Transmission for Transition: Solving the South African Energy Crisis Through Logistics

South Africa is in the midst of an energy crisis characterized by electricity shortages, blackouts, and lack of new infrastructure investment. Eskom, the state-owned utility supplying more than 90% of the nation’s electricity, has suffered from operational failures, maintenance issues, and breakdowns at aging, poorly maintained power stations, leading to steady declines in the energy availability factors for its power plants between 2016 and 2022. This has led to greatly inefficient generation capacity, with the country regularly implementing loadshedding (scheduled power cuts) to manage demand.

At the end of 2022, Eskom only had half of its power generation capacity operational, which forced the company to escalate its daily scheduled national power cuts. Since mid-January 2023, users in South Africa have typically been without electricity for eight to 10 hours a day.

The crisis is unlikely to improve in the short- to medium-term. In fact, it is expected that as power demand increases during South Africa’s colder months from now through August, the country’s electricity supply will decline to the point where power may sometimes be available for only 12 hours a day. To plug the estimated 6,000-MW baseload energy gap, the country will require both continued investment into energy generation, and also, importantly, investments into the infrastructure responsible for transmitting power to end-users.

Apart from limited access to power for citizens, why is loadshedding such a major issue for the country? In short, it is crippling the economy. Power disruptions have had a massive impact on all businesses in South Africa, as unreliable electricity supply leads to increased running costs, and reduced productivity and profitability.

The South African Reserve Bank estimates that rolling blackouts of between six to 12 hours a day, or so-called stage 3 and stage 6 loadshedding outages, detract between $11 million (R204 million) and $48 million (R899 million) per day from the South African economy. According to new research, the total economic impact of loadshedding in South Africa over the past 10 years could be as high as $17 billion (R338 billion). In 2022, loadshedding is estimated by some market participants to have contributed to a reduction by as much as 5% of the country’s GDP (gross domestic product).

Huge Renewable Potential Stymied by Lack of Transmission Infrastructure

Coal dominates the South African energy mix, providing 80% of the total system load, while renewable energy technologies provide 7.3%. This is on a continent with abundant renewable energy resources for solar, wind, hydro, and geothermal energy production.

Greater focus on investment into energy infrastructure, specifically renewables, is sorely needed to increase capacity and close the domestic supply gap. However, the areas favorable for renewable electricity generation are usually located far from offtake centers and industrial energy consumers, so without adequate transmission infrastructure, this huge renewable resource potential remains largely untapped, making the development of long-distance and cross-border electricity transmission an absolute necessity. In the sixth bid window of the Renewable Energy Independent Power Producer Procurement Programme (REIPPP), just 860 MW in new renewable capacity (less than a fifth of what was originally planned) could be procured on account of anticipated oversubscription of grid capacity in the Eastern, Northern, and Western Cape areas, and no new projects could be allowed without further studies.

Improvements in the process for allocation of scarce grid connection capacity to ensure that only shovel-ready projects are allocated capacity, such as those recently announced by Eskom, could be beneficial. However, there should be a focus on three further investment priorities, which are:

• The need for additional transmission infrastructure with a focus on establishing better links to solar rich resources in the Northern Cape.
• Increased focus on the development of large-scale battery energy storage systems in areas such as the Northern Cape to better utilize semi-available grid capacity (arising from the intermittent nature of renewable generation).
• The improvement of north-south transmission infrastructure.

For other parts of the continent, investment into transmission capacity is required to link countries and stabilize grid networks. In Western Africa, for example, hydropower resources are strategically located in countries that border the Atlantic, while solar resources are primarily located in the Sahelian countries. An integrated transmission infrastructure would allow countries in the region to share the benefits of both hydro and solar energy sources.

By investing in transmission networks, countries can efficiently transmit electricity generated from renewable sources, enabling their integration into the grid. This helps diversify the energy mix, reduces reliance on fossil fuels, and contributes to global efforts to combat climate change.

The Rise of Power ‘Wheeling’

A critical option for increasing generation capacity in grid systems is through energy wheeling, which unlocks a significant investment opportunity for the private sector. Energy wheeling, the act of transporting electricity from a generator to a remotely located end-user through the use of an existing transmission and distribution (T&D) system, has become prominent in South Africa as a way of providing power to high energy use commercial and industrial (C&I) consumers.

Since 2008, Eskom has approved third-party wheeling for the physical export of energy onto the national grid by an independent power producer (IPP), and in 2021, an amendment to South Africa’s Electricity Regulation Act raised the threshold for self-generation or distributed-generation power plants from 1 MW to 100 MW with this threshold subsequently abolished completely during 2022. This has successfully placed renewed focus on wheeling as a scalable solution for the surge in uptake of renewable energy to liberalize the electricity market.

The energy wheeling frameworks and tariffs are unlocking the potential for significant private sector investment in renewable energy generation by removing some of the geographical location-based limitations of renewable energy solutions for C&I customers. Wheeling additionally allows for better management of insolvency risk for projects given the possibility of selling to multiple customers thereby reducing single customer exposure and allowing for the replacement of defaulting customers. African Infrastructure Investment Managers (AIIM) has invested greatly in private-sector energy solutions, including through NOA Group Holdings (a vertically integrated net-zero energy platform) and Starsight Energy, which have become increasingly involved in distributed power generation for C&I customers, including through the use of wheeling in markets with liberalizing energy frameworks and adequate grid infrastructure.

The Key Is Collaboration

Energy generation can only be successfully delivered to consumers if there is sufficient transmission infrastructure, but grid investment within a silo cannot solve the energy crisis. Historically, a large part of the challenge has been that T&D networks in many countries have remained the responsibility of power utilities that are facing varying degrees of financial distress. Apart from a few exceptions, private-sector investors have therefore focused less on this area. Whilst T&D is a more complex arena (than power generation) for private-sector participation due to the network nature of the assets, greater collaboration between private player and regional governments will be crucial to enable optimization of renewable energy resources at scale.

A number of markets have already unbundled their electricity sectors to allow for simpler collaboration between public- and private-sector partners. Take Nigeria as an example, which has established a framework that includes a government-owned transmission network and privately owned generation and distribution networks. In Nigeria, recent changes in law have decentralized the electricity market such that the powers to regulate the entire electricity value chain that were almost exclusively vested in the federal government can now also be exercised by state governments. If utilized correctly, these arrangements could feed into more optimized hydropower development for affordable electricity generation and efficient distribution. This will allow power to be privately generated in one part of the country and then delivered to another private offtaker.

Other countries on the continent have a similar opportunity to increase power capacity with government collaboration. In the case of South Africa, if the private sector can increase its focus on transmission bottlenecks for delivering renewable energy both within the country and for export, this could mean the end of loadshedding once and for all.

—Ed Stumpf is Investment Director with African Infrastructure Investment Managers (AIIM). He has more than two decades experience in emerging markets private equity, corporate and infrastructure finance, and financial services. Since 2014, Ed has overseen transactions comprising in excess of $500 million in equity for AIIM across multiple sectors including renewable energy, digital infrastructure, and mobility and logistics.