Standard Bank is prepared to help solve the government’s R210 billion grid expansion dilemma — but policy uncertainty could delay this. (Waldo Swiegers/Getty Images)
Cash-strapped Eskom needs R210 billion to upgrade its power grid. Failing to do so will prevent the utility from bringing about the promised additional capacity from renewable energy — potentially prolonging the country’s electricity crisis for another decade.
Renewables have been touted as the fix to South Africa’s energy crunch. But Eskom’s outdated transmission infrastructure means the promise of new capacity is far from being realised.
The country’s inadequate grid has become a thorn in the side of Electricity Minister Kgosientsho Ramokgopa, who has time and again underlined the importance of mobilising investment for the grid.
He said that to upgrade the grid, Eskom needs R210 billion, an amount that cannot come out of the utility’s already lean coffers. And, after receiving a bailout from the government, Eskom’s ability to raise capital is even more constrained, hamstringing efforts to bring load-shedding to heel.
With one expert estimating that it will take 10 years before the grid is up to scratch, South Africa will probably be saddled with load-shedding for much longer than some politicians have promised.
The country’s energy crisis has beaten back economic growth for well over a decade, a period that has been characterised by soaring unemployment.
Policymakers have prioritised building new generation capacity, albeit at the eleventh hour, starting with the decision to pour hundreds of billions into the construction of the Medupi and Kusile power stations.
This came almost a decade after experts warned that electricity demand would outstrip supply, which precipitated the current crisis.
Together Medupi and Kusile should generate 9 600 megawatts, 4 800 each, of additional capacity.
But 15 years after construction on the two power stations began — and with four of their eight units offline — they generate only 3 600 megawatts of electricity combined, according to data provided by Eskom on Wednesday.
This number is dwarfed by the 10 gigawatts (10 000 megawatts) of renewable energy that Energy Minister Gwede Mantashe has said would be procured in coming bid windows.
But the country cannot exploit this renewable capacity — which would more than cover the country’s energy shortfall, ending load-shedding — given the constraints on the grid. Ramokgopa has previously said there is a 6 000-megawatt shortfall.
Ramokgopa has warned that policymakers cannot kick the can down the road in addressing the country’s transmission problem, lest they repeat the mistakes they made on the generation front.
“Transmission must be resolved today,” Ramokgopa said during a briefing on Sunday.
The country’s transmission woes were exposed in the wake of bid window six, when none of the 23 onshore wind projects that bid for a 3 200 megawatt allocation were selected, because of inadequate grid capacity in coastal provinces.
South Africa’s transmission infrastructure is concentrated inland in Gauteng, KwaZulu-Natal and Mpumalanga.
During a media briefing last month, Presidential Climate Commission director Crispian Olver suggested that the government’s overriding priority be to expand the transmission grid by 8 500km by 2031.
The current transmission lines are about 31 107km, according to Eskom’s transmission development plan for the period 2022 to 2031.
“Grid capacity is a major constraint to scaling up the energy transition and that is a view across the board — every stakeholder, government, business, labour, civil society. Grid capacity is a national priority to solve, not only for our transition needs but also for our short-term emergency to solve load-shedding,” he said.
Monique le Roux, the senior energy researcher at the Council for Scientific and Industrial Research, said it would take 10 years to execute essential infrastructure projects to upgrade Eskom’s power grid.
Although solar and wind power plants could be built in a fraction of the time, Le Roux said the grid itself does not have the capacity to bring power from where it’s generated to where it’s needed. “Unfortunately, those good wind and solar resources are located in provinces — for instance, the Northern, Western and Eastern Cape — where there isn’t a lot of demand,” she said.
“Those lines that carry the power from the south of the country where the good wind resource is have been completely utilised. They’re running at full capacity.”
The challenge with renewable energy is that solar energy is not available during peak hours, from 6am to 9am and 5pm to 9pm, Le Roux added.
“For solar, it’s a bit easier. You can add solar anywhere in the country because the resource is linear throughout most of [South Africa]. As people could understand, in the morning and in the evenings, you don’t have good solar resources — and that’s our peak demand periods that need to be served,” she said.
Although there is pressure to add renewable capacity to the grid, Le Roux said the lack of reliable capacity meant that load-shedding would persist.
“The capacity then becomes a waste if it can’t be added to the grid. Without a solution to the grid constraints, we are going to be stuck in load-shedding until the grid can be expanded or improved,” she said.
Peter Attard Montalto, the just energy transition lead at Intellidex, said grid constraints would remain prevalent until at least 2025. “We would have to wait two years for independent renewable power producers to make a real dent in load-shedding.”
