How the government can finance critical grid expansion
Public-private partnerships are needed to boost grid expansion
SA’s electricity grid is facing a critical capacity shortfall that threatens to stall its renewable energy ambitions and economic growth.
While the World Economic Forum rates SA highly in its energy transition progress the country still has a long way to go.
Lara Bezuidenhoudt, partner and head of the finance and projects practice group at law firm Fasken, has suggested that public-private partnerships (PPPs) and project finance could be the key to unlocking the grid’s potential.
“While much attention has been given to Eskom’s ageing coal-fired power stations, an equally big problem is the electricity grid’s capacity challenges, given inadequate investment into the grid in the past three decades,” said Bezuidenhoudt, a public-private partnerships expert.
She noted that this had become a major bottleneck, especially for independent power producers (IPPs) in the renewable energy sector that are struggling to connect to the grid.
State power utility Eskom has proposed measures such as a curtailment framework and reserving grid capacity for IPPs involved in government programmes. However, these ideas remain untested and are not likely to provide a comprehensive solution.
“Ultimately, new power lines and substations will have to be added at pace to avoid grid constraints continuing to negatively impact the roll out of renewable energy generation,” said Bezuidenhoudt.
The president’s climate commission previously highlighted that PPP funding models for transmission could be both cost-effective and efficient.
Bezuidenhoudt said the commission pointed out “rightly” that involving the private sector in financing, building and operating grid infrastructure could accelerate the expansion process significantly. .
Reflecting on the government’s plans, she pointed to the recent announcement by the Treasury that off-balance-sheet financing would be released by end of next month.
She indicated that the initiative aimed to boost private sector investment in the grid without burdening Eskom’s balance sheet or the national budget.
Bezuidenhoudt said that project finance — focused on financing of long-term projects using a non- or limited-recourse financial structure — was suited to this task.
Project finance, where the debt and equity are repaid from the cash flow generated by the project, was an ideal approach for funding costly infrastructure like grid expansions.
Bezuidenhoudt said SA’s experience with PPPs, such as the successful N4 toll route concession linking SA to Maputo, showed the potential for similar models in grid infrastructure.
Despite a recent decline in new PPPs, due to bureaucratic challenges, there is still strong private sector interest in such partnerships.
“For their part, Eskom and the SA government have already proved that project finance can work in the energy generation space given the successful renewable energy programme. They also have a good understanding of what is required for projects to be bankable.
“Lenders, sponsors and equity providers in SA are well versed in the ways of project finance and would be very comfortable navigating structures such as this so long as they are bankable,” she said.
“Increasing SA’s grid capacity has to be a priority to grow and develop the country’s economy and ensure its long-term sustainability. Project finance is the perfect tool to facilitate this.”