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South Africa's $21 Billion Grid Upgrade: A Power Move for Economic Revival

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Leo Gonzalez

March 15, 2024 - 06:50 am

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South Africa Rallies to Combat Power Crisis with $21 Billion Grid Expansion

In a decisive move to combat the chronic electricity outages plaguing the nation, South Africa is poised to undertake a colossal endeavor with the objective of expanding its national grid at an estimated investment of 390-billion-rand (around $21 billion). This ambitious project aims to connect a greater number of power plants to the grid as the country strives to resuscitate its crippled economy. The severe power cuts, termed "loadshedding," have had a detrimental effect on the nation's industrial output, employment levels, and have constrained its economic growth rate to less than 1% on average over the last ten years—a significant talking point as the country approaches its May 29 elections.

The existing transmission system is under the purview of Eskom Holdings SOC Ltd., a dominant force responsible for supplying over 80% of South Africa's electricity. However, Eskom's failure to execute the proper maintenance of its facilities or accelerate the construction of new power stations has led to persistent energy shortages. The planned grid expansion includes the construction of an extraordinary 14,218 kilometers (8,835 miles) of power lines over the next decade, which is a threefold increase compared to the past decade's achievements. This is in addition to a sixfold increase in transformer capacity and the establishment of other necessary infrastructure.

The issue of loadshedding has had far-reaching implications, stifling economic activity, exacerbating unemployment, and intensifying the political fervor surrounding the upcoming national elections. In response, the African National Congress has pledged in its election manifesto to expedite the growth of the transmission grid, allowing for an increased supply of energy, with an emphasis on renewable sources. This commitment is shared by its main political competitors, indicating a consensus on the energy issue's significance.

The ability to fund such a sweeping expansion appears to be a feat beyond the current capabilities of Eskom. The state-owned utility has weathered financial looting during the near-decade tenure of former President Jacob Zuma, which resulted in a debt exceeding 400 billion rand. Despite a conditional bailout from the National Treasury, Eskom is heavily constrained and cannot entertain additional borrowing without further compromising its precarious financial position.

Industry insiders have alarmingly characterized the lack of investment in the grid as "a real emergency." Brian Day, chairman of the South African Independent Power Producers Association, stressed the urgent need to accelerate the construction of new lines and substations. There's a sense that development is happening at a snail's pace, and a significant boost in momentum is required.

One of the stark realities is that inadequate transmission infrastructure is proving detrimental to the ambition of boosting the electricity supply. For instance, a recent call for bids that would have seen wind power purchases from private entities doubled ended fruitlessly, none being awarded due to the inability to connect these projects to the grid. This issue has also cast a shadow of doubt over an estimated 66 gigawatts of wind and solar projects that are currently at various stages of development within South Africa, as pointed out in an analysis by Raine Adams from Allan Gray, a fund manager.

Tracing the history of South Africa's electricity system back more than a century, power stations were initially constructed near the nation's rich coal reserves in the northeast to meet the energy demands of mining operations, primarily for extracting gold and other minerals. Subsequently, a network of transmission lines was established to connect various regions of the country. Recent years have seen numerous private solar and wind projects successfully connected to the grid. However, further connections, particularly in regions ideal for such sustainable power facilities, have reached their limits—a predicament that must be resolved if South Africa intends to adhere to its commitments for reducing greenhouse gas emissions.

Eskom acknowledges several formidable barriers in its quest to extend the grid, including the protracted nature of statutory approvals and procurement processes, as well as securing the requisite capital budgets. Other significant roadblocks involve securing land rights for laying cables, and the challenge of organised crime that has infiltrated the construction industry in South Africa.

The utility's prowess in executing infrastructural projects remains questionable in light of its blemished history. The saga of the Medupi and Kusile power plants, two of the world's most significant coal-fired plants, is illustrative of Eskom's troubled past. Both plants were projected to be completed within eight years from their announcement in 2007, at an initial total cost of 163 billion rand. However, the costs have surged, likely exceeding 460 billion rand, and neither facility operates at full capacity as of yet. Despite the challenges, Eskom is taking measures to glean lessons from these past missteps and is contemplating the outsourcing of certain aspects of the grid expansion work.

The situation presents bleak prospects for Eskom's financial sustainability, which, according to Lindani Vezi from Futuregrowth Asset Management, remains unviable without the government's backing or other forms of credit enhancements. In the wake of these concerns, financial institutions are naturally hesitant to provide additional funding under the current circumstances.

A glimmer of hope is emerging as South Africa's cabinet has approved the establishment of an Independent Transmission Projects Office, intended to attract private financing for the grid expansion. This model has found success in countries such as Brazil and India, as noted by Electricity Minister Kgosientsho Ramokgopa. There exists an eagerness among private companies to invest in transmission infrastructure. Nonetheless, progress has been delayed by numerous procedural holdups, including the drawn-out unbundling of Eskom into separate entities for generation, transmission, and distribution—a move that would simplify access to the grid.

Despite the unwavering stance of the ANC against privatizing the transmission network, there remains a need for a financing mechanism that can balance strategic control with the inflow of private capital as pointed out by Sanjeet Sanghera from BloombergNEF.

Progress, albeit slow, is being made in terms of easing regulatory constraints and enhancing the utilization of the existing grid. Hilton Trollip, an energy researcher at the University of Cape Town, offers a ray of hope with the government's recent flexibility, signifying a tentative move in the right direction.

For additional insights on this unfolding development, contributions have been made by Gem Atkinson, James Herron, and Paul Richardson from Bloomberg.

South Africa's Grid Expansion

©2024 Bloomberg L.P. provides comprehensive coverage of this crucial initiative as South Africa confronts its energy woes head-on.

In conclusion, South Africa's undertaking to revamp its transmission grid is a herculean task that not only addresses the immediate loadshedding crisis but also sets the foundation for a resilient and sustainable energy future. Amidst fiscal challenges and historical inefficiencies, the resolve displayed by both the government and the private sector to bridge the infrastructure gap underlines the critical importance of the energy sector in South Africa's overall economic blueprint. As the nation edges closer to the elections with energy policy at the forefront, the eyes of the world are keenly observing how South Africa navigates this monumental challenge.