Cape Town opens electricity grid to private investors

From the newsletter

The City of Cape Town has opened its electricity grid to private energy trading following the completion of a year-long wheeling pilot project. The initiative enables private-sector participants to buy electricity directly from Independent Power Producers (IPPs) or licensed traders using the municipal grid infrastructure.

• Early this month, the Cape Town municipality received a loan of $150.2 million from the German development bank KfW for electricity grid infrastructure upgrades. This funding will support the municipality's ambitious three-year "Building For Jobs" project, which plans to invest over $220 million in electricity grid upgrades and maintenance.

• South Africa unbundled its electricity sector in response to Eskom's load-shedding crisis. This move aims to increase energy investment and enable municipalities to trade independently with IPPs and energy traders.

More details

• The wheeling initiative facilitated the transfer of over 562 MWh across the city’s network. This involved three energy trading companies, each working with a generator and an off-taker. Enpower Trading, Equites Property Fund, and Etana Energy acted as power generators.

• Cape Town consumes over 10,000 MWh of electricity, with the industrial sector accounting for over 70% of the total consumption. As electricity demand continues to grow, the city is committed to ensuring it meets these needs. To this end, it has created an energy strategy document that aims to prevent future load shedding by increasing generation capacity, primarily through private sector involvement.

• Furthermore, the city allows electricity customers with small-scale embedded generators (SSEGs), such as rooftop solar PV systems, to feed excess power back into the grid. It purchases this surplus electricity, providing customers with a credit offset on their electricity bills.

• Beyond energy generation, Cape Town has established a special economic zone designed to attract investment in renewable energy and green technology companies. The construction of its first ground-mounted 7-10 MW solar photovoltaic (PV) plant to power operations in the economic zone is expected to be completed later this year. There is also a plan for adding battery energy storage in future.

• The city hosts a diverse range of renewable energy enterprises across various sectors, including solar manufacturing, wind turbine production, electrical manufacturing, fuel supply, professional services, and renewable energy project developers and IPPs. It accounts for over 10% of South Africa's total GDP. Between 2013 and 2024, investments in these areas totalled approximately $1.4 billion, supporting around 30 new projects.

• Opening the grid for electricity trading will create opportunities not only for IPPs but also in the transmission, distribution, sales, and purchase of electricity through an open electricity market. This is likely to create strong competition, which will help lower electricity tariffs.

• Looking ahead, Cape Town is preparing its power grid for increased electric vehicle (EV) penetration. The Electric Vehicle Framework will take the opportunity of  EV roll-out to increase the share of renewables in final energy consumption. It is considering requiring public EV charging stations that exceed a specific demand threshold to operate on renewable energy, either generated from local solar PV capacity or purchased through contractual arrangements.

Our take

• The unbundling of Eskom presents opportunities for South African municipalities to chart their energy paths. While this might prove to be a burden due to the high costs of building energy infrastructure, the private sector can assist.

• Independent sourcing of municipalities' power would reduce bureaucracy and energy charges from Eskom. More players in the electricity supply chain would bring competition. This means municipalities can choose the best deals and, in return, offer competitive electricity tariffs to attract investors in the industrial and commercial sectors. This will further boost electricity consumption.

• Cape Town is pioneering this independent energy model, setting a potential blueprint for other municipalities. However, this path is fraught with challenges. The absence of fully developed policies and regulations creates potential loopholes that could lead to corruption and hinder progress. Without rigorous planning and robust oversight to address these vulnerabilities, municipalities risk replicating Eskom's past failures, where corruption undermined growth.