Funding is at the heart of South Africa’s grid capacity dilemma, which has already received ample attention through Eskom’s transmission development plan, Ramokgopa suggested on Sunday. Eskom’s most recent report on the plan also pointed to the utility’s liquidity position as a stumbling block to its execution.
“It is regrettable, but unavoidable, that the funding constraints will result in more time being taken to bring the transmission system into compliance,” he said. “The effects on customers and the national economy will be minimised through consultation with customers and activation of risk mitigation measures.”
After amassing upwards of R400 billion in debt, Eskom’s funding options have been slim.
Earlier this year, the treasury proposed that the government take over R254 billion of Eskom’s debt, which has hamstrung the utility’s ability to maintain its ageing coal fleet — feeding into the country’s 15-year energy crisis.
The Eskom Debt Relief Bill, which was passed by the national council of provinces last month, stipulates that the support will be transferred to the utility in tranches over three years, enabling it to pay down its debt and interest obligations. Eskom can use the funds when the bill is signed into law.
But the debt relief comes with strict conditions to safeguard public money. One of these conditions is that Eskom’s capital expenditure is restricted to transmission and distribution and that no new generation projects be built during the three-year period.
The treasury’s head of asset and liability management, Duncan Pieterse, told parliament in late May that the main reason the new generation projects were unable to be connected to the grid was lack of investment in new transmission infrastructure.
Eskom is also prohibited from borrowing more money over the three-year period, after which the utility’s improved financial position should enable it to borrow against its own balance sheet.
Given the extent of the debt takeover, the utility should not need any additional money from the treasury, said Rand Merchant Bank’s chief economist, Isaah Mhlanga. With a freed-up balance sheet, Eskom can go out to the market to raise capital. The R210 billion could also come from private capital, which Ramokgopa has alluded to.
Last month, ratings agency Moody’s flagged that South Africa’s energy system will remain constrained until there is a material acceleration in building more infrastructure. A significant step-up in renewable capacity “will require an increase in investment in the transmission grid by Eskom, which may be difficult”, Moody’s said.
In a separate note, also released last month, Moody’s suggested that the Electricity Regulation Amendment Bill will unlock private investment in Eskom’s transmission grid.
The amendment bill provides for the establishment of an independent transmission company that will act as the system and market operator, providing access to the grid on a non-discriminatory basis. The transmission company will raise its own funding.
“Transmission connections between metropolitan areas with high power demand and areas with renewable energy resources will allow the country to maximise the benefits of renewable energy,” Moody’s noted.
“However, Eskom’s ability to complete such projects will remain hampered, including by limited local supply chains. This poses a material challenge to the speed at which any improvements can be achieved.”
The cabinet approved the draft Electricity Regulation Amendment Bill for tabling in parliament in March, but there has been no action since.
If energy reform, including getting Eskom’s transmission company up and running, is unsuccessful, “the corrosive effect of load-shedding will continue”, Moody’s said.
In March, presidency official Rudi Dicks told reporters that the licence for Eskom’s transmission company ought to be granted in April after it was put out for public comment by the National Energy Regulator of South Africa (Nersa). Obtaining the licence will be the first step towards getting the transmission company to start operating. Eskom will then have to get consent from lenders.
April came and went. Last month, acting Eskom chief executive Calib Cassim reportedly told parliament’s standing committee on public accounts that the utility now expects Nersa to issue the licence by the end of July — teeing up for a November launch of the transmission company.
Nersa said its electricity subcommittee met this Tuesday to consider the application. The energy regulator will meet at the end of July to make a final decision.
Montalto said Eskom must fast-track the registration of its transmission company to resolve the grid dilemma.
But questions remain about the guise the transmission company will take — what its ownership structure will look like and how it will generate sufficient revenue to make a profit.
Since President Cyril Ramaphosa’s announcement in 2018 that Eskom would be unbundled, critics warned that the process would lead to privatisation, resulting in higher electricity prices for consumers as investors endeavour to maximise profits. There are also concerns about the effects of financing, also at the expense of public interests, with renewable energy emerging as an asset class that private investors are scrambling to get in on.
These questions have been raised in reference to the $8.5 billion pledged by wealthy nations to accelerate South Africa’s energy transition. The money, which will come in the form of concessional loans and grants, will see South Africa balancing the interests of several partners and development institutions — each with their own conditions.
Mandisa Nyathi is a climate reporting fellow, funded by the Open Society Foundation for South Africa.