The Washington PostDemocracy Dies in Darkness

South Africa has one of the most coal-intensive economies in the world. Can it change?

The country is negotiating with wealthy nations for a novel package of climate finance that could be a highlight of the COP26 summit

High voltage trellis near Wonderkop in Marikana, South Africa. (Michele Spatari/AFP/Getty Images)
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With the approach of the COP26 climate summit, South Africa is negotiating with a handful of wealthy nations about how to overhaul its ailing electricity sector in what could become a model of climate finance for other countries heavily dependent upon coal plants.

The showcase plan, which could cost as much as $15 billion, would not only provide financial support for the state-owned utility, but also backing for broader economic and social change — known as a “just transition” — in a deeply divided and unequal society. The plan could help persuade other developing nations, mostly in Asia, to shelve plans to build as much as 243 gigawatts of new coal plants.

“We think it could be a very important feather in the cap of this COP if broad outlines are announced that could provide a template for other country-scale transactions,” said Mike Muldoon, managing director for innovative finance at the Rockefeller Foundation. “We think this is one of the only solutions that meets the scale of the challenge.”

South Africa, whose economy is one of the most coal-intensive in the world, wants to steer investment into renewables and start shutting down its aging fleet of 15 coal-fired, carbon-spewing power plants, which supply 84 percent of the nation’s electricity.

In a September report to the United Nations ahead of the Glasgow, Scotland, climate summit, South Africa pledged to slash its greenhouse gas emissions by as much as a third by 2030 and close six coal-fired power plants to stick to a path of as much as a 1.5 degree Celsius (2.7 Fahrenheit) change in global temperatures since the late 1800s.

But South Africa can’t launch its plan without international help from governments as well as private investors. The state-owned utility Eskom is drowning in more than $27 billion in debt. After borrowing too much to build coal plants, it isn’t able to scrape together enough money to invest in renewables or transmission lines. Frequent rolling blackouts have angered residential and business customers and are making Eskom a target in municipal elections. And restructuring the electricity sector could idle large numbers of the roughly 120,000 workers in power plants and mines, requiring retraining and improved social services.

The rescue plan could tap into money from the United States and Europe, multilateral lending institutions and private foundations. It could also involve bonds whose interest would be paid in the form of carbon reduction.

John Morton, the Treasury Department’s first climate counselor, traveled recently to South Africa and said the utility there, a vertical monopoly, was in a “too big to fail situation.” He said funds could eventually help Eskom regain access to capital markets and help affected workers.

Helen Mountford, vice president for climate and economics at the World Resources Institute (WRI), said South Africa’s new climate plan, known as a Nationally Determined Contribution, or NDC, “underscores its commitment to moving towards a goal of reaching net-zero carbon dioxide emissions by 2050, setting the stage for the country to heavily invest in clean power while accelerating a transition away from coal.”

“The major pieces of the deal will likely include a faster rollout of renewable energy and a faster exit from coal, with the just transition agenda featured prominently,” said Katie Ross, also with the WRI. She said in an email that it was important to ensure that “communities and livelihoods tied to the coal industry are uplifted and protected in the transition.” She said it was particularly important in the northeast region of Mpumalanga, where 90 percent of coal mines and 70 percent of coal power plants are located.

The negotiations over Eskom are rife with historical references and internecine politics. President Cyril Ramaphosa, who was general secretary of the mineworkers’ union in the apartheid era before he became wealthy as a private businessman, has cautiously backed the financial talks. He has received support from the Congress of South African Trade Unions, whose leaders recognize the need to scale back coal.

But the energy minister, Gwede Mantashe, has his own loyalties to the coal industry and says developed countries are trying to impose their own plan on South Africa. The environment minister, Barbara Creecy, supports expanding the use of natural gas, another fossil fuel.

Eskom was created by the Electricity Act of 1922 and grew rapidly after 1960. Ever since 2008, it has used “load shedding,” or rolling blackouts, to meet electricity demand. Parts of two sprawling coal plants, Kusile and Medupi, each with multiple units, are still incomplete.

As in other countries, private banks are pulling back from coal companies. The South African financial conglomerate FirstRand announced in September that it would end funding for new coal-fired power plants and coal mines by 2026 and that it would reduce its exposure to coal to reach the net-zero carbon emissions by 2050.

South Africa has large areas well suited to solar power, yet until this year, investors have been blocked from installing more than one megawatt of solar energy without approval from Eskom, which also owns the transmission lines that make up the electricity grid. Eskom has used its position to box out competition from independent power suppliers that threaten its monopoly. According to a member of the presidential advisory panel, the law has now been liberalized to allow projects as large as 100 megawatts to be built without Eskom’s approval.

