Transmission tariff shortfall threatens SA’s grid expansion

The portion of electricity tariffs currently allocated for the transmission function is too small to justify the private investment that is envisaged to supplement Eskom’s grid expansion.

This is one of the key findings in a report by Meridian Economics and Krutham (formerly Intellidex) – ‘New business and funding models to resolve grid infrastructure constraints in South Africa’.

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The report follows repeated statements by Electricity Minister Kgosientsho Ramokgopa about the need to get the private sector involved in the expansion of the South African grid.

Ramokgopa made it clear that the 1 400km of power lines Eskom plans to construct in the next three years must be increased to 6 000km with the help of the private sector to unlock the additional generation capacity required for South Africa’s future energy needs.

Tariff adjustment

As matters stand, the grid has been saturated in the Eastern, Western and Northern Cape, where renewable energy resources are best, and Eskom has resorted to curtailment to squeeze every available bit of capacity out of the grid in those provinces.

“If we don’t expand the grid, it would be detrimental especially to the development of more wind generation, because the wind resources are very area-specific,” says Meridian’s Dr Grové Steyn.

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Restricting wind generation to areas where resources are less favourable may result in an increase of 20% in the cost of energy generated, he says.

“It will be better to rather adjust the transmission tariff.”

Steyn emphasises that the network needs wind generation as it supplements solar generation which is only available during the day.

‘Ample appetite’

Ramokgopa held an investment conference last year and gave assurance that there is ample appetite in financial markets.

He indicated that government would establish an office like the Independent Power Producers (IPP) office, which does the procurement of generation capacity from independent power producers, and indicated that a ‘build, operate and transfer’ model would be followed for private investment in transmission lines.

After Public Enterprises Minister Pravin Gordhan appointed a board for the new National Transmission Company of South Africa (NTCSA) in January, Ramokgopa submitted the work his office has done on private participation in grid expansion as one of the options to consider.

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According to Meridian and Krutham, the current margin on transmission tariffs is however not enough to justify such investment.

In Eskom’s tariff, the costs of generation, transmission and distribution are all bundled together, although Eskom does structure its tariff application in a differentiated way.

The tariff approved for Eskom for the next financial year by energy regulator Nersa provided for a return on transmission assets of only 2%, which is lower than the rate at which private projects would be financed, and therefore it must increase substantially to justify a business case for such investment.

‘Complementary’ approach

 The report suggests two complementary models for independent power transmission (IPT).

The conventional state-backed IPT model for large inter-zone power transfer projects (400kV and 765kV) that work from the “inside, out” and an IPP-backed IPT model for power collection and deep connection projects (132kv and 400kV) that work from the “outside, in”.

For the state-backed IPT, the report suggests a ‘build, own, operate and transfer’ model, where government appoints companies through procurement auctions to finance, construct and operate specific lines for a period of 20-30 years.

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During this period, the company must maintain the line to a specified standard and receive a fixed return. At the end of the period, the line is transferred to the utility.

This will address two current challenges, namely that Eskom’s balance sheet is too weak to do grid expansion itself and that it lacks the capacity given the size of the challenge, according to the report.

The second model is for a private grid company to build and operate grid lines and substation infrastructure from IPPs to the main public backbone infrastructure.

Since the resources for renewable energy are often located in a specific area, several independent wind or solar farms may be situated near each other.

They jointly contract with an independent grid company to build the line and other infrastructure and provide one contact point to the Eskom grid.

The IPPs pay the private grid company for the use of its infrastructure, while the IPPs have their own contracts with off-takers or sell into the market.

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Several regulatory changes will however be required to accommodate these models.

Meridian and Krutham ran some models to indicate the gap between current tariffs and what would be needed to justify the development of a 400kV line:

This article was republished from Moneyweb. Read the original here