Grid bottlenecks continue to slow power projects

Financing is readily available for South Africa’s growing captive and embedded power market, yet limited transmission capacity and grid connection constraints continue to hold back investment.

Speaking to Moneyweb on the sidelines of the Africa Energy Forum in Cape Town last week, Vincenzia Leitich, executive vice president of power and renewables, Client Coverage at Standard Bank, said capital was not the primary constraint facing developers.

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“The capital is there, and the appetite is there, but the main challenge is getting projects connected to the network.”

South Africa has limited grid capacity available for new generation projects. Grid expansion and regulatory certainty are critical to unlocking further investment.

According to Leitich, addressing these bottlenecks would encourage more developers, financiers and sponsors to enter the market.

“I think if that’s clear, the investments come, and you can crowd in developers, sponsors, banks, but then you need the ability to actually build and connect to the grid.”

Transmission bottleneck

According to Eskom’s latest Transmission Development Plan, South Africa needs almost 14 500km of new high-voltage transmission lines over the next decade to connect about 56GW of new generation capacity, much of it renewable energy.

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Electricity and Energy Minister Kgosientsho Ramokgopa has estimated the cost of expanding the grid at about R440 billion.

Given the constraints on both the national fiscus and Eskom’s balance sheet, government has turned to the private sector through its Independent Transmission Projects (ITP) programme, which aims to attract private investment into transmission infrastructure.

The bottleneck is partly a legacy of South Africa’s coal-based electricity system.

Much of the country’s transmission network was built around coal-fired power stations in Mpumalanga.

However, the strongest wind and solar resources are located in the Western, Northern and Eastern Cape provinces.

Grid capacity in several of these areas has been largely exhausted, preventing a number of fully funded renewable energy projects from connecting to the network.

Market reform

South Africa’s energy reforms are intended to address some of these challenges.

The National Transmission Company South Africa (NTCSA) was legally separated from Eskom in 2024 and has since obtained a market operator licence.

Government, however, is still working towards the creation of a fully independent Transmission System Operator (TSO).

President Cyril Ramaphosa confirmed in his State of the Nation Address earlier this year that the new TSO will own transmission assets, operate the grid and run the electricity market.

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A task team established under the National Energy Crisis Committee is overseeing the transition, with a detailed implementation plan expected by the end of June.

Stakeholders hope the reforms will help create a more competitive electricity market and attract the investment that is needed to expand the grid and connect new generation capacity.

Demand for flexibility

Leitich told Moneyweb that businesses are increasingly looking for more flexibility when buying electricity, rather than signing traditional 20-year power purchase agreements.

She said many companies expect significant changes in the electricity sector over the next few years and do not want to be locked into long-term contracts with fixed tariffs.

As a result, shorter-term contracts are becoming more attractive, even if they come at a higher price.

She added that aggregators are becoming more important by connecting power producers with multiple customers and providing greater flexibility in how electricity is bought and sold.

Avoiding stranded assets 

Leitich said securing reliable offtake agreements remains a crucial consideration for financiers, particularly for embedded generation projects that are not connected to the grid.

If an offtaker defaults or terminates a contract, a power project built to supply a specific customer may have no other way to sell its electricity, creating the risk of becoming a stranded asset.

For this reason, lenders pay close attention to the credit quality and long-term viability of customers when assessing projects.

In some cases, developers are encouraged to connect projects to the grid where possible, reducing the risk of being dependent on a single buyer.