At the COP27 UN climate summit this week in Egypt, South Africa secured a mammoth finance package of $8.5bn, around R128bn, to begin its great transition over the next five years to a new, greener and cleaner economy. That’s the theory anyway…. SA is receiving the first such loan package as our power generation is 85% dependent on coal, making us a high-carbon economy, and a good potential-use case for such funding. This is a state-led plan from an ideologically driven government that wants the private sector and philanthropic donors to come on board yet this government limits the role it wants the private sector to play. It’s a complex decision, with as many naysayers as supporters, and Jonathan Katzenellenbogen writing on the Daily Friend looks at the pros and cons below. – Sandra Laurence
Will the Just Energy Transition investment plan save SA?
By Jonathan Katzenellenbogen*
South Africa is about to embark on a massive and risky state-led plan to change from a fossil fuel-based economy to one based on renewable energy.
The Just Energy Transition, JET, promises a new, greener and cleaner economy with multiple spin-offs.
But there is also a risk that the country will be left short of the power it needs, and without the electric cars and green hydrogen and new jobs promised.
At the COP27 UN climate summit this week in Egypt, a mammoth finance package of $8.5 billion, around R128 billion, for South Africa to begin its great transition over the next five years should be confirmed. The $8.5 billion package is mostly made up of loans from the EU, the US, UK, Germany and France.
It is the equivalent of about two percent of GDP, but the financing required for the entire undertaking is far larger, says the government, noting that its modelling shows that $98.7 billion, about R1 500 billion, is needed over the next five years. That is more than ten times the size of the initial loan and equivalent to 24 percent of GDP.
In receiving this loan, South Africa is a test bed for the concept for such energy transitions. South Africa is receiving the first such loan package as our power generation is 85 percent dependent on coal, making us a high-carbon economy, and a good potential-use case for such funding. And, anyway, coal power stations are having to be decommissioned because of their age, and hence new opportunities are open for green solutions.
Similar financial packages might be extended to other coal-dependent emerging markets such as Indonesia, India, and Vietnam. Clearly the donors will be watching South Africa’s performance closely to learn lessons for future loans.
Massive reserves
The cynics might say; forget about energy transitions and stick to coal, as the country still has massive reserves. But the reality is that Europe and the US will at some stage impose tariffs on the deemed carbon content of exports. Besides, financing for coal-fuelled power generation plants is becoming increasingly difficult to obtain. So in reality, our choices on our energy future have been drastically narrowed, and we might as well go ahead with what is offered.
Even so, there is a lot that could go wrong along the way. This is a state-led plan from an ideologically driven government that wants the private sector and philanthropic donors to come on board to support plans for a new industrial future. Yet this government limits the role it wants the private sector to play, whether it be restricting independent energy producers to just 100MW or only allowing investors into a few railway projects.
Under the plan, short of half the total investment – 47 percent – would go into the electricity sector, 21 percent into green hydrogen, nearly 9 percent into electric vehicles, and more than 20 percent into developing municipal capacity for a greener future.
The government says the private sector is ready to finance about a third, R500 billion, of the JET programme. South Africa is having enormous difficulty in attracting both domestic and international investment, and unless the business environment improves, this will not change even with a green transition plan.
The overriding question about the transition plan is whether it will see enough power produced to meet the country’s needs. Can renewable power come on stream fast enough to at least make up the gap that will result from the decommissioning of coal-fired stations? The answer is probably no.
Over the next 13 years, Eskom plans to decommission nine coal-fired power stations, currently producing 22 000 MW. It has said it needs an additional 50 000 MW within this period, in addition to the capacity of 44 000 MW it currently has on paper.
Renewable capacity
The JET plan envisages that the private sector will put in most of the renewable capacity. So far, there is about 7 000 MW of renewable capacity for which independent producers have bid. There has been a strong interest, but much has been delayed due to red tape and the insistence that some parts be locally made. One of the advantages of solar projects is that they can come on stream fairly quickly – about two years, if all goes well. It is unclear when the 7 000 MW will be actually dispatched to the grid. A sixth bid window that could amount to up to 5 200MW will open soon. In short, it might be very difficult for the private sector to actually get power onto the grid if such a cumbersome regulatory framework remains in place.
The image in the JET investment plan of converting what were formerly dirty coal-fired power stations into solar and wind farms with battery storage is appealing. But this might not be ideal. Many of those dirty coal-fired power stations that will be decommissioned are in Mpumulanga. That is not the area of the country that is optimal for the location of wind and solar farms. It is the western part of the country that has the most clear days and it is at the coast where the wind can blow incessantly.
South Africa will not be able to end power cuts or even prevent these worsening on renewables alone. Even green Germany has had to fall back on coal-fired power plants recently. It is likely that the terms and conditions of the $8.5 billion loan would have something to say about what investments can be made in fossil fuels, even though the loan will not finance these. Are further investments in coal generation now closed by the deal? We must at least be able to invest in slightly cleaner gas or fossil-free nuclear.
The investment plan envisages South Africa becoming a leading world exporter of green hydrogen. Hydrogen becomes green when renewable energy is used to split water molecules into hydrogen and oxygen. It can then be used as a green fuel for transport, to help produce peak power for electricity plants, as a heat source for industry and buildings, as well as a feedstock for fertilizers and plastics and steel making, as well as food and glass production. Before so much as a thought is even given to the country becoming a major exporter of green hydrogen we will probably have to be well beyond power outages.
Subsidise local production
There is also a vision for a new energy vehicle industry. It is unclear whether we would actually develop such an industry or just subsidise local production. It might be difficult for South Africa to achieve economies of scale with exports, now that production is well advanced in other countries, unless we are prepared to subsidise production.
In implementing the JET the government is promising ‘strong governance arrangements to ensure oversight, transparency, safeguards, and accountability’, as well as robust management arrangements, and monitoring and evaluation ‘for the measurement of success and continuous improvement, and a risk management framework to identify risk’.
All fine words, but we have not had that in the past, and there are no signs of the sort of changes at Eskom and in government that can guarantee this in the future,
- The views of the writer are not necessarily the views of the Daily Friend or the IRR
- Jonathan Katzenellenbogen is a Johannesburg-based freelance financial journalist. His articles have appeared on DefenceWeb, Politicsweb, as well as in a number of overseas publications. Jonathan has also worked on Business Day and as a TV and radio reporter and newsreader.
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Also read:
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- Europe’s energy crunch will trigger years of shortages and blackouts
- Will the energy on the ground at COP27 translate into implementation?
