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Finding $21 bln for transmission is proving a challenge

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Donors won't lend to state power company without

guarantees

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EDF, Aker, Acciona involved in big renewable projects

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Burning coal has put South Africa in top 15 emitters

By Tim Cocks

PRETORIA, Aug 12 (Reuters) - South Africa's plan to

expand its power grid, now the biggest bottleneck to replacing

coal with renewables, has hit a snag: finding investors to lend

the necessary $21 billion to a near-bankrupt state monopoly.

Since May's election brought a coalition government to

power, there has been a policy shift favouring renewables, after

years of bureaucratic delays and contradictory messages about

South Africa's willingness to give up coal, which provides 80%

of its power.

But as private providers - including Mainstream Renewable

(owned by Aker Horizons ( AKHOF )), EDF Renewables and

Acciona SA - prepare to transform the sector, many face

another problem: how to get power from sunny and windy outposts

to energy-hungry urban centres.

Six officials told Reuters over the past month they were

considering options for financing some 14,000 kilometers (8,700

miles) of power lines and pylons, but hadn't yet found a

solution.

"Our quest to decarbonise ... relies heavily on our ability

to expand the grid," new Energy Minister Kgosientso Ramokgopa

told Reuters at his office in Pretoria late last month.

"But raising 390 billion rand ($21.30 billion), the state

doesn't have the balance sheet to roll out that size of capital

investment."

Meanwhile, donors offering a total of $11.6 billion mostly

in loans to fund climate-related projects are reluctant to lend

the needed cash to state power firm Eskom without sovereign

guarantees, which the government cannot currently provide, two

donor country sources and a South African source involved in the

programme, told Reuters.

That is because of its high debt levels - Eskom owes over

400 billion rand, even after receiving billions in government

debt relief. Broke municipalities also owe the utility 78

billion rand, which Ramokgopa calls an "existential threat".

Representatives of the German and French partners in the

donor-funded program did not respond to emailed questions, while

British partners declined to officially comment.

"SIMPLY NO WAY"

Burning coal has rendered South Africa among the world's top

15 greenhouse gas emitters - above Italy, France and Britain. It

is seen as a test case for aid to developing countries to switch

to green energy, alongside Vietnam and Indonesia.

But years of blackouts from aging power stations have also

ravaged Africa's most industrialised economy, and Eskom only

ended them earlier this year by firing up its coal burners to

full capacity, most likely increasing emissions.

A bidding process to bring in independent producers to

generate power and sell it to Eskom last year failed owing to

insufficient grid capacity, Rudi Dicks, head of project

management at President Cyril Ramaphosa's office, said.

The core issue is that the grid stems from the northeastern

coal belt, but the sun beats down hardest on the semi-desert

Northern Cape, while coastal Eastern Cape gets the best winds.

"You really need to reconfigure the entire grid ... (but)

they are chugging along building at less than 10% the pace

that's needed," Crispian Oliver, head of the Presidential

Climate Commission, told Reuters.

Eskom's plan involves building 1,400 kilometres of

transmission lines every year for at least 10 years. Last year,

it managed 74 km (45 miles).

"There's simply no way Treasury can put out (sufficient) ...

guarantees," Oliver told Reuters, remarks echoed by Ramokgopa.

"The alternative is to ... get the private sector to take on

large portions of the risk," Oliver said, via mezzanine finance.

"WE NEED TO BUILD NOW"

A Treasury spokesperson did not respond to a request for

comment, but the two donor sources said options included escrow

accounts - in which a neutral third party holds the funds and

releases them when both sides have met their obligations - and

offtake agreements with private firms that would fund

construction in exchange for future earnings.

The latter could unlock cash from the United States, which

currently doesn't fund transmission as it will not work with

public institutions.

"Should a framework involving private entities be

established, we would be open to exploring partnerships," Emilia

Adams, a U.S. embassy spokesperson, said.

Eskom CEO Dan Marokane told Reuters that to attract private

companies into transmission, the regulator still needed to

overhaul tariffs "because investors want to know with certainty

what their return expectations can be".

He hoped this would happen by year-end.

Dicks, meanwhile, said the Treasury had agreed in principle

to fund some grid buildout on a case-by-case basis, and that

work was underway to get private firms involved.

"But that's 18 months away," he said. "And we need to build

right now".

Officials had agreed to adopt engineering procurement and

construction financing (EPC) and independent power transmission

funding (IPT) methods, Dicks said, with the latter opening up

the possibility of getting China, which last year signed a raft

of energy deals with South Africa, involved.

A spokesperson for The State Grid Corporation of China could

not be reached for comment.

($1 = 18.4847 rand)