‘Religious commitment’ to coal could scuttle SA economy

17 Sep 2019

As activists prepare for global protest action on the climate emergency, the good ship South Africa is sailing into powerful energy policy crosswinds – which could either beach the economy or allow us to tack our way towards a low-carbon, climate-friendly horizon.

The government must choose between expensive coal or cheaper renewables and an Eskom bailout that pays for a just transition for workers. If coal wins, a ‘junk status’ downgrade and financial ruin are likely. Will reason prevail over ‘religious commitment’ to a dying technology?

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“If you want to build a coal power station in South Africa, no one will give you the money.”

That’s what outgoing Eskom CEO Phakamani Hadebe said from the podium at the African Utility Week in May this year, within earshot of then energy minister Jeff Radebe.

Hadebe wasn’t making a prediction, he had his finger on the pulse of the global zeitgeist: the global coal industry is haemorrhaging investment support faster than a plague-scourged ship drops bodies overboard.

This does not bode well for a country that has to decommission the bulk of its ageing coal power stations in the next two decades, and whose replacement mega-plants Medupi and Kusile remain half complete, poorly built, years behind schedule, and performing at about half capacity.

President Cyril Ramaphosa has decided to skip the UN General Assembly gathering in New York this week, which will take place amid global protests to highlight the climate situation in the run-up to next week’s UN Climate Summit.

The urgent domestic matters Ramaphosa says need prioritising now might include the latest bailout plan for the financially and operationally crippled Eskom. This bailout plan that could bring a handbrake turn to the emissions profile of a country that is the largest carbon polluter on the continent and the 14th biggest globally. It could also put a safety net in place to support the workers and communities whose livelihoods depend on the dying coal industry.

The plan is billed by the president-appointed Eskom Sustainability Task Team as the Just Transition Transaction.

Speaking at a global divestment summit in Cape Town last week, Dr Emily Tyler, an independent climate economist and contributor to the plan, says it lays out a package of local and international commercial and concessionary finance, pulled together through a blended climate-finance vehicle that will pay Eskom over two decades through a bespoke “transition fund”.

But, if accepted by the government, it will come with tight conditions: funders will only commit if the state agrees to an accelerated phase-out of coal. If the government fails to meet agreed-upon decarbonising targets over the course of the five-yearly pay-outs, some kind of penalty will apply: either interest rates on the funds will ratchet up; funding will stop; or the funds will need to be repaid. The details of this would still need to be decided, according to Tyler.

The Just Transition Transaction is a way to plug the hole in Eskom’s balance sheets and pool funds to support workers who will be left stranded as coal mining and power generation phase out – a transition analysts agree is inevitable, whether the country takes charge of a managed transition to a lower-carbon grid or not.

“Workers and communities, particularly those in Mpumalanga, will be decimated by the inevitable transition away from coal,” Tyler says. “This transaction fund is a way of getting climate finance from development finance institutions to pay for accelerated coal phase down. We need to get the coal going down in a managed way that doesn’t decimate the economy and communities. Currently, there is no just transition plan in place within the government.”

How energy policy could beach SA’s economy

Three crosswinds are pummelling the sails of South Africa’s ship this month.

Ramaphosa is hopefully mulling over his team’s Just Transition Transaction plan. Public Enterprises Minister Pravin Gordhan is expected to release his long-awaited Eskom policy paper by the middle of this month, which should give some clarity on his department’s solution to the Eskom debt crisis. And Cabinet is reviewing the updated Integrated Resource Plan (IRP), which is the evolving blueprint for the country’s future grid development.

But political factions within the government, rather than rational thinking, might determine which direction the country’s energy planning takes and whether South Africa’s economy beaches itself or not.

“The IRP has different scenarios in it,” explains Professor Mark Swilling from the Sustainable Development Programme in the School of Public Leadership and co-director of the Centre for Complex Systems in Transition at Stellenbosch University.

“One scenario is based on price, where a transition to renewable energy is the best and cheapest option, and where coal needs to be decommissioned over the next 20 years. But the other is a forced scenario, which was imposed on the IRP modelling process by politics rather than rational scenario building.”

This second, artificially constrained scenario, limits the amount of renewable energy to be built into the grid and favours coal to the tune of 1,500 megawatts (Gw). This is the more expensive option and comes with the additional cost of a higher carbon footprint, at a time when growing international pressure is calling on governments and sectors around the world to set firm actions in place to reduce carbon pollution by 45% by 2030 and reach zero net emissions by 2050.

According to Swilling, National Treasury has called for a lifting of the imposed restriction on renewable energy in the IRP, and base future energy procurement policies on price alone. If this economic policy overrides the pro-coal bias in the IRP, then the IRP will quickly be out of date.

But there is a “religious commitment” to coal within factions of government which could override rational arguments for cheaper renewables and the Just Transition Transaction funding model that would pay for it. If this political agenda wins out, it would sink Eskom – and take the economy with it.

“Business confidence is worse than it’s been in three decades,” says Swilling. “Gordhan’s policy paper was due out by mid-September and there are high expectations of this policy document. If it doesn’t explicitly commit South Africa to the cheapest energy source, which is what Finance Minister Tito Mboweni recommends in his recent economic transformation paper, then we are stuck in limbo and won’t rebuild confidence.”

