South Africa’s Just Energy Transition Explainer
Exhibit 1: Proposed South Africa Energy Transition Spending
Sources: Government of South Africa; Blended Finance Taskforce and Centre for Sustainability Transitions at Stellenbosch University
Key Points: South Africa’s JET is an ambitious (easily >US$300 Billion required investment) plan to decarbonize and develop green industries. The economic potential highlights (1) the importance of government enabling and (2) that international grants (vs. loans) and government spending should focus where there is less financial return (like Just Transitions).
Just-released Just Energy Transition (JET) Investment Plan (IP) is for US$100 Billion through 2027. A year after the announcement of an international partnership dedicated to a comprehensive “greening” of South Africa, with financial commitments from its international partners, the government of South Africa last week released its JET Investment Plan in time for COP27. This plan, which covers the five years through 2027, is comprised roughly of $60 Billion (B) for electricity transformation, ~$35B for green industry development — Electric Vehicles (EVs), Green H2 and the municipal infrastructure to support EVs — and the balance for Just Transition, predominantly for the province of Mpumalanga, which is heavily dependent on coal (see Exhibit 1).
Total spending through 2050 could easily exceed $300B. What has been released is a “phase 1,” although the IP lays groundwork for further investments and green economic growth over the next ~25 years. (The plan does detail spending expectations in the electricity sector through 2035, by which point it expects power-related expenditure to have been US$150B vs. the aforementioned $60B by 2027.) For perspective, an independent estimate of total spending for just the power decarbonization portion is US$250B (see Exhibit 1). Coupled with subsequent spending to support the EV and Green H2 industries, it suggests that total investment in these areas can well exceed US$300B by 2050.
Coal retirement schedule in the IP accelerates after 2030. The JET IP envisions a retirement/decommissioning schedule for the country’s coal capacity of 39GW as follows: 5GW by the end of 2029, 9.5GW (cumulatively) by the end of 2030, 22GW (cumulatively) by 2035 and all but the two youngest plants in the country by the end of 2050. The retirements accelerate after replacement (primarily green) energy has been put in place.
Government action creates private sector power opportunity and penalizes carbon. Through the course of 2022, the South African government has taken steps to liberalize the electricity market in country as well as to implement specific climate policy. Some highlights:
- a climate change bill for the transition and for investment in climate resilience is working its way through Parliament
- a climate tax was introduced by the Ministry of Finance
- changes in electricity sector regulation, including establishing an independent transmission operator
- liberalization of generation: more latitude for independent power producers, for example by raising the licensing threshold for new capacity to 100MW from 1MW
The IP envisions a blended finance model. The IP details commitments that have been made from international and domestic entities as follows below. Assuming that all of the indicated commitments come through, it leaves US$47B to be secured of the $100B planned investment (see Exhibit 2).
- The international partners in South Africa’s Just Energy Transition Partnership, the governments of France, Germany, UK, USA and the EU, have committed US$8.5 of financing for the period 2023-2027. That support is going largely to electricity infrastructure, with modest amounts also going to planning/implementation capacity, EV and Green H2 infrastructure and Just Transition. Referred to as the International Partners Group (IPG) in Exhibit 2.
- Development Finance Institutions/Multilateral Development Banks (DFIs/MDBs in Exhibit 2), including the New Development Bank and the International Development Corporation, have committed US$10B.
- Several private institutions in South Africa have made public commitments to fund climate finance assets totaling ~US $33B.
The IP also details the nature of (logical) participation by activity, i.e. whether government, concessional, private/commercial (including Venture Capital) and/or grant sources. As envisioned, concessional and government sources play actives role in decommissioning and repurposing the coal plants, building infrastructure and capabilities across industries and Just Transition efforts in Mpumalanga.
Exhibit 2: Estimated Composition of Financing Sources, by Target, 2023e-2027e (in South African Rand Billions)
Source: Government of South Africa JET IP
This process is being watched by several countries. Countries including Indonesia, Vietnam, India and Senegal are engaging in conversations with international partners regarding their own versions of JET. These are bespoke and the intent is to design them around conditions specific to each. Yet they all embrace the economic development/industrial policy goals embedded in South Africa’s JET.
11/7/2022