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CLIMATE FINANCE
THE LONG AND SHORT OF LOADSHEDDING SOLUTIONS
Time to call disaste and harness the power of wind and solar energy r
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The huge cost of loadshedding could have disastrous economic consequences and cause civil unrest that makes July 2021 pale into insignificance. If the problem is tackled purposefully and urgently with a coordinated emergency plan partnering Eskom and civil society, it is technically and financially possible to end loadshedding within 24 months.
BY MARK SWILLING*
As South Africa once again plunges into severe loadshedding in the wake of sabotage and more unexpected breakdowns of our aging power stations, the Centre for Sustainability Transitions at Stellenbosch University and the Blended Finance Taskforce have launched a breakthrough report entitled Making Climate Capital Work: Unlocking $8.5bn for South Africa’s Just Energy Transition.
Speaking at a side event during the annual meeting of the World Economic Forum in Davos, Switzerland, Catherine Koffman, group executive, project preparation at the Development Bank of Southern Africa, said: “It is difficult to conceive of a path to 2050 that doesn’t account for people – we must not only talk about the energy transition, but about transitioning the whole economy including sectors and jobs currently linked to the coal value chain.”
We urgently need to adopt short- and long-term solutions, to the energy crisis in general and ever-more-serious loadshedding. The one without the other will plunge South Africa into an even deeper crisis, with disastrous economic consequences that will ultimately translate into mass protests that will make the July 2021 insurrection look like a picnic.
COLLAPSE OF THE GRID
In the short term, there is no doubt that conditions are now so serious that it is appropriate to support the call for some sort of equivalent to a declaration of a national disaster for the energy crisis. It is arguable that the consequences of further loadshedding – that could eventually lead to a total collapse of the grid – would do far greater damage to the South African economy and society than the pandemic did in 2020 and 2021. If the pandemic justified the declaration of a national disaster, why not the threat of a deepening energy crisis? After all, experts have worked out that stage four loadshedding costs the South African economy nearly R1-billion per day. This is clearly a crisis that cannot be allowed to drag on, even for the short term.
After declaring such a national state of disaster for the energy crisis, the president could mandate Eskom to do whatever is necessary to bring loadshedding to an end within 24 months. As many experts have shown, this is technically and financially possible. But not if there is no single point of coordination for this emergency energy plan. After all, who else has the capacity for such a task? Eskom may not be credible in the eyes of the public, but it does manage a massive energy system.
Eskom cannot do it alone. As in the case of the pandemic, an expert group drawn from industry, academia and civil society should be constituted to advise Eskom’s emergency implementation team. Furthermore, a partnership comprising the major energy users, municipalities, energy supply companies and funders should be constituted to accelerate implementation by any means.
The target for such an emergency energy plan is simple: the installation of at least 10 000MW of new solar and wind generation, plus 5 000MW of storage by the end of the 24-month period. That will bring loadshedding to an end.
UNDISPUTABLE SOLUTIONS
Until then, we as a nation will have to grit our teeth as things get worse, while we all pull together to achieve this one unifying strategic mission, without confusing messages about technology pet projects that will take at least a decade to implement. The only technology that can deliver at affordable rates what is needed in 24 months is wind and solar power. This fact cannot be disputed.
As far as the long term is concerned, the Making Climate Capital Work report has calculated what is needed through to 2050. To put the $8.5-billion pledge made at COP26 by donor governments into perspective, this report calculates that a total investment of $250-billion (R3.7-trillion) will be required through to 2050 to ensure South Africa joins the global renewable energy transition that is well under way across all world regions. This makes sense because it is the only way to procure the cheapest available energy, mobilise largescale affordable foreign and local investment (including low-cost climate finance), trigger upstream industrialisation and therefore drive an economic recovery that can reduce unemployment, end extreme poverty and tackle the serious inequalities that plague us.
