FINANCING THE POST COVID-19 GREEN RECOVERY AND THE NEED FOR REGULATORY REFORMS IN THE SA POWER SECTOR - DR GROVÉ STEYN
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FINANCING THE POST
COVID-19 GREEN
RECOVERY AND THE NEED
FOR REGULATORY
REFORMS IN THE SA
POWER SECTOR
EU SA
PARTNERS FOR GROWTH
DR GROVÉ STEYN
grove.steyn@meridianeconomics.co.za
25 JUNE 2020
THE ENERGY SECTOR ALREADY HAD SEVERE CHALLENGES
BEFORE THE COVID-19 CRISIS
• The exceptional carbon intensity of our energy sector exposes the entire economy to
excessive climate risk. (86% of electricity is from coal fired power stations)
• SA is suffering chronic power shortages and load shedding that is crippling economic
growth.
– Our Medupi, Kusile and Ingula power station mega projects had encountered serious
problems with large cost and time overruns.
– Our renewable energy IPP programme had been stalled for years, with only Round 4
projects proceeding recently (bid in 2015).
– These were all self-inflicted wounds.
• Electricity distribution networks, especially in many municipal areas are in a poor state of
repair and in desperate need of reinvestment.
• Electricity tariffs had increased 172% in real terms over 15 years.
• Eskom already receives enormous state bailouts (current commitment of R230bn in total).
– R49bn in FY2020, R56bn in FY2021, R33bn in FY2022, and then R23B per year thereafter.
• Public sector capacity to finance energy infrastructure is now severely limited
©Meridian Economics 2020 ׀2THE ENERGY SECTOR CAN PROVIDE A LARGE GREEN
STIMULUS TO LEAD SA’S ECONOMIC RECOVERY
• Much of Eskom’s generation capacity needs to be retired in the foreseeable future.
• The most economic power system development path now consists primarily of renewable
energy, with gas power and battery backup (DMRE: IRP2019; CSIR).
– New renewables are now increasingly cheaper than continued operation of Eskom’s more
expensive coal fired power stations.
• These circumstances create an opportunity for a large, sustained, mostly private sector
financed, investment programme.
• This includes small scale projects, embedded generation, self supply, third party supplies,
utility scale independent power producers and possibly Eskom.
• In turn creates opportunity for:
– value chain localisation, reindustrialisation, and large scale job creation in manufacturing,
services, construction, operations and maintenance.
– much greater participation in the energy sector for previously disadvantaged groups.
– roll-out of a Just Transition programme for affected power station and coal workers.
– large scale Enterprise Development (ED) and Social and Economic Development (SED)
project spend associated with REIPPP projects.
©Meridian Economics 2020 ׀3WITH SUBSTANTIAL CLIMATE BENEFITS BUT NO ADDITIONAL
COST TO THE ECONOMY IN RAISED ELECTRICITY COSTS
Marginal Cost of Electricity vs CO2 Emissions
90.0
Aggressive RE industrialisation
~1 Gt mitigation
program & All Coal off by 2040.
80.0
Levelised cost (c/kWh) 2020 - 2050
70.0
IRP 2019
Aggressive RE industrialisation program
60.0
50.0
40.0 Modest RE industrialisation program
The full capital cost of:
30.0 • the required pollution
control retrofits; and
• refurbishments
20.0
to enable full-life operation
for many coal units is not
10.0 taken into account here.
