The independent transmission projects programme is set to mobilise substantial private investment in South Africa’s electricity grid. It is critical to our economic growth targets because it will unlock more electricity generation and wider access. But an announcement on 1 October from the department of electricity & energy and national treasury has pushed the request for proposals (RFP) out from the third quarter of this year to the second quarter of next year. That is an unfortunate slippage of the timetable.
The good news is that there has been real institutional capacity building to support the process. A delay is better than rushing to market with a call for proposals that cannot be properly managed, or that leads to excessive pricing because bidders cannot assess the risks. A failed procurement would cause more delays and cost more than a pause while government gets it right.
One important intervention is a credit guarantee vehicle that will protect investors from credit risks stemming from the National Transmission Company South Africa (NTCSA). The vehicle is being created by national treasury, the World Bank, FSD Africa and the Development Bank of Southern Africa.
The NTCSA is being unbundled from Eskom along with the transmission assets. Once that is done, it will form the Independent Transmission System and Market Operator (ITSMO), which will be the counterparty to investors building out grid infrastructure. It will be the first time private investors have put money into transmission lines in South Africa.
Because the ITSMO is still being established, bidders would face a counterparty that does not yet have its own balance sheet or credit history. The guarantee vehicle provides an important risk management function, giving bidders the confidence to make long-term, multibillion-rand investments. It was incorporated in August and is now being readied to support the programme.
But the timelines are a concern. On the current trajectory, the new grid infrastructure is unlikely to be operating by the end of the decade. The announcement targets the RFP for the second quarter, but it made no commitment on the steps that follow: bid adjudication and negotiation with the winners, before financial close, when construction can actually begin. A clear timetable for the whole process would help manage expectations and enable planning.
Binding constraint
The grid is already the binding constraint on new generation. We cannot get electricity from where it is cheap to generate to where it needs to be consumed.
Eskom and BLSA are aligned on concluding the establishment of the ITSMO, with Eskom’s transmission assets unbundled to it. Finalising that process swiftly will build confidence in the whole grid investment outlook, because investors will know exactly what they are dealing with. The ITSMO will buy grid capacity from investors, so its own creditworthiness will matter in the risk outlook. The guarantee vehicle will help, but a creditworthy institutional buyer underpinning it will provide additional confidence.
The first phase of grid investment calls for only 1 164km of new lines, even though the NTCSA plans to have 14 500km in place by 2034. This procurement needs to be followed swiftly by others.
The commitment of the department and national treasury to the process, and the institutional development that has happened, is to be welcomed. It would build confidence to have a complete timetable through to financial close, and for associated reforms such as the South African Wholesale Electricity Market, which has also been subject to slipping deadlines and is key to enabling competition in the electricity sector.
Business will play a fundamental role. Banks and fund managers will be critical investors in grid infrastructure, and we are supporting Eskom and other key role players to conclude the restructuring process.
None of this is for its own sake. Reliable electricity and competitive prices are growth enablers: they allow businesses to invest and expand, ultimately creating the jobs our country desperately needs. Sticking to reform timetables will get us there sooner.
- Busi Mavuso is CEO of Business Leadership South Africa
