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FINANCE
A CHANCE TO CHANGE HISTORY IN SOUTH AFRICA
Climate finance for a transition away from coal
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In the opening days of COP26, a financing partnership was announced between South Africa and a consortium consisting of France, Germany, the UK, the US and the EU. The partnership aims to support South Africa’s just transition to a low-carbon economy. Essentially a just transition is one where no one is left behind.
BY EMILY TYLER*
The announcement made international headlines and is highly significant for many reasons. The finance offer is large; it has a strong element of justice; it’s not just about a few individual projects; and it’s for a country that has long been shaped around its dependence on coal.
This partnership represents an important opportunity for South Africa at a critical juncture, if it is approached judiciously and if the domestic politics can be managed. A failure to engage the partnership strategically will squander the moment, resulting in an incremental outcome that won’t unlock the just transition the country so desperately needs. A failure to tame the politics would put the entire flow of finance at risk.
SPECIFICS OF THE SUPPORT
The financing partnership mobilises an initial R131-billion (US$8.5-billion) over the next three to five years. Some of this in the form of grants and some is concessional debt finance (cheaper than commercial debt). The partnership is intended to enable a range of outcomes. One is to speed up the process of moving away from carbon in the electricity system. South Africa has recently updated its nationally determined contribution to the international emission-reduction effort. Importantly, the finance will support the workers and communities who will be affected as the country moves away from coal.
Another aim is to support a sustainable solution for the South African power utility’s debt and ensure its long-term financial sustainability in the context of power sector reforms. Lastly, finance will be channeled towards the development of the electric vehicle and green hydrogen sectors.
SIGNIFICANCE OF THE FINANCE
Pitched at an initial US$8.5-billion, the partnership has the potential to be one of the largest individual climate finance transactions to date. Large Green Climate Fund transactions hover closer to the US$1-3-billion mark.
Its justice element is important. It has an explicit focus on supporting those who face immediate transition impacts, such as the approximately 80 000 coal miners and the communities who depend on them. The partnership envisages that the climate finance will enable an energy sector transition, which is different to the usual focus of climate finance on individual green projects.
The deal is significant because it has been announced despite South Africa’s coal legacy and influential incumbents. The country has spent over
100 years building an economy whose competitive advantage is based on coal as its primary energy source. The legacy of coal is evident in physical infrastructure, the way the energy sector is organised and the form of energy sector institutions. It influences the way finance flows and power sector contracts are written. And there are powerful groupings who have vested interests in keeping it all this way for as long as possible.
Ironically, it is this legacy that enables South Africa to offer the world significant and globally cost-efficient emission reductions as it changes course. South African electricity is the most carbon intensive in the world. Because renewable energy is now the cheapest form of power supply, decarbonising the country’s electricity supply by accelerating the phase down of the coal fleet will yield a large volume of emission reductions at very low cost, especially compared to more expensive emission reduction options in other sectors and countries.
But the political and institutional challenges to realising this transition are very real.
PACING PROVOCATION
The global target of achieving an average of net-zero carbon emissions by 2050 is an enormous challenge. It requires rapid and disruptive change as economies and societies globally are decarbonised within
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THOUGHT [ECO]NOMY
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greeneconomy/report recycle SUPPORTING JUST TRANSITIONS IN SOUTH AFRICA | Just Transition Case
Study | Climate Investment Funds [September 2020]
The term “just transitions” is used to acknowledge that there are multiple framings of just transitions related to a variety of theories of change and world views. This has resulted in a situation, whereby there is no one clear definition of just transitions, but rather a range of positions, principles, and practices.
At the heart of the just transitions discourse(s) is the debate on whether addressing humancreated environmental challenges, including climate change, inevitably requires choosing between protecting the planet or precarious jobs and the economies that sustain (and simultaneously exploit) people and nature. The falsity of the dichotomy is best summed up in the slogan: “There are no jobs on a dead planet.”
The recent economic and social impacts of the pandemic, including massive job losses, have provided an illuminating example of the devastating effects of a global systemic shock. It is imperative for people to recognise that climate change has the potential to introduce or exacerbate similar systemic shocks. Therefore, attention to climate change and fundamental change at the global and local scales are of the utmost urgency and importance. Just transitions focus attention on important questions related to change, including:
- Who decides what kind of transitions are needed? - How are different groups included in the decision-making processes? - Who benefits and loses in change processes? - How can benefits be distributed and losses mitigated in both safe and just ways?
By raising these questions, the concept of “just transitions” highlights the significance of encompassing issues of inclusivity and justice in change initiatives.
Objective and Importance and intention of principles of just case study transitions
Just transition framework in the context of South Africa09 11 18 30 Project Case 1: The Sere Wind Farm Project 32 Project Case 2: Xina Solar One CSP Project
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THOUGHT [ECO]NOMY
CLIMATE FINANCE TO TRANSFORM ENERGY INFRASTRUCTURE AS PART
OF A JUST TRANSITION IN SOUTH AFRICA | Research report for SNAPFI
project | University of Cape Town [July 2020]
greeneconomy/report recycle
The just transition transaction (JTT) has been developed in technical detail since 2019 by Meridian Economics (2020) and making the financial deal is work in progress. This case study reflects on the JTT, seeking to understand its architecture. The purpose of the study is to understand the potential of a just transition transaction to accelerate the phase out of coalfired power and to fund development projects.