“There is massive pent-up demand to go faster and do more,” said one presidential adviser who spoke on the condition of anonymity because he is not authorized to speak for the president, “but the existing model was running out of road.”

“The convenient truth is that economic and public policy imperatives have aligned, as low-carbon sources of energy have emerged as the lowest-cost option,” said Kenneth Creamer, an economist at the University of the Witwatersrand in Johannesburg. “Given that South Africa has for over a decade experienced electricity shortages, expanded wind and solar generation capacity offers the quickest and cheapest solution.”

In a nod toward mineworkers, many of the renewable developments might be built in the mining region of Mpumalanga, even though other areas are better suited to solar. In addition, the electricity grid may be in better condition in the province of Mpumalanga than it is in the warmer northern Cape.

As negotiations continue, parts of a deal are taking shape. The money — part grants, part loans — would come in three five-year tranches, starting small with feasibility studies and running through 2035, Creamer said. The participants would include the United States, European Union, United Kingdom, Germany and France. The World Bank and its for-profit arm, the International Finance Corporation, have roles.

One creative proposal would establish a price of carbon at $7 a ton, an amount much lower than the price of carbon on the mandatory market in Europe but higher than voluntary markets in the United States. A foreign investor or government would lend money to the South African treasury, not Eskom, and accept interest paid out in reductions in carbon emissions from coal operations. That would create an incentive for South Africa to shrink emissions while providing capital for new energy projects.

“Instead of having to pay interest in cash, we can pay against carbon savings,” the presidential adviser said.

“We would ideally see carbon markets develop to a point where they could develop this kind of transaction,” Muldoon said. “But we’re not at that stage yet.” He said the Rockefeller Foundation estimates $10 a ton would be a more likely carbon price.

South Africa, whose 10-year sovereign bonds pay more than 9 percent interest, is also looking for about $5 billion of concessionary financing at rates closer to 1.5 percent a year. The lower rate, assuming the money is not wasted, could speed South Africa’s pace of adopting renewables.

“How far down the range SA moves, will depend on SA’s access to concessional finance,” Creamer said in an email.

South African negotiators take a dim view of piling more debt onto Eskom, which can pay only part of its obligations now. “Whenever the CEO is questioned, he says they will just increase the tariffs because our tariffs are low,” said an adviser to the government. But he said raising rates will “nudge South Africa toward massive protests,” which have frequently followed utility rate increases.

The presidential adviser said, “Eskom debt has been stranded for three years. It’s like an oil tanker hitting the bottom.”

One theme at this year’s COP26 is the need to pull together $100 billion a year for climate-connected aid for developing nations. In South Africa’s case, past aid left a bad taste. The World Bank in 2010 loaned more than $3 billion to build Eskom’s Medupi coal plant complex — the same plants that climate activists are asking South Africa to shelve.

Now the World Bank’s new Climate Change Action Plan is providing technical assistance to Eskom to help decommission and repurpose the power plants. While some are new, the average age of a South African coal plant is just over 40 years.

In an Oct. 14 letter to the World Bank’s president, David Malpass, a coalition of organizations called the Civil Society Groups said that since the Paris climate accord in 2015, the bank had spent more than $12 billion in direct project finance — mostly loans and guarantees — for fossil fuels in over 35 countries. “The failure of the [bank] to position itself with science and justice when it comes to climate change mitigation undermines the mission of the institution,” the letter said.

Now the bank is changing direction. It will partner with the Climate Investment Funds, a multilateral climate fund, to finance more large battery storage. The Group of Seven in July approved an additional $2 billion for the Climate Investment Funds, which would support coal transition and “climate justice.” As of early October, 14 countries had sought part of that money. “South Africa is at the top of the list in terms of priorities and needs,” Morton said. That could translate into $500 million for South Africa, said Joseph Curtin, director of power and finance at the Rockefeller Foundation.

A restructuring plan for Eskom would probably break it up into separate companies for power generation, transmission and delivery.

“This is the most energy-intensive economy on the planet,” Morton said. “South Africa has this unfortunate position. But ironically it is a bit of an asset. It is in everybody’s sites as a desired partner in this transition.”

He said South Africa’s deal would be “almost a first of its kind of transition both in terms of scale and complexity. We donor countries are confident that if we can approve a model that works here, we could take that to other countries.”

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