The National Treasury announced in budget documents tabled in parliament on Wednesday it would launch a project at end-July that would enable private investment in electricity grid infrastructure.
The government has been working in partnership with the International Finance Corporation to agree on the short-term options for off-balance sheet financing to accelerate private sector investment in transmission without negatively affecting Eskom’s balance sheet and the fiscus.
Allowing the private sector to participate in the building of new grid infrastructure will help to speed up the rollout of new transmission lines which will contribute to ending load-shedding by allowing more new generation capacity to be connected to the grid.
One company that is already providing end-to-end solutions for the financing, development and construction of grid infrastructure, within the current regulatory framework in which ownership and operating of all grid infrastructure sits with Eskom, says it has a pipeline of projects that will connect 22.5GW of renewable energy to the grid by 2028.
The Green Transmission Company is led, among others, by energy sector veteran Enos Banda — a previous Eskom CEO and an early chairperson of the national energy regulator of SA.
Banda spoke to Business Day about how the environment for private participation in grid development was likely to unfold.
The government has not yet announced on what basis it will allow for private sector investment in the transmission system. Do you have some expectations around what such a structure will or should look like?
SA is unique and the model that ultimately gets adopted must react to our specific circumstances. I know there has been some reference to using a model similar to the Renewable Energy Independent Power Producers Procurement Programme (REIPPPP), but there are important differences between the market for generation and the market for grid that needs to be considered.
REIPPPP procures electrons and because SA, including Eskom, has a shortage of electricity, it must go out and buy from anyone who can supply it at a reasonable price.
Grid is different in that not everybody needs grid, so when you put out a request for proposals for grid build and investment projects it will be driven by the users of the grid — those developers who want to connect their projects — and not by the electricity customers. That is why we have to think carefully about what an adequate response to private sector construction of grid would be.
We must keep in mind the type of competition that will be created by allowing private investment in grid infrastructure and avoid the risk of renewable energy developers building something that they will not want to share.
These are the things that we need to consider when we decide how wide the policy space should actually open.
Before the energy market opened up for private generation and trading Eskom was the trigger for new grid investments. Now you have people who need grid who won’t be selling their power to Eskom — actually the majority of renewable energy projects are pointing in the direction of private demand.
So how do you then look at a public procurement processes for integral systems when the two parties on the two ends are private users of power?
This is why the solution that will work in SA will have to be seriously correlated to the problem we have.
Eskom is in a financial position where it needs government support and the government is running out of headroom to provide that.
This economy can absorb the cost of building the grid with the private sector as an intermediate between the economic demand and utilisation of grid and the Eskom balance sheet challenge. No-one is saying that Eskom is not good at maintaining the grid. It is just Eskom cannot afford to build the grid they need. We need a solution that does not negate what Eskom is doing which is to operate and maintain the grid.
Ultimately, as an intermediate step, we need a model that strikes a balance between extreme forms of ownership and Eskom’s prerogative to operate the grid by looking at zones where a modicum of private access can be built and then connected to main transmission infrastructure.
Given your experience in the financing, development and construction of grid infrastructure, is there sufficient appetite from financial institution to fund such projects?
SA has incredible amount of capacity in the capital market. In our experience all major lenders understand what we do, and they have responded positively to fund the infrastructure that we are busy developing. Our preference is domestic finance, but there is also international develop finance interest because of the catalytic effect of what our investment in grid infrastructure enables.
For every R1 we invest in grid we accelerate R10 investment in renewables.
There is general recognition of the need to transition SA’s energy mix to low-carbon technologies, but recent announcements suggest the timeline for this as been delayed. The draft Integrated Resource Plan (IRP) 2023 has disappointed many for being not ambitious enough in terms of adding new renewable generation capacity. How does the IRP’s move away from renewables towards adding more gas-to-power, for example, affect the outlook for a fast-tracked transmission build programme?
We are a country in transition and a few years ago, if you had asked me whether there would be a private production and sales market for electricity in SA using the Eskom grid for wheeling, I would have thought this was crazy.
Now, with the existence of a parallel, private market for electricity the IRP really reflects what government believes is under its influence and control — rather than a full reflection of the realities of the environment.
With the IRP the government is focusing on what it can do and if it chooses to drive more gas-to-power this is not in opposition to the private sector investing in more renewables or the state’s objective to speed up the expansion of the transmission network to enable private renewable projects to connect to the grid.
Eskom’s generation recovery plan focuses on improving the performance of certain key power stations and achieving an average energy availability factor (EAF) — a measure of total generation output as a percentage of total installed capacity — of about 65% across the fleet within the next two years. The EAF is now sitting below 55%. As a former CEO of Eskom, do you think the recovery Eskom is targeting is possible?
Getting the EAF higher is not so much a question of investment but having the space to do it — balancing the demand that is unmet with the need for the space to really improve the performance of the coal fleet is really the conundrum of our time.
It is not a question of whether it is technically possible, because I believe it is. The question is really whether there will be the room for these plants to be out of commission so that they can be properly repaired and then brought back. I just don’t think there is leeway to do that because it would result in even more load-shedding in the short term.
This is why accelerating the expansion of the grid and adding more renewables to alleviate the challenge represents one of the most important exercises we can do as a country. Introducing new capacity whether it be from gas or renewables is what will give Eskom the breathing room to do more maintenance on the coal fleet.
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