The spatial scale of the analysis is national, in that Eskom debt threatens South Africa’s financial sustainability. Physically, the Mpumalanga province is a key focus of this study. This province of South Africa contains its central coal basin, most of the coal-fired power stations are surrounded by poor communities with several small rural towns dependent on coal for livelihoods. Mpumalanga is a micro-cosm of the challenges of sustainable energy development in South Africa – environmentally, socially and economically.
What is a just Key elements transition? of the South African problem interpretation35 54 61 The just transition transaction 82 Renewables ownership in the just transition
Courtesy of The Conversation three decades. But technology and finance are already driving the transition. This can be seen in the massive decline in the cost of renewable energies and the accelerating shift of financial portfolios to green investments. Global capitalism is now oriented towards a lowcarbon economy.
As a small open economy, South Africa can neither resist nor control these forces. And the country is in a vulnerable starting position as one of the world’s most carbon-intensive economies. There is not much time to avoid being economically marginalised as wealthier and nimbler economies mobilise around net-zero goals. South Africa will need all the support it can get to keep up with the pace of change.
Fortunately, as studies by the National Business Initiative and Meridian Economics-CSIR show, accelerated electricity decarbonisation has two big plusses. It is the cheapest way of providing a reliable electricity supply to the economy. And renewables have the shortest lead time to build. So they are the quickest and cheapest way to lift the country out of its current power cut woes.
DAUNTING DETAILS
The just transition partnership announcement has achieved both a political space and an implementation platform (the taskforce) to start working out the support details. These details include the type of financing instruments, what the finance will be used for, the mix of grant and debt, and financing terms and conditions. An initial scope of supported actions, financing sources and terms will be identified within six months, with a full partnership work programme and investment plan outlined within a calendar year.
Currently, there are many views on what the details could look like. These include Eskom’s Just Energy Transaction, Meridian Economics’ Just Transition Transaction and the Presidential Climate Commission.
The taskforce will have to work out how to: • Ensure that alternative, attractive and sustainable economic livelihoods are created in the regions that have depended on coal • Prioritise spending on activities that will help to fundamentally re-orientate South Africa’s energy sector as opposed to only achieving incremental change • Ensure that the grant and concessional finance components of the partnership leverage rather than crowd-out commercial investment • Achieve a transition pace aligned with South Africa’s international climate commitments.
POLITICAL POWER
But if the technical details are formidable, a recent address by the Minister of Minerals and Energy, Gwede Mantashe, demonstrates that the domestic politics are even more so. In direct opposition to Ramaphosa’s vocal support of the partnership and decarbonisation trajectory, Mantashe argued that South Africa should continue to exploit its coal resources, suggesting that the partnership is an attempt to pressurise the country to conform to an international agenda that is not in the country’s best interest.
Despite the economic realities of a global energy transition well under way, and the increasingly obvious technical, economic and social failings of South Africa’s coal-based energy system, the political challenges to leaving the coal legacy path are clear.
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IT’S A GO FOR GREEN
The South African Wind Energy Association has put its voice of support behind the first-of-its-kind green financing deal, announced at Cop26 climate talks.
BY SAWEA
Noupoort Wind Farm.
Speaking on behalf of the wind power industry and the country’s broader renewable energy sector, this deal, which comprises multi and bi-lateral grants, concessional loads, guarantees and private investment, will provide impetus for South Africa’s accelerated uptake of green energy. “We view our sector as a key implementer for the country to decarbonise its power sector and increase its energy availability. Hence, we look to the various policymakers within the Department of Forestry, Fisheries and the Environment, the Department of Mineral Resources and Energy; and the Department of Public Enterprises to facilitate and lead this transition, which will no doubt be abetted by this financing deal,” says Mark Tanton, SAWEA board member.
The US$8.5-billion package, committed by the UK, France, Germany and the USA, is intended to speed South Africa’s transition away from coal and represents a new model of green financing for emerging economies. This forms part of the global Accelerating Coal Transition Investment Programme, formulated by the Climate Investment Funds (CIF). The programme is the first to target developing countries that lack adequate resources to finance the shift away from coal, which is crucial to limit the global temperature rise to 1.5 degrees Celsius by 2030.
“This makes sense as sustainable, cost-effective financing, is necessary to enable developing countries to be able to implement their climate change mitigation targets and accelerate the required energy transition away from carbon-intensive power production to renewable energy,” adds Tanton, who also reiterated that this announcement coincides
with the expected parliamentary tabling of SA’s Climate Change Bill this month. While many details as to the structuring of the funds and exactly how it will be utilised are still to be ironed out, SAWEA notes there are several considerations. This includes the just energy transition as well as Eskom’s need to upgrade and add new transmission lines and renew its distribution network to accommodate additional green electrons. Mark Tanton, SAWEA board member. “In a nutshell, we need to remove CO2 from the atmosphere as fast as possible, and at the same time we need to drastically increase our Energy Availability Factor, so that we can bring a halt to the ongoing and crippling load shedding. The answer to all of this is a renewables-dominated power system, which is also the most cost-competitive system for South Africa,” concludes Tanton.
Cabinet has endorsed a new Nationally Determined Contribution (NDC) range of 420- to 350-million tons of carbon dioxide equivalent (Mt CO2-eq) for 2030, which represented a marked improvement on its 2015 pledge of 614 Mt CO2-eq to 398 Mt CO2-eq.
THE CLIMATE CHANGE BILL
• Provides for a coordinated and integrated response by the economy and society to climate change and its impacts • Provides for the effective management of climate change impacts • Addresses that mitigation efforts should be based on the best available science, evidence and information • Gives effect to SA’s international commitments and obligations in relation to climate change.