0.0
2 000 2 200 2 400 2 600 2 800 3 000 3 200 3 400 3 600 3 800 4 000
Emissions (Mt) 2020 - 2050
Practical RE build programs
©Meridian Economics
Meridian2020Economics,
׀4 CSIR (forthcoming) “Power Sector Ambitions Study”WE HAVE A LARGE OPPORTUNITY TO TRIGGER A SUSTAINED
INVESTMENT PROGRAMME GREATER THAN THAT ENVISAGED IN
THE IRP 2019
IRP 2019
8 000
7 000
Annual Capacity installed (MW)
6 000
5 000
4 000
3 000
2 000
1 000
0
2027
2020
2021
2022
2023
2024
2025
2026
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
Solar PV Wind
©Meridian Economics 2020 ׀5BY ACCELERATING THE ROLLOUT OF RENEWABLE ENERGY
Moderately accelerated build program
8 000
7 000
Annual Capacity installed (MW)
6 000
5 000
4 000
3 000
2 000
1 000
0
2027
2020
2021
2022
2023
2024
2025
2026
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
Solar PV Wind
©Meridian Economics
Meridian2020Economics,
׀6 CSIR (forthcoming) “Power Sector Ambitions Study”BY ACCELERATING THE ROLLOUT OF RENEWABLE ENERGY
AGGRESSIVELY
Aggressively accelerated build program
8 000
7 000
Annual Capacity installed (MW)
6 000
5 000
4 000
3 000
2 000
1 000
0
2027
2020
2021
2022
2023
2024
2025
2026
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
Solar PV Wind
©Meridian Economics
Meridian2020Economics,
׀7 CSIR (forthcoming) “Power Sector Ambitions Study”AND SIGNIFICANT ADDITIONAL CAPITAL INVESTED IN THE NEXT
10 YEARS AND BEYOND
IRP 2019
60 000 000
R246.9Bn
Annual Investment (2019 Rands '000)
50 000 000
40 000 000
30 000 000
20 000 000
10 000 000
0
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
Solar PV Wind
©Meridian Economics 2020 ׀8AND SIGNIFICANT ADDITIONAL CAPITAL INVESTED IN THE NEXT
10 YEARS AND BEYOND
Moderately accelerated build program
60 000 000
R344.1Bn
Annual Investment (2019 Rands '000)
50 000 000
40 000 000
30 000 000
20 000 000
10 000 000
0
2025
2034
2020
2021
2022
2023
2024
2026
2027
2028
2029
2030
2031
2032
2033
2035
2036
2037
2038
2039
2040
Solar PV Wind
©Meridian Economics 2020 ׀9AND SIGNIFICANT ADDITIONAL CAPITAL INVESTED IN THE NEXT
10 YEARS AND BEYOND
Aggressively accelerated build program
60 000 000
R452.7Bn
Annual Investment (2019 Rands '000)
50 000 000
40 000 000
30 000 000
20 000 000
10 000 000
0
2028
2020
2021
2022
2023
2024
2025
2026
2027
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
Solar PV Wind
©Meridian Economics 2020 ׀10PLUS THE ABILITY TO CREATE THOUSANDS OF ADDITIONAL JOBS
IRP (2019) RE jobs per year till 2040
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040
Operation Construction
Meridian Economics, CSIR (forthcoming) “Power Sector Ambitions Study”;
Employment factors drawn from Hartley et al (2019) “Co-benefits study: future skills and job creation through renewable
©Meridian energy in2020
Economics South
׀11Africa” and Eberhard and Naude (2017) analysis of IPP Office Data in “The South African Renewable Energy
IPP Procurement Programme”PLUS THE ABILITY TO CREATE THOUSANDS OF ADDITIONAL JOBS
Moderately accelerated build programme: RE jobs per year till 2040
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040
Operation Construction
Meridian Economics, CSIR (forthcoming) “Power Sector Ambitions Study”;
Employment factors drawn from Hartley et al (2019) “Co-benefits study: future skills and job creation through renewable
©Meridian energy in2020
Economics South
׀12Africa” and Eberhard and Naude (2017) analysis of IPP Office Data in “The South African Renewable Energy
IPP Procurement Programme”PLUS THE ABILITY TO CREATE THOUSANDS OF ADDITIONAL JOBS
Aggressively accelerated build programme: RE jobs per year till 2040
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040
Operation Construction
Meridian Economics, CSIR (forthcoming) “Power Sector Ambitions Study”;
Employment factors drawn from Hartley et al (2019) “Co-benefits study: future skills and job creation through renewable
©Meridian energy in2020
Economics South
׀13Africa” and Eberhard and Naude (2017) analysis of IPP Office Data in “The South African Renewable Energy
IPP Procurement Programme”ALLOWING SOUTH AFRICA TO CATCH UP WITH THE REST OF THE
WORLD, WHERE RENEWABLE PENETRATION FAR EXCEEDS OUR
OWN
TOTAL RENEWABLES CAPACITY RELATIVE TO SYSTEM PEAK LOAD
300%
Germany
250% Spain
Ireland
United Kingdom
200%
Italy
China
150%
Australia
Japan
100%
India
Brazil
50%
South Africa
Aggressively accelerated
build program
0% Moderately accelerated
2029
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
build program
YEAR IRP 2019
Sources: CSIR; www.ourworldindata.org; http://www.bp.com/statisticalreview; Meridian Economics.