Treasury’s Economic transformation, inclusive growth, and compe titiveness: Towards an economic strategy for South Africa, released in late August, identifies the “massive job creation potential” of the growing renewable energy sector and the opportunity for renewables to cut electricity prices in the country.

“South Africa is considered a renewable energy ‘superpower’ – ranking 6th in terms of renewable energy production potential per square kilometre,” states the document. “This industry is a major source of potential jobs in South Africa.”

Treasury’s report notes that coal mining and coal-derived electricity boost jobs in the mining and industrial sectors, and nuclear energy technologies call for highly skilled experts and technicians, which South Africa has few of.

Renewable energy technologies, on the other hand, require more low- and semi-skilled workers and the bulk of the jobs in this sector will be from construction, installation, manufacturing and wholesale trade.

“Government should be doing as much as possible in the policy space to allow this industry to flourish, while at the same time managing the transition through targeted programmes, such as those aimed at reskilling people currently employed in the coal mining industry.”

Swilling’s prediction is that a policy statement that keeps us locked into expensive, carbon-polluting coal will quickly result in a final downgrade to “junk status” by global rating agency Moody’s that has been threatening for months.

“We were promised a solution to the Eskom debt crisis in February. It’s September now. If we don’t have a solution by the end of the year, the loss of confidence will deepen and increase the likelihood of a Moody’s downgrade. This could trigger an economic crisis that would need a bail-out by the International Monetary Fund. We have a very short window.”

Corruption, politics at odds with market forces

Treasury’s report also calls for the IRP to be updated to reflect the fast-changing price of available energy technologies. The CSIR showed as far back as 2017 that utility-scale solar and wind power are cheaper than new-build coal.

Writing in Engineering News in May this year, engineer and integrated energy researcher Dr Tobias Bischof-Niemz, who contributed to the CSIR report, made a case for how electricity policy planning needs to be depoliticised.

But threatening this might be corruption and vested political interests in the electricity sector that have been surfacing on almost every transparency platform in the past few years, which doesn’t bode well for forces driving decision-making processes in government as it scrambles to salvage Eskom: the public protector’s State of Capture inquiry in 2016, when advocate Thuli Madonsela had her hand on the tiller of corruption-busting; legal submissions in various court processes, including one challenging the state’s nuclear procurement processes; press coverage of Eskom deliberately obstructing the utility-scale renewable energy programme by stalling on the sign-off of independent power producers’ financial paperwork for the fourth round of bidding in the Renewable Energy Independent Power Producer Procurement (REIPPP) programme; and the vested coal interests skewing energy planning through profiteering in the coal contracts arena.

Daily Maverick recently reported on dirty dealings behind the nuclear lobby in government and its links with the coal agenda, and why current Mineral and Energy Resources Minister Gwede Mantashe is the fox watching the henhouse.

A few weeks after beleaguered outgoing Eskom CEO Phakamani Hadebe gave his keynote address at the Utility Week gathering in Johannesburg, he made another damning statement about the state of the country’s electricity sector.

“Eskom is in a death spiral,” he said, at the release of the utility’s annual financials in July. The Eskom Sustainability Task Team’s Just Transition Transaction may be the only way to secure international funding to salvage it and pay for a just transition for coal workers – as the appetite to fund coal developments sours internationally.

At last week’s divestment conference in Cape Town, Institute for Energy Economics and Financial Analysis (IEEFA) energy finance analyst Simon Nicholas presented findings of an IEEFA report released in February showing the ra pid capital flight from fossil fuel investments globally.

“Over 100 globally significant financial institutions have divested from thermal coal, including 40% of the top 40 global banks and 20 globally significant insurers,” said Nicholas.

Development finance institutions (DFIs) are banks that are majority-owned by national governments and fund development projects that the private sector is not willing to finance. According to the IEEFA report, as of February this year, nine DFIs had agreed to put restrictions on coal financing.

Meanwhile, many of the multilateral development banks have similarly adopted policies to move away from coal investments, including the World Bank (as of 2013), the European Investment Bank, the Asia Infrastructure & Investment Bank, the New Development Bank (“the Brics bank”), the International Finance Corporation and the Asian Development Bank.

The appetite of domestic private banks is also souring to coal. Three of South Africa’s big four banks – Nedbank, Standard Bank and FirstRand Bank Limited – have begun closing the door on coal developments, all stating in the past year that they won’t fund unviable and carbon-intense new-coal investments.

South Africa’s coal export market is also starting to dry up, too, according to another IEEFA report, South African Coal Exports Outlook Approaching Long-Term Decline, due for release this week and referenced by Nicholas at the divestment conference.

As climate activists take to the streets around the world this week, to draw global attention to the urgent need for tangible actions to cut carbon pollution everywhere to zero within three decades or see the climate tip into a new regime that will no longer support life on Earth, the outcome of the government’s energy planning decisions now have consequences beyond just the immediate price of electricity here or whether the country’s economy stays afloat.

A decision to commit to a carbon-polluting, coal-based electricity future, by one of the biggest carbon-emitting economies in the world, will be a threat to economic, social and political stability across the globe in coming decades. DM

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