Budget red light over green power

On the surface, finance minister Enoch Godongwana’s budget speech was an encouraging leap forward for renewable energy. 

The R219.2bn set aside for energy infrastructure includes renewable resources, while the streamlining of public private partnerships (PPPs) and the promise of grid expansion are vital steps to creating a sustainable energy system for South Africa.

But look deeper, and it all begins to look less convincing. 

For a start, much of this sustainable future hinges on private investment – yet all indications are that this regulatory process may turn out to be achingly slow and burdened by bureaucratic bilge.

First, the new regulations which are meant to reduce the complexity of PPPs will take time to implement, condemning renewable projects to delays. As it is, many have already been delayed by years due to bureaucratic hurdles and the prioritisation of coal-fired power stations.

Roxanna Naidoo, head of global strategy at Latita Africa, tells Currency that the independent transmission programme – to create a “standalone entity responsible for building, operating and maintaining the transmission grid, separate from Eskom” – will likely face the same problem.

Naidoo says that while the programme is critical for the country, it is also an administrative behemoth that, like many South African infrastructure projects, risks being bottle-necked.

This suggests the backlog to connect energy projects to the grid might span multiple years, raising fresh questions about the viability of these plans. Even without a budget squeeze, “some industry estimates suggest that gigawatts’ worth of project applications are in the queue”, Naidoo says.

This bottleneck isn’t only due to regulatory molasses; Eskom’s “ageing and poorly maintained transmission network” is equally culpable, says Tracey Davies, executive director of investor activist organisation Just Share. 

Davies says South Africa needs about R390bn to upgrade its energy grid so that new renewable energy projects can be plugged into it, given the advanced state of Eskom’s dysfunction.

But even then, until there is a fully functioning independent transmission system and adequate tariff reform to finance the grid overhaul, the transition to renewable energy is likely to stall. 

This suggests that South Africans will continue to be exposed to “the vagaries of Eskom’s uncompliant, collapsing, inefficient, and expensive coal fleet” for some time, Davies argues.

Opportunity costs

Delays in projects of this size might be commonplace in government – but these come with a heavy price tag. 

For investors, this is a red flag. In 2023 alone, a dozen green energy projects, collectively set to provide about 1-billion watts of electricity globally, were impeded by financial woes. 

In South Africa’s case, it faces another risk too: earlier this month, Godongwana threw another curveball into the mix by proposing a hike in the VAT rate from 15% to 16% over the next two years. 

This tax will raise both capital and operational costs, says Naidoo. 

“In competitive procurement or bidding environments, such as those run by the department of [electricity] and energy, higher VAT can reduce project profitability or force developers to adjust their bidding prices upward.” 

This will reduce the profit margin on renewable energy projects, making their long-term returns less compelling for investors, she says.

As it is, the long delay in splitting Eskom’s business into three – generation, transmission and distribution – has already heightened the investment risk. As Davies argues, an Eskom that continues to “act as both player and referee” is not financially or environmentally sustainable.

All of these factors combine to create a chilling environment for capital. And this is critical as, if developers and investors shy away from bidding for renewable energy projects, the government might have to carry the burden of the energy transition alone – a nearly impossible task. 

Analysts say this would be an immense pity, as South Africa is endowed with solar and wind resources that are the envy of many other nations. But for this to work for investors, a stable grid and a reformed energy market are vital first steps. 

If South Africa’s talk of an energy transition is to be more than just lip service, the government has to prioritise a functional grid able to efficiently transmit renewable energy. Without that, it is just another unmet promise.