South Africa’s plan to expand its power grid, now the biggest bottleneck to replacing coal with renewables, has hit a snag: finding investors to lend the necessary R390-billion to a near-bankrupt state monopoly.

Since May’s election brought a coalition government to power, there has been a policy shift favouring renewables, after years of bureaucratic delays and contradictory messages about South Africa’s willingness to give up coal, which provides 80% of the country’s power.

But as private providers — including Mainstream Renewable (owned by Aker Horizons), EDF Renewables and Acciona SA — prepare to transform the sector, many face another problem: how to get power from sunny and windy outposts to energy-hungry urban centres.

Six officials said over the past month they were considering options for financing some 14 000km of power lines and pylons but hadn’t yet found a solution.

“Our quest to decarbonise … relies heavily on our ability to expand the grid,” energy minister Kgosientsho Ramokgopa said in an interview in Pretoria late last month.

“But raising R390-billion — the state doesn’t have the balance sheet to roll out that size of capital investment.”

Meanwhile, donors offering a total of US$11.6-billion (R212-billion) mostly in loans to fund climate-related projects are reluctant to lend the needed cash to Eskom without sovereign guarantees, which the government cannot currently provide, two donor country sources and a South African source involved in the programme said.

That is because of its high debt levels. Eskom owes more than R400-billion rand, even after receiving billions in government debt relief. Broke municipalities also owe the utility R78-billion, which Ramokgopa calls an “existential threat”.

Test case

Representatives of the German and French partners in the donor-funded programme did not respond to e-mailed questions, while British partners declined to comment officially.

Burning coal has rendered South Africa among the world’s top 15 greenhouse gas emitters — above Italy, France and Britain. It is seen as a test case for aid to developing countries to switch to green energy, alongside Vietnam and Indonesia.

But years of blackouts from ageing power stations have also ravaged the economy, and Eskom only ended them earlier this year by firing up its coal burners to full capacity, most likely increasing emissions.

Read: Delinquent municipalities owe Eskom R82-billion

A bidding process to bring in independent producers to generate power and sell it to Eskom last year failed owing to insufficient grid capacity, said Rudi Dicks, head of project management in President Cyril Ramaphosa’s office.

The core issue is that the grid stems from the north-eastern coal belt, but the sun beats down hardest on the semi-desert Northern Cape, while coastal Eastern Cape gets the best winds.

“You really need to reconfigure the entire grid … but they are chugging along building at less than 10% the pace that’s needed,” said Crispian Oliver, head of the Presidential Climate Commission.

Eskom’s plan involves building 1 400km of transmission lines every year for at least 10 years. Last year, it managed 74km.

“There’s simply no way Treasury can put out [sufficient] … guarantees,” Oliver said, remarks echoed by Ramokgopa. “The alternative is to … get the private sector to take on large portions of the risk” via mezzanine finance.

A national treasury spokesman did not respond to a request for comment, but the two donor sources said options included escrow accounts — in which a neutral third party holds the funds and releases them when both sides have met their obligations — and offtake agreements with private firms that would fund construction in exchange for future earnings.

The latter could unlock cash from the US, which currently doesn’t fund transmission as it will not work with public institutions. “Should a framework involving private entities be established, we would be open to exploring partnerships,” Emilia Adams, a US embassy spokeswoman, said.

Eskom CEO Dan Marokane said that to attract private companies into transmission, the regulator still needed to overhaul tariffs “because investors want to know with certainty what their return expectations can be”. He hoped this would happen by year-end.

‘Right now’

Dicks, meanwhile, said national treasury had agreed in principle to fund some grid buildout on a case-by-case basis, and that work was under way to get private firms involved. “But that’s 18 months away,” he said. “And we need to build right now”.

Officials had agreed to adopt engineering procurement and construction financing (EPC) and independent power transmission funding (IPT) methods, Dicks said, with the latter opening up the possibility of getting China, which last year signed a raft of energy deals with South Africa, involved.