South Africa’s energy transition is typically framed through the lens of gigawatt-scale renewable procurement, multibillion-rand climate finance pledges, and the gradual unbundling of Eskom. But beneath this high-level narrative lies a less visible, more structural constraint—one that may ultimately determine whether the transition succeeds or stalls: the financial and institutional condition of municipalities.
A recent report by the International Institute for Sustainable Development (IISD), led by researcher Bathandwa Vazi, argues that South Africa’s transition is being undermined by a fundamental misalignment in how climate finance is distributed. While funding flows into the energy sector have increased rapidly—reaching approximately ZAR239 billion (≈USD12.9 billion) in 2024—these resources are overwhelmingly concentrated in utility-scale generation and private-sector investments. Municipalities, which form the backbone of electricity distribution and local infrastructure delivery, continue to receive only a marginal share.
This imbalance is not incidental. It reflects a structural feature of the climate finance ecosystem.
Municipalities occupy a critical but undercapitalised position in South Africa’s energy value chain. As licensed distributors, they are responsible for last-mile electricity delivery, grid maintenance, revenue collection, and increasingly, the integration of distributed energy resources such as rooftop solar, battery storage, and embedded generation. In a decentralising energy system, their role is expanding rather than diminishing.
Yet fewer than 10% of tracked climate finance flows reach local government directly.
The result is what can be described as a “missing middle” in the financing architecture. Municipalities are too financially constrained to access capital markets at scale, yet too operationally important to be excluded from the transition. This creates a systemic bottleneck: capital is available, but it is not reaching the institutional layer responsible for implementation on the ground.
At the centre of this constraint is the issue of municipal bankability. Many municipalities face chronic financial instability, characterised by weak revenue collection, rising debt burdens, and tariff structures that are not cost-reflective. These factors erode creditworthiness, making it difficult for municipalities to access debt financing or participate in blended finance structures.
Vazi’s research highlights that even where funding opportunities exist, municipalities often lack the technical capacity to structure projects that meet investor requirements. The ability to develop bankable project pipelines—complete with feasibility studies, risk assessments, and clear revenue models—is limited. As a result, municipalities struggle to meet the due diligence standards of development finance institutions, commercial lenders, and climate funds.
The barriers extend beyond finance into institutional and informational domains. Municipal officials report limited awareness of available funding instruments, weak alignment between donor requirements and municipal financial systems, and insufficient expertise in navigating complex climate finance frameworks. This combination of constraints creates a self-reinforcing cycle: limited capacity restricts access to funding, and limited funding prevents the development of capacity.
At the same time, policy reform is moving ahead at a faster pace than institutional readiness. Amendments to the Electricity Regulation Act, alongside the introduction of the Climate Change Act, have begun to liberalise South Africa’s electricity market. These reforms enable municipalities to procure power independently, enter into wheeling arrangements, and facilitate embedded generation.
In theory, this should catalyse a more decentralised, competitive, and resilient energy system.
In practice, however, implementation has been uneven. Regulatory ambiguity, limited technical expertise, and the absence of standardised procurement frameworks have slowed uptake. Larger metropolitan municipalities—such as Cape Town, Johannesburg, and eThekwini—have begun to explore new procurement models and distributed energy solutions. Smaller and rural municipalities, by contrast, remain constrained by aging infrastructure, billing inefficiencies, and persistent fiscal distress.
This divergence is producing a two-speed transition, raising concerns about widening inequality in energy access and service delivery.
The IISD report also points to a growing spatial imbalance in climate finance allocation. A significant share of concessional and donor funding has been directed toward Mpumalanga, reflecting its heavy dependence on coal and its centrality to South Africa’s just transition strategy. While this focus is justified from a socio-economic perspective, it risks crowding out investment in municipalities elsewhere that may be better positioned to implement projects efficiently due to stronger institutional capacity or more robust grid infrastructure.
In effect, the geography of climate finance may not always align with the geography of implementation readiness.
The scale of the financing gap at municipal level is substantial. Allocations to municipalities within the just transition funding framework amount to approximately ZAR1.71 billion (≈USD92 million). By comparison, estimated municipal infrastructure investment needs stand at around ZAR200 billion (≈USD10.8 billion), excluding additional requirements for climate adaptation and resilience.
This gap is further contextualised by broader climate finance trends. South Africa recorded average annual climate finance flows of ZAR130.6 billion (≈USD7.1 billion) between 2019 and 2021, rising to ZAR188.3 billion (≈USD10.2 billion) in 2022 and 2023, before reaching ZAR239 billion in 2024. The upward trajectory is clear—but so too is the disconnect between where capital is flowing and where it is most needed.
The implications are significant. Without adequate investment in municipal systems, South Africa risks decarbonising electricity generation while neglecting the distribution networks that underpin reliability, access, and local economic activity. In such a scenario, the transition would be technically advanced but operationally incomplete.
Addressing this imbalance will require a reconfiguration of South Africa’s climate finance architecture. The IISD report calls for a set of targeted interventions aimed at integrating municipalities more effectively into the financing ecosystem. These include large-scale capacity-building programmes focused on project preparation and financial management, as well as the deployment of blended finance instruments and credit enhancement mechanisms to improve municipal access to capital.
Reforms to tariff structures and revenue models are also essential to restore financial sustainability and improve creditworthiness. In parallel, the development of standardised, replicable public–private partnership frameworks could help reduce transaction costs and accelerate project implementation. The report further emphasises the need for transparent tracking systems to monitor municipal-level climate finance and ensure more equitable allocation.
Ultimately, the report’s central argument is that municipalities are not failing the energy transition; rather, the system is failing municipalities.
For a country grappling with persistent load shedding, constrained public finances, and deep socio-economic disparities, this distinction matters. The success of South Africa’s energy transition will not be determined solely by national policy frameworks or large-scale investment commitments. It will depend on whether municipalities—the institutional layer closest to citizens and businesses—are adequately financed, capacitated, and empowered to deliver on the ground.
Without that shift, the transition risks becoming uneven, fragmented, and socially contested.
In the final analysis, South Africa’s energy transition is not just a question of how much capital is mobilised, but of how effectively it is distributed. Until municipalities are fully integrated into that financial architecture, the country’s transition will remain constrained by a bottleneck at its most critical point of delivery.