©Meridian Economics 2020 ׀14THIS CRITICAL OPPORTUNITY IS NOW RECOGNISED BY MANY LOCAL AND INTERNATIONAL COMMENTATORS ©Meridian Economics 2020 ׀15
TRANSITION FINANCE IS NEEDED IN SECTORS HEAVILY RELIANT ON
CARBON INTENSIVE LEGACY ASSETS
Divestment Transition Green
Pressure Finance Finance
Divestment from Investment in green
fossil fuel infrastructure /
infrastructure / economies
economies
2020
©Meridian Economics 2020 ׀16DESPITE A GLOBALLY SIGNIFICANT RE BUILD OUT, COAL
GENERATION IS UNAVOIDABLE IN SA FOR A TRANSITION PERIOD
Era of coal Transition Era of renewables
Annual energy by generation source
450
400 Wind
Annual Energy generation (TWh)
350 Photovoltaic
Concentrated Solar
300
Distributed Photovoltaic
250
Battery Storage
200 Pumped Storage
150 Hydro
Biofuel
100
Nuclear
50 Gas Peaking
0 Natural Gas
2020
2050
2022
2024
2026
2028
2030
2032
2034
2036
2038
2040
2042
2044
2046
2048
Coal
Year
©Meridian Economics 2020 ׀17
Generation of this energy requires ongoing financingTRANSITION FINANCE IS REQUIRED TO UNLOCK AN ACCELERATED
TRANSITION BY OVERCOMING ECONOMIC, SOCIAL AND POLITICAL
PATH DEPENDENCE.
(2) Transition finance supporting a bridge
to a more rapid, sustained transition is
required to overcome change resistant
path dependence.
Stakeholder value
Locked-in New
coal based sustainable
legacy (1) An incremental transition
development
system initially involves a reduction in
path
stakeholder benefits, which
creates broad based
resistance.
Decreasing carbon intensity
Transition finance is required to unlock an accelerated transition by: (a) supporting substantial
measures to overcome economic, social and political path dependence ; (b) while protecting
©Meridian Economics 2020 ׀18 system integrity during the intervening period.A LARGE AMBITIOUS CLIMATE TRANSACTION COULD
UNLOCK THE GREEN STIMULUS
The additional carbon savings could form the basis for a large concessionary climate finance
transaction – a Just Transition Transaction consisting of three legs:
1) The South African Government and Eskom will commit to delivering additional,
measurable CO2 reductions over and above the current policy trajectory (enabled by the
large green industrialisation programme); In return:
2) Eskom’s access to its traditional funding sources (DFIs, capital markets, banks, etc.) will
be restored; while
3) Affected labour and communities will benefit from a Just Transition programme backed
by the net proceeds from the transaction, and the crowding in of new energy projects
and other infrastructure in Mpumalanga and beyond.
Eskom Central Buyer (Transmission Group) could also make a margin on utility scale
renewable energy that will replace its coal power.