Such a transition will also ensure South Africa becomes increasingly climate resilient. It will reduce our emissions by 1.4 gigatons, which is what will be required if we are to live up to the ambitious end of our commitment, as expressed in our Nationally Determined Contribution (NDC) document approved by the government and tabled – along with NDCs from other governments – at COP26. By honouring this commitment, we also establish the credibility we need to raise the kind of climate finance that will be needed to ensure large-scale adaptations to climate change.
The recent KZN floods are the canary in the coal mine: rebuilding KwaZulu-Natal should be our laboratory for designing, constructing and operating climate-resilient infrastructures. A business-as-usual infrastructure design will just set that province up for failure when the next floods arrive (which will be soon).
SIX KEY OUTCOMES
If we are serious about economic recovery by way of a long-term commitment to permanent energy security, then according to the Climate Capital report, a 24-month emergency energy plan needs to be coupled to a long-term energy transition plan that should aim to achieve six key outcomes: 1. The timely and gradual closure of all our coal-fired power stations over a period of two decades at an estimated cost of $24-billion. 2. Building 5-6GW of renewable energy per annum to reach a target of 160GW by 2050, at a total cost of $125-billion, to replace the coal-fired power stations and meet new demand. 3. Enabling flexibility for a grid that transmits variable renewable energy so that demand can be met at all times will mean building 33GW of battery storage (ideally, over the long-term, vanadium- rather than lithium-based because we have vanadium in South
Africa, but no lithium), and 30GW of gas backup for occasional use when supply cannot meet demand (using green hydrogen that we can produce in abundance and not natural gas, which we don’t have); at an estimated cost of $50-billion. 4. The rehabilitation, strengthening and extension of the transmission and distribution grids at a cost of $40-billion to $50-billion, which will mean ramping up our build rate from the current estimated 400km of transmission cables per year to 1 500km per annum. 5. Climate justice outcomes will need to be funded, estimated to be around $10-billion – these will have to be grant or zero interest loans to mitigate negative effects on affected communities, but also to prepare workers for new jobs in the green mining and manufacturing industries that will be created. 6. The energy transition can stimulate green industrialisation, ie the creation of a mass of mining and manufacturing activities that will be able to respond to the demand for new materials (many of which can be extracted by our mining industry for local use and export), manufactured components (from ball bearings to blades, also exportable) as well as exportable green fuel such as green hydrogen and ammonia.
At this stage, it is difficult to estimate the investment needs of green industrialisation. The South African Renewable Energy Masterplan is not yet complete and hopefully will provide guidance in this regard when it is published.
SUSTAINED ECONOMIC RECOVERY
What is very clear, is that if the prices of renewables are pushed down too low because of hyper-competitive dynamics, it will not be possible for public and private developers of renewable energy to adhere to the local content requirements. The average internal rate of return for Bid Window 5 projects was around 11%. This can only work for international developers with access to cheap international finance. To lower costs to make reasonable profits at low prices, South African developers will put on the pressure to get exemptions from local content requirements so that they can import all the equipment. That might work for Chinese workers, but not South African workers.
Finding the appropriate price to kick-start green industrialisation so we sustain job creation and economic recovery over the long term is crucial. That will require the right partnerships across public, private and philanthropic capital providers.
For those who think the numbers are wildly out of line, it might be worth considering the National Infrastructure Plan 2050 (NIP2050), recently approved by Cabinet, which estimates that R6.2-trillion is needed between 2016 and 2040 to meet the investment requirements for bulk energy and water, as well as freight and digital infrastructure. Of this, R4.4-trillion is estimated to be needed for energy and water alone up until 2040. If it is assumed
that energy makes up 70% of this amount, a R3.7-trillion investment requirement through to 2050 is within the ballpark.
This narrative helps to contextualise the $8.5-billion pledged by donor governments at COP26 to support the South African energy transition. This is less than 5% of the total requirement. However,
FRAMEWORK PRINCIPLES
The Climate Capital report proposes a set of principles that should be used as a framework for South Africa’s $8.5-billion just energy transition transaction – as well as for other climate deals currently being negotiated in countries like Indonesia, India and Vietnam: • It must be country-led, respecting domestic development and growth priorities. In doing so, affected communities must be given a voice. The Presidential Climate Commission is pioneering a transparent and collaborative governance process (eg holding open sessions and community consultation for the Just
Transition Framework). • It must not create burdensome transaction costs on South Africa of engaging with a fragmented group of donors with diverging interests and financial capabilities. • Debt on debt won’t cut it – debt sustainability is a key issue in South Africa and the deal is not fit-for-purpose if it further exacerbates the debt burden (of the sovereign or the utility).
