BETTER FINANCE, BETTER GRID

New report calls for alternative capital structures to unlock ~ZAR 235-372 billion of investment in South Africa’s grid for energy security, low-carbon growth and green jobs

South Africa can unlock up to $20 billion of investment in grid infrastructure through better financing and smarter de-risking.  This investment is needed to accelerate the current build-rate of transmission lines by 8 times current rates – investment which is critical to ensure energy security, tackle load shedding and deliver low-carbon growth and green jobs.

Alternative capital structures, which allow grid infrastructure to be financed off-balance sheet, can help unlock the capital needed. De-risking proven models like Independent Transmission Projects with catalytic funding from programmes like the just Energy Transmission Partnerships (JET-P) can play a crucial role in accelerating progress.  Optimising the existing grid while building new transmission infrastructure is key to bring up to 20 GW of renewable energy online in the next 4-5 years.

better grid

A new report from the Blended Finance Taskforce, Stellenbosch University’s Centre for Sustainability Transitions and the Centre for Renewable and Sustainable Energy Studies called “Better Finance, Better Grid” finds that using catalytic capital to strengthen the transmission grid is both critical and urgent to transition to a more secure and equitable power system in South Africa.

A national strategic programme of investment is needed to build and connect the renewable energy generation that is critical to energy security, job creation and low-carbon growth. As stated by South Africa's Minister of Finance, Enoch Godongwana, “The lack of reliable electricity supply is the biggest economic constraint” in the country.

The stabilisation and transformation of South Africa’s energy framework will in large part depend on the successful build out of the transmission grid, led by the newly established National Transmission Company of South Africa (NTCSA). Based on the budget speech, Eskom’s future will no longer be about generating electricity, but about transmission and distribution. “Better Finance, Better Grid” provides a path of action for targeted investment to address short term transmission grid constraints and scale investment in new transmission infrastructure for the longer term.

“The grid has been the Cinderella of the energy system for many years. It has been neglected, and therefore there are large sections that need to be rehabilitated and major extensions are needed. Moreover, more than 3 GW of renewable generation projects out of bid window 6 are not happening because there is no capacity to connect them.” ~ Professor Mark Swilling, Co-Director of the Centre for Sustainability Transitions

optimising current infrastructure

The report finds that the only way to add new renewable generation capacity in the short term (4-5 GW per year) is by optimising the use of existing transmission infrastructure capacity. Building new infrastructure typically takes 7-10 years and therefore does not provide a solution for 16-20 GW of new generation capacity to be built and connected in the coming 4-5 years.

The report lays out the options for optimising the use of current infrastructure by:

1. Focusing new generation projects in areas with existing transmission grid capacity

2. Maximising the amount of generation capacity connected at any specific location

3. Upgrading infrastructure with additional transformers

This could unlock up to 17GW of grid capacity; connecting renewables at decommissioning coal sites and increasing rooftop solar generation potentially adding up to 18GW of additional capacity.

“Current grid constraints can to some extent be alleviated through actions like co-locating solar and wind generation, oversizing renewable capacity and deploying batteries. This in essence allows more energy to be fed into the grid using the same grid connection, and also reduces the variability in power generation driven by weather conditions. Quantifying the financial value of such actions at existing connection points will be a logical next step towards deployment.” ~ Professor Bernard Bekker, Associate Director of the Centre for Renewable and Sustainable Energy Studies

Simultaneously, the build rate of new transmission infrastructure must increase by 8 times the current rate to connect the full 53 GW generation capacity required for energy security until the early 2030s.[1] To ensure sufficient transmission capacity, the grid build rate needs to increase from ~300 to ~2,300 km per year. Even more is needed for new generation from 2030-50 to meet power demand.

A national strategic program of investment, that builds on South Africa’s global and domestic leadership to finance the just energy transition, can help overcome existing barriers to achieving the required transmission infrastructure build rate.

alternative financing models needed

One of the key barriers is access to the ~235-372 bn ZAR (~ USD 14-22 billion) of capital required to finance new transmission infrastructure in the coming 10-12 years. Alternative models for financing the transmission infrastructure off Eskom’s balance sheet can help increase access to the necessary capital.

