Eskom needs the private sector to help with its R200 billion load shedding problem

 ·19 Apr 2024

South Africa desperately needs to increase its grid access for the switch to renewable energy, but Eskom will have to turn to the private sector to finance the expansion.

South Africa has experienced a multi-week reprieve from load shedding, but experts expect this to be short-lived.

Public Enterprises Minister Pravin Gordhan recently said South Africans should expect load shedding to continue unless new capacity is added to the grid, which is currently constrained by infrastructure, like grid access and transmission lines.

Electricity Minister Kgosientsho Ramokgopa echoed a similar sentiment, stating that new generation capacity is throttled by the issues on the transmission side.

Although Eskom’s Transmission Development Plan (TDP) is expected to cost over R200 billion over the decade and add over 14,000 km to the grid, Meridian Economics and Krutham (formerly Intellidex) said that this level of infrastructure spending and project prioritisation might not be enough for the nation’s needs.

Eskom Chairperson Mteto Nyati said that the group needs close to R350 billion over the next ten years to build the nation’s transmission infrastructure but admitted that the group, from its operations, cannot fund it.

Meridian Economics and Krutham added that this is concerning as the TPD is already proving to be a challenge for Eskom.

Eskom’s new grid build-out rates have historically been very low, averaging around 200km to 300km per annum, far below the required 2,000 km+ per annum.

In addition, the three best renewable energy-endowed provinces – the Northern, Eastern and Western Cape – have close to zero grid capacity left.

What to do

In response, the experts completed a study on appropriate Independent Power Transmission (IPT) models for South Africa, which will be implemented alongside Eskom’s own grid programme.

The study recommended two complementary models for private sector participation in the grid.

For large backbone infrastructure (usually large 765kV inter-zonal power transfer lines), the team recommends a standard IPT BOOT (Build, Own, Operate, and Transfer) Model.

This would see the private sector finance and build the grid for a state-backed capacity off-taker.

The study said this provides the grid as a service from the inside out.

“However, the ability of the state to support this strategy through guarantees is limited, and Eskom is in a weak financial position,” said the experts.

“We recommend a model where a portion of the electricity tariff charged to end users is ring-fenced in escrow for IPTs, similar in some ways to the Water Trading Entity arrangement that backs the Trans-Caledon Tunnel Authority (a Centurion-based SOE that specialises in Water-related infrastructure).”

With the BOOT model, the assets can be given to Eskom after a fixed period when the capital cost has been amortised.

When it comes to grids connecting and evacuating IPP power into the main Transmission backbone, an IPP-backed IPT BOOT model is recommended.

This would include the regulatory and tariff changes that will allow IPPs to back the financing of the necessary power line infrastructure.

“We show that with these changes, IPPs could be incentivised to build a large portion of the IPP power evacuation networks, releasing the financial burden from the national government.”

Finally, the experts recommended a tariff reform, as the current Eskom transmission tariff model has not been updated to reflect that the main transmission constraints relate to renewable energy flowing from the Cape provinces inland, not from Mpumalanga, where the coal stations are located.

The tariff level and structure need a complete overhaul to reflect the cost of the new grid build and the changing nature of the grid constraints as renewable generation capacity is connected.

Tariffs should thus be redesigned in the current dysfunctional transmission tariff system and increase tariff levels to be cost reflective, supporting both Eskom’s engineering, procurement and construction (EPC) projects and the IPT models.

The study from Meridian Economics and Krutham can be found below (mobile user click here):

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