Simply offering more debt is not responsive to the challenges
South Africa faces. Donors need to make greater use of catalytic instruments (like guarantees, concessional funding for project development and low-cost hedging). They also need to engage complementary pools of capital in a systematic way to drive synergies, avoid duplication and secure quick wins. • Justice needs to be at the centre of any package, making sure that coal-dependent workers and communities are not left behind – this is a whole-of-economy transition.
Ultimately, any package – including transaction costs – must be more attractive than what South Africa could get on the capital markets in the case of debt financing or through bilateral negotiation in the case of other financial instruments.
South Africa has substantial public and private sector financial institutions that have the capital to invest most of what is required through to 2050. The fiscus will have a role to play, especially with respect to Eskom debt, which hovers around. As far as the public finance institutions are concerned, the most significant are the Government Employees Pension Fund (GEPF), whose investments are managed by the Public Investment Corporation (PIC), as well as the Industrial Development Corporation (IDC) and the Development Bank of Southern Africa (DBSA).
The GEPF/PIC hold R80-billion of Eskom’s debt (against assets worth R2-trillion) and the DBSA holds R20-billion (which is a quarter of its loan book). Together, this amounts to more than a quarter of Eskom’s debt and is unlikely to be converted into equity.
The PIC/GEPF, coupled with the complementary de-risking mandate of DFIs like the IDC and DBSA, are ideally placed to play key roles in the mobilisation of the large-scale public, private and international funding that will be required to accelerate the energy transition. The DBSA has already invested nearly R20-billion in renewables, which is only 10% of the total generated by the Renewable Energy Independent Power Producers Procurement Programme (REIPPPP) but helped to leverage nearly half the R200-billion generated by the REIPPPP from private investors.
it is unhelpful to write it off as irrelevant. It could be catalytic if the cost of this capital is lower than normal sovereign rates if it includes “de-risking” instruments like guarantees and if it is made up of a substantial grant component to address the climate justice element of the overall challenge.
The president has appointed former deputy Reserve Bank governor Daniel Mminele to lead a task team to deal with the matter. To get the best result, this task team needs to present a compelling case to the donors that clearly defines what South Africa wants. This will need to be a pipeline of catalytic projects that respond to both the short-term crisis (and ideally forms part of the emergency energy plan) and the long-term energy transition (especially regarding the transmission/ distribution grids and climate justice outcomes which support worker upskilling, retraining, compensation and community rehabilitation).
INFRASTRUCTURE INVESTMENT
In 2020, the DBSA set up the Infrastructure Fund (IF), South Africa’s largest blended finance vehicle, with start-up capital of R100-billion from the fiscus to crowd in R900-billion in private sector infrastructure co-investments over the next decade. The IF is now well-staffed with competent executives recruited mainly from the private sector and has
Article courtesy of Daily Maverick a pipeline of projects worth R85-billion across several sectors. It is ready and able to package large-scale blended finance initiatives aimed at accelerating the energy transition, with a special emphasis on grid extension and transmission. Like the cross-sectoral investment role of the PIC, the IF is well-placed to manage a new generation of energy infrastructure investments on behalf of the GEPF.
A large share of the IDC’s loan book of R144-billion is invested in South African coal mines. This means the IDC may be facing the threat of stranded assets. This provides clear impetus for its diversification into financing the clean energy infrastructure that will underpin the transition. This has started to happen on scale.
What used to be a choice is now mandatory.
BLENDED FINANCE
The NIP2050 emphasises the importance of blended finance, with only 30% of the R6.2-trillion investment in bulk infrastructure between 2016 and 2040 envisaged to be publicly funded. The remainder, according to the plan, should be sourced through progressively structured public-private partnerships (PPPs), ie blended finance.
