South Africa’s electricity story is a fascinating mix of history, challenges, and exciting potential.
It is undeniable that Eskom has played a vital role in powering South Africa’s past and present. But its ability to continue powering economic growth hinges on a sustainable future.
Sticking with coal is unsustainable, especially as carbon border adjustment mechanisms become common will disadvantage South Africa’s export. But the shift away from fossil fuels to a more sustainable energy mix and ultimately net-zero by 2050, presents a golden opportunity and implications for institutional investment.
The challenge is twofold:
The integration of private sector players is crucial here and necessitates substantial funding and strategic planning.
NDP: The National Development Plan (NDP) is the blueprint for infrastructure development to 2030.
DMRE: SA’s energy policies are primarily driven by the Department of Mineral Resources and Energy (DMRE) and the Integrated Resource Plan (IRP).
IRP: The IRP is DMRE’s estimate of electricity demand growth and what energy generation types should be procured to meet that demand, along with the generation capacity, timing, and cost.
REIPPPP: The Renewable Energy Independent Power Producer Procurement Programme (REIPPPP) encourages private investment in renewable energy projects, aiming to increase the country’s use of clean energy sources.
BESIPPPP: Battery Energy Storage Independent Power Producers Procurement Programme (BESIPPPP) is a DMRE initiative aimed at procuring battery storage capacity from IPPs.
IRP targets a 29,500 MW increase in electricity capacity by 2030, predominantly through renewables, (14,400 MW wind, 6,000 MW solar PV). Fitch Connect predicts that renewables’ share of total power generation will grow from 9.3% in 2023 to 17% by 2032, driven by REIPPPP and deregulation that increases private sector engagement.
To date, REIPPPP has procured 6.4 GW from 112 independent power producers (IPPs) over seven bid windows, achieving cost reductions of about 55% for wind and 76% for solar PV, making these options economically competitive with new coal projects.
IRP targets an increase in renewable energy's contribution to the energy mix, aiming for 24.7% by 2030. [Relative to the peers, as shown in Figure 1, South Africa is lagging behind]
Figure 1: SA renewables penetration relative to EM peers
Source: Bloomberg and BP.
Transmission and capital expenditure requirements for the grid
To achieve the growth targets, Eskom requires a c.325% increase in transmission infrastructure over the next 10 years relative to the last 10 years. 53 GW of generation capacity is needed for energy security until the early 2030s. To connect this generation capacity, new transmission infrastructure must be built 8x faster. More new generation is further needed from 2031 to 2050 to meet increasing demand.
Figure 2: Eskom Transmission circuit-km build per year
Source: Eskom.
Despite progress in expanding renewables, grid constraints remain. Innovative strategies like the proposed Curtailment Framework can help integrate more renewable energy into the grid.
How curtailment works?
This involves connecting more solar PV renewable energy projects than the grid can evacuate at peak production time (midday).
Let’s consider a scenario where a power grid has a maximum capacity of 100 MW, and a 100 MW solar photovoltaic (PV) system is connected to it. In the early morning, when solar energy is less intense, the system generates only 30 MW, leaving 70 MW of the grid’s capacity unused. As midday approaches and solar intensity reaches its peak, the system fully utilises the grid’s 100 MW capacity. After this peak period, as solar energy wanes, the grid capacity is once again underutilised.
To optimise this setup, one could implement a curtailment model. For instance, imagine installing a 333 MW solar PV plant. In the morning, the plant could still supply 100 MW. At peak solar times, the output exceeding the grid’s capacity — 233 MW in this case — would be curtailed. After the peak, as solar output declines, curtailment would decrease, allowing the system to maintain a steady output of 100 MW throughout the day.
This example merely simplifies the concept, as real-world system efficiencies are never 100%. However, a significant challenge with this curtailment strategy is the financial model: it must address compensation for the electricity that could have been generated during peak times but was not, due to the need to curtail output to match the grid’s capacity.
Battery energy storage
Another innovation in the offing is the battery energy storage system. DMRE’s BESIPPPP aims to procure significant storage capacity through a series of bid windows, integrating battery energy storage systems to support the national grid and further enhance energy security.
The need for substantial capital investment — c.R235 million for new transmission infrastructure over the next decade — highlights the role of innovative financing models. Independent Transmission Projects (ITPs) offer a promising approach, allowing off-balance sheet financing and attracting international investment, crucial for accelerating infrastructure development.
