Energy and Water Infrastructure

In this session, Jason and Olga discuss the changes in the 2023 draft Integrated Resource Plan and what is needed in terms of reforms. They also highlight their concerns about Transnet, and finish off with their thoughts on municipalities, and water infrastructure in particular.

Previous episodes in the series include: Infrastructure investing - Futuregrowth's perspective and Infrastructure and Development Bond Fund.

Transcript

Hi, I'm Jason Lightfoot, I’m a Portfolio Manager at Futuregrowth Asset Management. Hi, I'm Olga Constantatos and I'm Head of Credit at Futuregrowth Asset Management.

OC: So, Jason, one of the key areas of reform is in the Integrated Resource Plan, of which there was a 2023 update recently released. Can you maybe talk us through some of the key differences that we're seeing in the 2023 version that were not there in the 2019 version?

JL: Sure. So it's still in draft version, I mean, public comment closed about a month and a half ago. Key differences are really around a massive reduction in the allocation to renewable energy with about a seven gigawatt reduction. Now, we think that's primarily premised off the fact that there's grid concerns - grid capacity concerns - particularly in areas like the Northern Cape and the Eastern Cape.

In addition, the 2023 version makes a massive allowance to so-called gas solutions - gas power solutions. And ultimately also a much lower reduction in the decommissioning of the coal fired plants, which is definitely a concern.

OC: Right. And you mentioned the grid capacity constraints. Can you maybe talk through what needs to happen with the transmission company and how the grid/what grid investments are needed?

JL: So right now obviously we are aware of the unbundling of Eskom into its three components. So from a grid transmissions company perspective the idea is that that should be operational from round about June/July this year. But ultimately the grid is fairly constrained. The requirement is, or the estimation is that, there's about R250 billion that's required to get the grid to where it should be and ultimately we know that Eskom, through the transmission company, can't afford that themselves.

It's quite likely that over time, we would see the formation of various grid IPPs or independent power companies that ultimately then own a portion of the grid to provide that service.

OC: Okay, so if the IRP is sorting out the energy source - if the grid capacity is sorting out the transmission of that electricity, can you maybe talk us through what reforms are needed in order for that to come together in terms of electricity actually being transmitted through the grid. What needs to happen for that to take place?

JL: So the creation of the National Transmissions Company of SA has definitely laid the path for wheeling: ultimately a mechanism where energy is produced in one area and bought by an off-taker in another region, using the grid as the ultimate transfer mechanism.

Read, Ambiguous Wheeling Framework Hinders Progress

We spoke earlier about the concerns around grid capacity, so obviously that needs to be sorted out first before we are able to achieve this end goal. But in saying so there are still concerns around the ultimate wheeling framework. Again, some level of incoherence coming through there. There’s no clarity in terms of the ultimate tariffs, the standardisation of the agreements and the associated costs with that.

JL: So Olga, can you tell us what your concerns are currently around Transnet and the reforms that are required to allow the private sector to invest into initiatives alongside Transnet.

OC: So I think what's very evident is that Transnet doesn't have the financial capacity to provide for railway lines, the maintenance of this, carriages, etc. And so it is going to need, as you said, the private sector to get involved.

In order for that to happen, what we need is to see the tariff regime, which is basically the charges that Transnet will be charging the private companies for use of their railway lines, for that to be sorted out.

At the moment it's a little bit unclear what that tariff regime is going to be and the current draft that is available has been termed as predatory by some of the participants, which raises some questions as to whether there will actually be any private sector take up for that.

And so I think that's something that needs to be clarified before private sector money can be invested in the logistics and transport sector, particularly as it relates to doing private public partnership deals with Transnet as the partner.

So that's a significant impediment that does need to be resolved in order to unlock investment in that space.

JL: Can you tell us more about your thoughts on the municipality sector and particularly in context of water infrastructure?

OC: Right, so water infrastructure for a long time has been ignored and there's been a significant underinvestment in that space, particularly by the municipalities. And what that looks like is a lack of investment in the pipes, which is resulting in a lot of water leakage and losses. And that needs to be addressed.

Unfortunately, what has to happen first is that the chronic dysfunction at the municipal level needs to be addressed. And that's basic things like, doing maintenance on time, having the right people and teams in place in order to do that maintenance, and making sure that money that the municipality gets from residents for water is utilised for investment in pipes and infrastructure, and is paid over to the bulk water providers.

And so the dysfunction at the municipal level and addressing that, is a key building block in making sure that water infrastructure is improved and allows more water to go to residents and less water to be lost.

OC: So I think we all know that water is the next crisis that is almost upon us, and in our next video, we're going to be unpacking that in some more detail. What needs to happen so that we don't have watershedding like we've had loadshedding?

So that's it for now. And we'll see you next time.