However, except for the REIPPPP, PPPs are in decline and only account for 2% of the public infrastructure budget of R791-billion envisaged for 2021/2-2023/4 in the Cabinet-approved Medium-Term Expenditure Framework. And yet, the vast bulk of the $250-billion proposed by Climate Capital report to enable the energy transition through to 2050 will need to be mobilised via a wide variety of blended finance vehicles. The IF will clearly play a major role in this regard.
* Mark Swilling is a professor at the Centre for Sustainability Transitions at Stellenbosch University.
Finding the appropriate price to kick-start green industrialisation over the long term is crucial.
In summary, within the next few weeks we should urgently commit to an energy emergency plan coordinated primarily by Eskom that unites the country around one single overriding strategic mission – end loadshedding within 24 months.
EFFICIENT LEVERAGING
That plan must include a way to leverage new climate finance commitments more efficiently. Eskom needs full control over what is required to make this happen. This needs to be coupled to an unambiguous commitment to a long-term energy transition through to 2050 on the scale proposed by the Centre for Sustainability Transition and Blended Task Force in the Climate Capital report.
As the Presidential Economic Advisory Council made clear in its report Briefing Notes on Key Policy Questions for SA’s Economic Recovery: “What used to be a choice is now mandatory. Those countries not adapting to a green transition will find themselves behind and excluded. They will be behind on the innovation curve, the cost curve, will suffer from stranded assets and will face increasing barriers to markets that have accelerated their own transitions. Thus, the question is not whether, but how.”
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THOUGHT [ECO]NOMY
Transition | Blended Finance Taskforce | Centre for Sustainability Transitions, Stellenbosch University [2022]
The 26th Conference of Parties in November 2021 was a climate meeting defined by raised expectations. Dubbed the “Finance COP”, a handful of rich countries pledged $8.5-billion for South Africa’s just energy transition – signalling the first in a series of country-led climate greeneconomy/report recycle deals to accelerate the phase out of coal, scale up renewables and support workers and communities impacted by the transition to Net Zero. But – as is usually the case in the climate world – what happens after the press conference is what matters. Despite the initial optimism surrounding the $8.5-billion pledge, there is still a lot of work to do to ensure it lives up to expectations. Most analysis of the $8.5-billion is speculative – speaking to the lack of transparency surrounding the commitment. Similarly, most recommendations to implement a just energy transition in South Africa are focused on actions that the government and its state-owned utility, Eskom, need to take. There is little scrutiny on the donors – or the composition of the $8.5-billion itself – making it hard to tell if the deal is fit-for-purpose and worth the transaction costs of engaging with a multidonor funding programme. This paper takes a different approach. It lays out a framework for the investment needs and costs to deliver an ambitious energy transition in South Africa (at least $250-billion over the next three decades). While the $8.5-billion only represents ~3% of that total figure, deployed right, it can accelerate the broader transition and avoid an additional 1GT+ of emissions compared to South Africa’s current pathway. But this will depend on what the deal really looks like.
Unless the $8.5-billion includes new, not repurposed, funding for catalytic instruments like guarantees, currency hedging and grants, it will not be “fit-for-purpose” to address the most challenging transition costs linked to decommissioning coal, accelerating enabling grid infrastructure and supporting the just components of the transition for workers and communities.
The principles in this paper are aimed at donors who, like the rest of the world, cannot afford for this deal to fail. After all, decarbonising South Africa’s coal-dependent energy system is critical to achieving global climate targets under the Paris Agreement as well as more inclusive development in the region, which relies heavily on South Africa for power.
Fortunately, South Africa is already leading on the just energy transition agenda – dedicating resources within Eskom, via its Presidential Climate Commission and Presidential Climate Finance Task Team and across civil society to take a more systemic approach to financing a low-carbon, equitable economy. A plan already exists. But given the scale of the challenge, catalytic climate finance will be critical to move fast enough. The opportunity is clear. And the opportunity cost is enormous. There is no time to waste.
