We must achieve financial scale for South Africa’s just energy transition to succeed

By Saliem Fakir and Peter Attard Montalto

30 Nov 2022

South Africa’s just energy transition requires substantial quantities of new finance, continually and over a long period. It could take up to 30 years to transition the country with estimates on the investment needed ranging from R4-trillion to R8.5-trillion.

Climate is front of mind following the conclusion of the COP27 conference in Sharm el-Sheikh last week. The launch of South Africa’s Just Energy Transition Partnership Investment Plan (JETP-IP) ahead of the summit, which details how South Africa will mobilise $8.5-billion in funding from the International Partners Group (IPG), has created significant hype in the media and has attracted interest from policymakers, regulators, development financiers and social and environmental advocacy groups across the globe.

Moreover, Indonesia has become the second developing economy that has entered a Just Energy Transition Partnership (JETP), which seeks to mobilise $20-billion in funding for its own energy transition in the next three to five years.

Despite all the excitement about the JETP-IP, there are critical gaps in South Africa’s preparations for its transition to a low-carbon economy that need to be addressed urgently to facilitate the massive amounts of private sector investments that will be required. Forging ahead without recognising and addressing these shortcomings would be like buying trains before laying down the railway tracks.

South Africa’s just energy transition (JET) requires substantial quantities of new finance, continually and over a long period. It could take up to 30 years to transition the country with estimates on the investment needed ranging from R4-trillion to R8.5-trillion. Public sector facilitated financing is currently given most prominence given the unique position South Africa finds itself in following the creation of the JETP at COP26 in Glasgow.

However, it is crucial to establish how private-sector financing can be scaled for the long term, long after the JETP is forgotten.

The African Climate Foundation’s new report, Financing South Africa’s Just Energy Transition, written by researchers Intellidex, considers how to evolve the plumbing of the financial sector to ensure that the scale of financing needed for JET can be delivered. It is the first of three such reports on similar themes.

The existing JETP has the potential to be a point of departure for the private sector, but a lot of hard work is required to achieve scale. There are several blockages in the existing capital market landscape that prevent stakeholders across the financial sector from fully participating in funding the transition in large enough size.

One of the most significant blockages that the report details is the lack of clarity on an investable pipeline. Investors want to get their teeth into actual deals to test internal structures and processes as well as enable discussions with end investors. South Africa needs a strategy that will proactively deliver an investable pipeline at scale.

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While the size of investment required is enormous, from an investor perspective the volume of projects is small, with only a handful of projects closed in terms of the Renewable Energy Independent Power Producer Procurement Programme (Reipppp) and in the embedded generation market. These are largely funded by corporate balance sheets and there are few other opportunities to invest.

Another crucial blockage is the lack of conceptual consensus on what a just transition looks like. The report finds that without such a consensus, there is little understanding of what roles different parts of the financial ecosystem need to play.

Some stakeholders attribute the conceptual muddle to a national leadership vacuum which hints at looming implementation issues regardless of the various governance structures that have been established to champion the JET. These include the Project Management Office in the Presidency, the Presidential Climate Commission and the Presidential Climate Finance Task Team.

The report recommends that the Presidency develop a macro-level strategy to ensure alignment across all spheres of government on what a successful just energy transition will look like as well as to understand its own role in ensuring that the necessary funding is raised from the private sector.

All businesses would be affected by the macro risks that would unfold from an unsuccessful pursual of a just energy transition and the report urges private sector organisations to become more proactive in their thinking on how JET can be integrated into their core business strategies. For financial services organisations, this is important to maintain access to capital markets, as well as an opportunity to engage with clients to support them in achieving their own transition ambitions.

The current blockages related to liquidity, concentration risk, foreign exchange risks and lacklustre demand can all be eliminated through appropriate product development. Sustainable finance instruments also need to be listed on exchanges to grow the market and increase liquidity.

To achieve this, the report suggests that local capital markets need more robust engagement with transactors to obtain clarity on what is crippling appetite for faster adoption and widespread utilisation of listed instruments.

Importantly, emerging and frontier markets’ ability to attract funding (in general but specifically for the transition) has been affected by the way in which capital flows are being influenced by investors who are integrating ESG practices into their investment decision-making processes.

One example is the utilisation of exclusion lists to screen investment opportunities. Blanket exclusions of companies whose core operations relate to fossil fuels, for example, risk starving such entities of funds for transition ambitions — and these are the entities that most need funding to decarbonise their operations.

The report recommends that philanthropic funders with a climate mandate need to provide evidence-based research to regulators and industry bodies in developed markets to demonstrate the adverse implications of some of their ESG investment practices and advocate for changes to enable emerging and frontier markets to access capital more easily from developed market capital allocators.

Both policymakers and the private sector need to develop the solutions to these blockages quickly to scale financing. Some hurdles will be easier to overcome than others, yet with collaborative efforts between private and public sector actors, as well as partnerships between capital providers along the entire spectrum of capital — from philanthropic funders right through to commercial investors — progress can be made to ultimately mobilise JET funding at scale. OBP/DM

Saliem Fakir is Executive Director of the African Climate Foundation. Peter Attard Montalto is political economy, markets and just energy transition lead at Intellidex.

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