Transmission financing: lessons for emerging markets to overcome contractual risks and challenges

April 2025  |  SPECIAL REPORT: INFRASTRUCTURE & PROJECT FINANCE

Financier Worldwide Magazine

April 2025 Issue

This article discusses the importance of transmission infrastructure in emerging markets, often overlooked amid the focus on large power generation projects and renewable independent power producer (IPP) tenders. While there is significant attention on energy solutions like battery storage, hydrogen, offshore wind and cleaner power, the corresponding need for increased transmission capacity to deliver power to end users is critical. This article explores the challenges and structures that could be used in emerging markets to encourage private sector investment in transmission infrastructure. As the focus is emerging markets, we will look at the alternatives to privatisation and merchant transmission lines for private sector investment – as these effective funding models require a more liberalised energy market for deployment, and we will focus on domestic rather than cross-border transmission networks.

Investment in transmission infrastructure is essential for the continued development of grid-connected utility-scale renewable energy projects. Well-developed transmission systems are crucial for managing the intermittent nature of renewable energy, reducing technical losses and avoiding unnecessary generation or storage capacity. Sub-Saharan Africa has been a focus for transmission expansion in recent years, and we will draw on examples from the region in this article.

State-owned infrastructure

In many emerging market jurisdictions, energy transmission is the responsibility of state-owned utility companies, which own poorly maintained and ageing transmission infrastructure. The state-owned utilities are normally loss-making and heavily subsidised by government. These subsidies are often in the form of direct budgetary support from the government resulting in very little incentive by such public companies to improve their losses, upgrade their existing assets or to invest in new transmission assets. It is this backdrop of operating losses and limited availability of public budget which means without private funding, existing transmission systems will continue to be neglected, leading to further problems and interruptions to existing generating assets where transmission assets they rely on are no longer fit for purpose.

Transmission assets differ from typical project finance assets as they require ongoing capital investment for upgrades and maintenance, unlike generating facilities that primarily need funding for construction.

Public-sector financing

In Africa, most transmission infrastructure funding is public-sector-led, with the government borrowing directly to finance projects. This borrowing is typically through concessional loans from development finance institutions, monetary financial institutions or export credit agencies. The government may either procure the transmission infrastructure directly or lend borrowed funds to a state-owned utility to manage the procurement and repayment process. Ultimately, the government remains responsible for repaying the debt, regardless of whether the utility repays the government.

Lake Turkana lessons

The Lake Turkana Transmission Line project is a good example of a public sector-led transmission funding structure. The transmission line was designed to connect the Lake Turkana IPP to the grid and had the potential to connect with future projects along the long transmission corridor and the Kenya-Ethiopia interconnector and was financed through sovereign loans, as a separate project, with support from the Spanish and Kenyan governments. However, the project faced challenges when the transmission line contractor went bankrupt, leading to significant delays and interface risks for the Lake Turkana IPP. The IPP had to wait to connect to the transmission line, commissioned but unable to generate power due to lack of transmission infrastructure. Deemed energy payments accrued to the IPP during the delay period under the terms of its power purchase agreement, and the African Development Bank provided a €20m partial risk guarantee to cover the IPP deemed energy payments. The transmission line was eventually completed by an alternative contractor and commissioning delays led to a $96m cost overrun, which was funded by the Kenyan government. Ultimately, the Kenyan government assumed the delivery risk for the Lake Turkana Transmission Line, while the Lake Turkana IPP was unable to generate. The delays and financial risks borne by the government underscore the importance of integrating transmission infrastructure into power generation projects to mitigate such risks.

In Asia, there have been private sector initiatives to help improve grid distribution through private sector funding of smart meters in Indonesia – as a means to measure energy usage and grid efficiency, but little private investment in transmission assets. In the Maldives, the Asian Development Bank supported investment into substations and battery storage systems to support new renewable energy generation projects currently being tendered to the private sector, but this was not funded through the private sector. In an article in the Business Times in January 2024, it was cited that the International Energy Agency has indicated that the world has a US$320bn grid investment gap till 2030, posing a significant barrier to achieving stated net-zero targets. There is also considerable discussion in Asia on expanding domestic power networks to create an Association of Southeast Asian Nations regional grid, and correspondingly in Sub-Saharan Africa, discussions of creating cross-border power pools through regional transmission and distribution systems, which in each case seems to be the bigger focus for transmission (and distribution) investment from the private sector.