IPTs have led to successful results in various countries:
Source: Financial Times.
Ninety One, through the Emerging Africa Infrastructure Fund (EAIF), continues to explore project finance structures such as IPTs in other markets such as Uganda and Zambia.
Post-2030 strategies must espouse scaling up renewable energy installations and exploring new technologies such as green hydrogen and bioenergy, which can provide both base-load power and peak-time support.
Natural gas will play a significant role as a transition fuel, balancing the grid as renewable sources are scaled up. DMRE aims to procure 3,126 MW of gas power by 2025.
Figure 3: Emerging plan from Horizon One Analysis
Coal |
Gas – IPP Programme |
Gas – Eskom |
Dispatchable capacity |
Nuclear |
Hydro |
Pumped storage |
CSP |
Solar PV |
Wind |
Hybrid IPP Programme |
Distributed Generation |
BESS - IPP Programme |
BESS - Eskom |
Unserved Energy (TWh) |
||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Current base (MW) | 38,800 | 1,005 | 2,825 | - | 1,860 | 1,600 | 2,732 | 500 | 2,287 | 3,443 | - | 5,000 | - | 20 | ||
2024 | 720 | 100 | 150 | 900 | 199 | 13.06 | ||||||||||
2025 | 720 | 1,220 | 2,115 | 644 | 476 | 900 | 513 | 141 | 7.63 | |||||||
2026 | 140 | 900 | 7.66 | |||||||||||||
2027 | 1,000 | 684 | 900 | 2,000 | 615 | 4.55 | ||||||||||
2028 | 1,000 | 3,000 | 500 | 900 | 615 | 0.22 | ||||||||||
2029 | 500 | 1,500 | 900 | 0.25 | ||||||||||||
2030 | 1,000 | 1,376 | 500 | 1,500 | 900 | 0.27 | ||||||||||
Additional new capacity (MW) | 1,440 | 4,220 | 3,000 | 1,376 | 100 | 3,615 | 4,468 | 626 | 6,300 | 3,743 | 360 |
Source: DMRE.
The IRP envisages adding 3,000 MW of gas power via the IPP programme and 3,000 MW of gas power from Eskom.
Through EAIF, Ninety One has played a significant role in financing gas-fired power stations on the continent. Examples include:
Côte D’Ivoire
Expansion of the Azito Energie gas-fired power station with an additional 253 MW capacity, representing 30% of Cote D’Ivoire’s installed generating capacity.
Mozambique
In Mozambique, US$38.25 million of debt was used to finance the development, construction and operation of a 450 MW gas-fired power plant.
The recent passing of the Electricity Regulation Amendment Bill by the National Assembly heralds an important step forward in transforming South Africa’s energy infrastructure and paves the way for SA’s transition to a multi-market model for electricity trading. The amendments detailed in the bill aim to establish a legal structure for the National Transmission Company of South Africa (NTCSA) and the Transmission System Operator (TSO). This new framework is designed to liberalise the electricity market by creating a competitive environment and reducing Eskom's monopoly over electricity transmission.
Based on research by BMI, non-hydropower renewables will be the fastest growing source of electricity generation in South Africa between 2019 and 2028.
Institutional investors can play a crucial role in financing South Africa’s energy transition. Through vehicles like Ninety One, substantial capital is directed towards renewable energy projects. These entities not only provide the necessary financial backing but also bring expertise in navigating the complexities of large-scale infrastructure projects in emerging markets.
For institutional clients, South Africa’s energy sector presents both opportunities and challenges. Investing in this sector requires a deep understanding of the historical, political, and economic contexts that shape its landscape.
Allocations to alternative investment in South Africa, including infrastructure, are up 21% in 25 years, and asset owners are starting to recognise the benefits that investment in infrastructure offers, such as predictable steady cash flow with low volatility.
While banks will remain an important source of finance, institutional funding is also required given the sheer size of the demand in funding.
Our team manages numerous strategies across illiquid and liquid credit, including 17 vintages of the Credit Opportunities Fund, closed-ended funds that focus on private and illiquid credit in South Africa and the rest of Africa. |
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R58bnInvested in infrastructure over 20 years |
R7 billionRate of deployment per annum |
130+Projects and borrowers supported |
R100bn +Assets under management |
50%of illiquid debt strategies are in infrastructure |