Independent Transmission Projects (ITPs) are likely the most successful model to achieve off-balance sheet financing needs for new transmission infrastructure. ITPs are a proven model in several emerging markets including Brazil, India, Peru and Kenya. They can be conducted for selected projects, allow for flexibility and require relatively limited regulatory changes.

Catalytic allocation of public capital can play a crucial role in financing and de-risking new transmission infrastructure and enabling a pathway to a more secure and equitable power system. Through project finance structures such as ITPs, capital can be unlocked for building, maintaining and/or operating transmission assets. To reduce the cost of capital for such projects, some risks need to be addressed, especially on long-term revenue stability. Concessional loans or development guarantees to ITPs would help mitigate certain timing and investment risks to lower the cost of capital. International climate finance like the $8.5 billion pledged by rich countries for the Just Energy transition under the “JETP” country financing platform could be one source of this catalytic funding, deployed through development banks like the DBSA and the AfDB.

Endorsement for the report

Catherine Koffman, Group Executive Project Preparation, Development Bank of Southern Africa: "It is difficult to conceive of a path to 2050 that doesn’t account for people – we must ensure catalytic capital is used to enable a transition across the whole economy affected by the energy supply value chain, in regions and assets which are critical to jobs and energy security including the transmission grid” 

Dipak Patel, Head: Climate Finance and Innovation at the South African Presidential Climate Commission (PCC): "South Africa’s just energy transition is central to its economic transformation. The JET-P Investment Plan highlights a ZAR 400 billion investment opportunity in transmission infrastructure as a key enabler to scale renewable energy build out. This is critical for jobs, energy security and low carbon economic growth and resilience” 

Nat Micklem, Co-Head of SA & Africa Credit, Ninety One: “A feasible pathway to end load-shedding before the end of the decade exists - but not without significant investment into South Africa's transmission grid. The provision of debt through alternative credit funds to support these and other related initiatives will drive the needed transformation - helping connect up to 20 GW of new renewable generation capacity by optimising existing transmission lines and accelerating the build rate for new infrastructure." 

Dr. Rob Stephen, former chair of CIGRE: “A strategic programme including a transmission build out plan with clear commitments is both needed and possible. We (Eskom) have achieved higher grid building rates in the past, built on strong coordinated planning, clarity on procurement processes and especially certainty around the capital to finance the infrastructure.”

Amar Bhattacharya, Senior Fellow at the Centre for Sustainable Development at Brookings: “We are in a decisive decade for climate and development. Accelerating investment in the energy transition is one of the most important levers we have to create a new pathway for sustainable and inclusive growth. It is also key to unlocking long-term investment opportunities in emerging markets and developing countries. Capturing these opportunities will require a strategic approach to target critical infrastructure which can unlock the system, build pipelines of investable projects and lower the cost of capital. Investing in the transmission grid is one key lever to ensure new renewable energy projects can be connected. Country financing packages like the JET-Ps can help by designing catalytic capital to de-risk critical infrastructure, upskill young workforces and drive the next decades of low-carbon growth.”

Saliem Fakir, Executive Director at The African Climate Foundation: " There is a major opportunity to drive South Africa’s just energy transition through a better use of catalytic capital. This will require innovative financial solutions to promote just and equitable outcomes - including a smarter use of international de-risking capital to enable investments in the grid."

Dr. Chantal Naidoo, Founder of Rabia Transitions:  “On our own, South Africa can achieve a certain level of climate action, but with the right support we can go further, faster — and the faster part is essential, because nature and science is against us. We are running out of time to act.  Financing infrastructure which unlocks the transition is key – especially grid infrastructure in the right places, with the right capital and the right risk-sharing structures.  Rapidly deploying fit-for-purpose finance is how we drive sustainable and inclusive growth.”

Erica Johnson, Centre for Sustainability Transitions: "A national strategic program of investment is the way forward to address transmission grid problems and get on a pathway to end load shedding. Public private coordination will be essential to ensure sufficient capital and to guide renewable generation projects to locations where grid capacity can be made available.”

Jeroen Huisman, Programme Director at the Blended Finance Taskforce: “A catalytic allocation of domestic and international public capital can play a crucial role in financing new transmission infrastructure through lowering the cost of capital. These could include concessional loans or development guarantees to Independent Transmission Projects to finance infrastructure off the transmission company’s balance sheet.”

[1] Following Eskom’s Transmission Development Plan 2022-2032 planned capacity additions