SA’s R1.5 trillion Just Energy Transition Investment Plan unpacked

South Africa’s R1.5 trillion Just Energy Transition Investment Plan (JET IP) unveiled at COP27 can be used as a model for other carbon-intensive developing countries to follow.

This will be helpful as developing countries have already indicated, at the beginning of the meeting, that they need help from rich countries to stop using fossil fuels.

The plan seemed very vague when President Cyril Ramaphosa released it on 4 November, for public comment.

But the complete plan given to the International Partners Group (IPG) not only clearly outlines how South Africa will apply the $8.5bn (R128 billion) pledged by the IPG to help the country move away from its reliance on coal to a low-carbon economy over the next three to five years, but also the scale of needs and initial investments required between 2023 and 2027 to decarbonise South Africa’s economy by 2030.

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At the same time, the country must also prioritise a just transition to ensure that human livelihoods, workers and communities are safeguarded from the direct and indirect impacts of the transition to an environmentally sustainable economy.

Who will pay for the Just Energy Transition Plan?

Deon Fourie, senior economist at Oxford Economics Africa, says although the $8.5bn JET IP pledge made at COP26 has a central catalytic role to attract more funding, the JET IP demonstrates that it is a far cry from the R1.5trn investment required over the next five years alone.

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“The plan’s success hinges on its consistent implementation to attract vastly more grant and low-cost finance to close the R700 billion funding gap and execute vital reforms to encourage large-scale private investment at speed.

“The time to act has passed and if the JET IP fails, there is a risk that developing countries will lose trust in the international climate order, especially in those countries from the industrialised world,” Fourie says.

The IPG’s R128 billion funding commitment in the form of grants, concessional loans, investment, and risk-sharing instruments plays an important role to mobilise increased private sector funding to help accelerate a reduction in greenhouse gas (GHG) emissions.

“The main take away from the JET IP is that significantly more funding is required to successfully ensure a just energy transition that is socially inclusive.

“Specifically, the JET IP demonstrates that R1.5trn is initially needed in new investments over the next five years to ensure a just energy transition, and reduce South Africa’s emissions to within the target range of 350 to 420 million tonnes of carbon dioxide (MtCO2e) by 2030, 11.5 times more than the funding committed,” Fourie says.

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Larger investments needed on longer term

He points out that far larger investments will be needed over the longer term to achieve a net zero emissions future.

“The JET IP was formulated around three priority sectors where South Africa can make the largest contribution to lowering its GHG emissions while fostering improved economic, social, developmental and environmental outcomes. These priority sectors are electricity, ‘new energy vehicles’ (NEVs) and ‘green’ hydrogen, each with these investment needs:

• Electricity: R1 trillion (69.7%), of which R648bn (62.9%) is required for infrastructure to support decommissioning of ageing coal-fired electrical power plants, strengthen and expand transmission and distribution grids and enable the rapid uptake of variable and intermittent renewable energy and complementary technologies. Another R319 billion (31.0%) is needed to support municipalities with electricity distribution infrastructure maintenance, modernisation and expansion, along with enhanced demand-side management and planning capabilities. To support a just energy transition that is socially inclusive in the coal heartland of Mpumalanga, R60.4 billion (5.8%) is intended for repurposing coal-based power plants and mines, diversify the local economy and invest in socio-economic initiatives that will support workers and communities reliant on the coal sector. R3.3 billion (0.3%) is also earmarked for the localisation of renewable energy value chains.
• Green hydrogen: R319 billion (21.6%) for domestic production, use and export of hydrogen produced from renewable energy sources, including to reduce emissions from sectors that are hard to decarbonise. Another R4.5 billion (1.4%) is required for various project feasibility studies, while capital costs represent R315 billion (98.6%) for investments in port and general hydrogen infrastructure, along with the production of green hydrogen and ammonia, green steel, e-methanol, aviation fuel, hydrogen-based vehicles and fuel cells.
• Neighbourhood electric vehicles (NEVs): R128 billion (8.7%) to transition value chains in the automotive sector for local production and export of electric vehicles (EVs) to underpin the sector’s vital contribution to the domestic economy and employment. R70 billion (55.0%) is needed to support the deployment of EVs, such as charging infrastructure and R41 billion (32.3%) for industrial development and innovation, followed by funds allocated for the abatement of transport emissions, public transport, early adoption and innovation and technical assistance.

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Potential funding sources

The JET IP also delineates potentially available funding sources, indicating local financial institutions committed to just over half (R778bn or 52.7%) of the plan’s total investment requirement (R500 billion or 64.3%), while domestic development finance institutions (DFIs) and the New Development Bank committed to R150 billion (19.3%) and the IPG under the JET IP R128 billion (16.5%).

Fourie says this suggests a remaining funding gap of R700 billion that needs to be affordably secured to enable the implementation of the country’s JET IP, of which 21.3% is sought for the electricity sector, 19.3% for green hydrogen and 6.8% for restructuring of the automotive sector.

“South Africa’s government debt is at unsustainable levels, increasing over sevenfold since the 2007/08 fiscal year (FY) to a staggering R4.27 trillion in 2021/22, with debt servicing costs rising sharply and likely to average R355.2 billion per year to 2025/26, which is set to increase when government takes over a significant portion of Eskom’s debt burden of around R400 billion.”

Fourie says considering this, any additional loans on commercial or concessional terms will aggravate South Africa’s public debt burden and crowd-out productive spending even further and, therefore, the JET IP places a large emphasis on the need for grants, “non-debt instruments” and other low-cost funding to be scaled up significantly if advanced economies are to honour their commitments to support the developing world to mitigate against the worst impacts of global climate change.

Advanced economies are yet to honour their financial pledges made at COP15 in 2009, to mobilise $100 billion annually to developing economies, while the grant component of the JET IP pledge represents a mere 3.9% of the total financing commitment by the IPG.

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Sufficiently detailed and well formulated plan

“We think the JET IP is sufficiently detailed and well formulated in South Africa’s socio-economic, sectoral diversification, developmental and environmental interests. It also promotes the implementation of the underlying elements of the president’s Energy Action Plan to help resolve South Africa’s electricity crisis.”

Many of these elements are already underway, such as accelerating the procurement of IPPs, encouraging private sector investment in generation capacity, restructuring the electricity sector and relaxing preferential procurement requirements for Eskom, which will enable the utility to improve the maintenance and performance of its existing fleet of power stations.

“South Africa is also walking its talk by decommissioning, repurposing and repowering the 1 GW coal-fired Komati Power Station into a renewable energy and battery energy storage plant, along with a microgrid factory and community training facility. The World Bank approved $497 million through a concessional loan last week, to support the Komati transition project.”

Fourie says it will be difficult to achieve the magnitude of the investments required and financing their terms over the next five years.

“Ultimately, the proof is in the pudding and the JET IP should be quickly followed by a detailed implementation plan that transparently holds bureaucrats and politicians accountable for its timely execution.”