©Meridian Economics 2020 ׀19Annual CO2 emissions from coal (Mega Ton/annum)
0
50
100
150
200
250
2020
©Meridian Economics 2020 ׀20
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
Coal CO2 emissions (MT)
latest government plan
2037
2038
2039
2040
Carbon emissions from Eskom coal fleet per
2041
2042
2043
2044
2045
2046
2047
CARBON TRAJECTORY WITHOUT TRANSACTION
2048
2049
2050CARBON TRAJECTORY WITH TRANSACTION
Mitigation required against emissions consequent from
latest government plan
250
200
Annual CO2 emissions from coal (Mega Ton/annum)
150
100
50
0
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
2042
2043
2044
2045
2046
2047
2048
2049
2050
Mitigation required 2°C compatible coal emissions
©Meridian Economics 2020 ׀21HIGH LEVEL FINANCIAL FLOWS
Blended Finance
Vehicle
Commercial
International & domestic
funders
Senior
Commercial Tranches
Subordinated
Concessionary Tranches
Concessionary
funders
Catalytic grant finance
South African Just
Transition Fund
©Meridian Economics 2020 ׀22THIS CLIMATE TRANSACTION IS IN LINE WITH THE PARIS
AGREEMENT’S PROVISIONS ON CLIMATE FINANCE
• Article 2: ‘This Agreement, in enhancing the implementation of the Convention,
including its objective aims to strengthen the global response to the threat of climate
change, in the context of sustainable development and efforts to eradicate poverty,
including by:
c) making finance flows consistent with a pathway towards low
greenhouse gas emissions and climate-resilient development’.
• Article 9: Stipulates developed countries are to:
• ‘provide financial assistance, and
• lead the mobilisation of finance from a wide variety of sources to support
developing countries to mitigate and adapt to climate change’
©Meridian Economics 2020 ׀23RENEWABLES DEVELOPERS FACE A RANGE OF MOSTLY
POLICY RELATED CONSTRAINTS
CONSTRAINTS ON RENEWABLE ENERGY ROLLOUT IN
SOUTH AFRICA Top 3 constraints
Lack of political commitment and policy certainty on industry growth
can all be
Regulatory restrictions in the electricity sector
addressed through
Grid capacity issues government
Local content requirements intervention and
Domestic skills and construction capabilities alignment of
Local capital pools planning efforts
Environmental regulation
Technical integration of renewable energy (grid…
BEE criteria
Logistics including port infrastructure and transport
Social resistance
Municipal/community capacity for engaging in…
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
% of total (19) experts and developers who ranked each as a constraint on industry growth (Meridian Economics analysis, 2020)
©Meridian Economics 2020 ׀24A LARGE GREEN STIMULUS CAN ONLY BE ACHIEVED WITH
FUNDAMENTAL POLICY, REGULATORY AND MARKET
REFORMS
• SA needs to drastically reduce the role of central planning, regulation and delivery, to enable thousands of
economic agents to respond nimbly to investment opportunities in a competitive market.
– Drastically increase the level of projects that are completely deregulated (NERSA), up to 50MW.
• Resolve large-scale regulatory disfunction
– Conduct independent study of NERSA’s role and performance; and
– Take steps to improve its independence, capacity, governance, and accountability (new appointment
mechanism; regular independent reviews; appeals mechanism, etc.).
– Improve coordination between environmental and land use approvals for renewables projects.
– Establish a public agency to support developers by cutting through red tape; and who should be measured the
investment outcomes.
• Resolve the fundamental conflicts of interest that have stymied the development of the sector:
– Industry structure: Separate natural monopoly functions from power generation. Establish the national
transmission grid (incl. the system operator, power system planner and central buyer) as a separate SOE that is
independent from all generators (See DPE’s “Eskom Roadmap” policy document and NT’s “Contribution
towards a growth agenda for the South African economy”)
– Government structure: Separate minerals (coal) policy function from energy policy function.
• Establish green industrialisation as the centre piece of our industrial policy.
©Meridian Economics 2020 ׀25CONCLUSIONS • A broad range of analysts agree that a large, renewable energy led, green stimulus is one of the few substantial recovery opportunities available to South Africa. • It does not require fiscal resources. • But, it will require fundamental policy and regulatory reform. • Initial short-term reforms (change ministerial regulations) can be implemented in months to initiate the process and initiate the ramp up of capital expenditure in 2021; • But, zero-based policy, regulatory and market design is required to achieve the main benefits for South Africa. • South Africa can also leverage the additional GHG mitigation with international climate funders to obtain large-scale concessionary funding for Eskom and a Just Transition for workers. • While there will be other challenges to achieving these large economic benefits for the livelihoods of South Africans, the main obstacles to success lie within our politics and the vision of our policy makers. ©Meridian Economics 2020 ׀26
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