construction. After a period of 20 to 30 years, ownership and responsibility for operation and maintenance reverts to the national transmission company. During this period, it is envisaged that the private sector will also be able to take advantage of expanded and improved infrastructure to generate electricity, potentially feeding into the national grid and ending blackouts in the process.
Both think tanks said this funding model transfers capital and funding requirements (and risks) from government and Eskom to the private sector.
“This (initial funding model) was developed from two key observations: Eskom currently lacks creditworthiness and does not have adequate execution capacity given the scale of the challenge. Therefore, limiting reliance on sovereign support will require innovative ways to contain costs and allocate risk,” Meridian Economics and Crutham noted.
Eskom’s financial situation remains dire. The utility suffered a huge financial loss of R23.9 billion in the year ended March 2023. This is the largest in its 100-year history of operation.
Read more at Daily Maverick: Eskom posts record financial loss of R23.9 billion
Another pressure point is Eskom’s inability to collect electricity bills from municipalities. Municipal debt continues to rise to unsustainably high levels, reaching R58.5 billion in 2023. Debt and interest costs remain a major problem for Eskom, weighing on its cash generation potential. The outstanding debt had ballooned to R423.9 billion, part of which was taken over by the national treasury.
Involvement of independent power producers
A second financing model for the grid, proposed by Meridian Economics and Crutham, would be supported by independent power producers (IPPs), such as wind and solar power. With the support of private power transmission companies, IPPs will participate in the construction and operation of power infrastructure such as power grids and substations.
Private transmission companies “will connect multiple (or other) IPP projects that pay grid and substation infrastructure fees. These IPPs have private offtakers who independently take over the energy they provide through PPAs (power purchase agreements) or sales to the market.”
This model is premised on the fact that IPPs have already spent large amounts of money on electricity infrastructure to set up renewable energy projects and are exposed to infrastructure investment risks.
“Currently, IPPs are shouldering the cost of building 132kV (kilovolt) transmission lines to connect substations on the 400kV network and handing over the assets to Eskom without cost reimbursement.”
The question of grid expansion needs to be decided by many players. We have Eskom’s management and board of directors. And within the government are Minister of Power Kgosiensho Ramogopa, Minister of Public Enterprises Pravin Gordhan (who is responsible for Eskom’s governance affairs), Minister of Mineral Resources and Energy Gwede Mantashe (who has the power to procure additional electricity from coal, nuclear and renewable energy sources), Minister of Forests, Fisheries and Environment Barbara Creecy (who is responsible for the environmental impact of Eskom and renewable energy issues), and the Minister of Finance. Enoch Godongwana (Head of Eskom’s exposure to public finances).
This was revealed by people close to companies and the government. daily maverick Godongwana and the National Treasury are said to be considering a proposal for the private sector to pay for the expansion of the national electricity grid. DM
