Private Power’s High Stakes: New Grid Connection Rules Could Deter Investors

In what seems to be a daunting curveball to potential investors, recent regulations for large-scale private power connections to the grid could significantly escalate the initial investment outlay, warns the South African Independent Power Producers Association (Saippa).

Stricter Regulatory Landscape

Eskom, South Africa’s principal electricity supplier, recently rolled out a set of new rules for independent power producers (IPPs). While these regulations were introduced at the behest of another IPP representative, the South African Wind Energy Association (Sawea), and various industry stakeholders, their implications could potentially dissuade investors. The move followed complications with linking new projects to the grid.

These freshly minted rules demand that developers comply with numerous additional conditions prior to their connection to Eskom’s grid. These prerequisites include:

• Securing environmental and water usage rights
• Finalizing an agreement with the power purchaser
• Gathering one year’s worth of data on solar availability for solar plants or two years of data on wind availability for wind farms

These guidelines mean that investors will have to shoulder an elevated financial burden in the early stages of the project to guarantee its launch.

The Implication of New Rules: Steep Initial Costs

According to Saippa chairman Brian Day, the pre-existing cost to bring an IPP project to financial close stood at around R30 million. Previously, approximately 20% of this sum was incurred before investors could be certain of securing a grid connection. Now, due to the new regulations, this figure has soared to nearly 67% of the total project cost.

Consequently, investors in larger-scale projects would need to front about R20 million, as opposed to the former R6 million – a risk that could be wasted if the grid connection is not approved.

Day advocates for Eskom to abandon these rules and instead maintain consistency with the grid connection deadlines. He suggests an alternative approach where other producers could connect to the grid if a particular project fails to meet its timeline.

Contention and Concerns

Sawea voiced its objections against the two-year data requirement for wind farms, deeming it excessive, unreasonable, and a cause for delays in plant rollouts. Multiple IPP associations share concerns that Eskom may not exercise impartiality when distributing grid resources, which, according to Day, underscores the urgency of establishing South Africa’s dedicated transmission company.

Glimmer of Hope: NTSCA

Recently, the Department of Public Enterprises projected that this entity, known as the National Transmission Company South Africa (NTSCA), could be operational by December 2023.

Transmission Capacity Troubles

These new rules were implemented in response to IPP organizations raising concerns about the dearth of transmission capacity in several provinces. Many completed projects, particularly in the Greater Cape Area, have been unable to connect to Eskom’s grid due to maxed-out transmission capacity.

Eskom disclosed in May 2023 that the Northern Cape had already surpassed capacity, while the Western and Eastern Cape were nearing their limits. These provinces are rich in solar (Northern Cape) and wind power (Eastern and Western Cape) for most of the year, making them highly appealing to investors.

Underinvestment in Transmission Infrastructure

Peter Attard Montalto, Intellidex’s managing director for capital markets, revealed that Eskom is investing less than R1 billion of the required R14.5 billion annually for transmission upgrades. He warned that unless this pattern changes, South Africans would need to wait considerably longer for IPPs to help alleviate load-shedding.

Reaping Where You Sow

Despite the capacity shortfall in these provinces, Eskom has substantially more transmission capacity in the northern parts of the country, including Gauteng, KwaZulu-Natal, and Mpumalanga. Montalto criticized developers for waiting for ideal conditions and access from new transmission capacity in the Northern Cape, when these provinces still outrank most other places worldwide regarding renewable potential.