Private sector funding alternatives

More typically, private sector funding in transmissions is through IPPs, where the developer constructs and finances the transmission lines as part of their generation IPP projects. These transmission lines are necessary for connecting renewable energy projects, often located far from existing grids to the grid, including building substations. It is usual that once the transmission assets have been built and financed, they are handed over to the government or the utility. In the renewable IPPs in Uzbekistan we have seen partial transmission infrastructure being integrated into the IPP, with the transmission assets being handed over to the government once constructed. This model reduces the back-to-back connection risk described in Lake Turkana above, and the private sector takes the risk. The funding for these projects can be repaid either through cash payments from the transmission utility or higher generation tariffs to cover the additional transmission costs.

In South Africa, the government’s most recent rounds of its Renewable Energy Independent Power Producer Procurement Programme wrapped transmission project costs into a related IPP generation project, allowing bidders to build grid connection facilities as part of their bid. The IPP developer designs, procures, constructs and commissions the transmission assets for its IPP, with Eskom’s approval to ensure alignment with technical specifications. After commissioning, the assets and related permits are transferred to Eskom. This helps mitigate the project-on-project risks but also places the responsibility for financing transmission infrastructure on the private sector. The cost of the transmission assets are then recovered through tariffs over the PPA term.

The other alternatives for private sector funding depend on having an enabling legal and regulatory regime, which allows for transmission to be undertaken and operated by the private sector. In Asia, transmission concessions have been successfully deployed in the Philippines, where a private consortium, the National Grid Corporation of the Philippines (NGCP), has the concession to operate, maintain and expand the transmission sector. NGCP is also the system operator. The state-owned TransCo owns the transmission assets. Under a typical concession structure, a government grants a private company the right to develop, operate and maintain transmission networks. The concessionaire is typically responsible for maintenance, repairs, upgrades and expansions while retaining operational control. The government primarily plays an oversight role, ensuring fair tariff regulation and planning. Such concessions are suitable in jurisdictions that have an independent electricity regulator and have a regulatory framework that allows for third parties to hold a transmission licence that permits them to construct, operate and maintain the transmission infrastructure. The tariff structures under a concession must be carefully designed to ensure financial viability, using either a cost-of-service or performance-based approach. However, as with any emerging market project transaction, risk allocation is a key factor, requiring government safeguards to the private sector, such as termination payments, credit support and political risk protection.

Independent transmission projects (ITPs) are being developed as a way to unlock private sector capital. An ITP allows private sector developers to design, finance, build and operate transmission infrastructure under long-term contracts with state-owned utilities. ITPs transfer construction and financing risks to private companies under build, operate, own (BOO), build, own, operate, transfer (BOOT) or build, operate, transfer (BOT) models, like IPPs. Again, this model requires legal frameworks that permit private sector involvement in transmission, which is not feasible in all jurisdictions. The project revenue comes from a transmission service agreement, ensuring financial predictability by basing payments on infrastructure availability and performance, rather than demand. As in other emerging market project sectors, governments can deploy risk mitigation strategies, such as credit support and payment guarantees, to attract investors. Essentially, ITPs can enable large-scale transmission expansion without burdening government balance sheets, but they are generally unsuitable for small-scale projects.

Finally, the de-centralised commercial and industrial (C&I) energy sector could be deployed for upgrading transmission infrastructure. In areas with limited infrastructure, where C&I customers have the financial robustness to develop and fund projects on balance sheet, or sufficient financial standing to attract private sector funding, C&I users fund and construct transmission assets to serve industrial areas, and where the regulatory regime allows, such assets can also be used by other third parties or the national utility. Financing availability will normally depend on the financial creditworthiness of the C&I customers, their commercial banking relationships and the strength of the sector the transmission infrastructure will serve. While the transmission line may serve specific industrial users, its eventual transfer to the public utility can still benefit the wider economy. Sub-Saharan Africa is a good example of a market where this model could be successfully deployed to support the mining sector.

Transmission infrastructure is often neglected, but private sector financing presents an opportunity to expand and enhance energy networks. The rise of renewable energy has increased the need for adequate transmission systems, making public-private partnership models a likely focus for funding transmission assets in emerging markets in the coming years.

 

Fiona Gulliford is a partner at Trinity International (Singapore) Law Pte. Limited. She can be contacted on +65 6522 0282 or by email: fiona.gulliford@trinityllp.com.

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BY

Fiona Gulliford

Trinity International (Singapore) Law Pte. Limited

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