South Africa’s electricity crisis is fast becoming one of the main drivers in the shift to renewable energy in both the public and private sector with massive investments accompanying positive regulatory changes.
The launch of South Africa’s Just Energy Investment Plan at COP 27 in Sharm El-Sheikh, Egypt is a strong indication of the magnitude of private-sector investments needed to decarbonise the economy and secure electricity supply in critical industries.
Some $98 billion will be needed over five years to begin South Africa’s 20-year energy transition. While the international community has already pledged $8.5 billion of this in concessional, traditional and grant financing, all indications are that accelerated private-sector investment will be needed to make this happen. Negotiating the terms of these agreements will be a priority on the 2023 climate mitigation agenda.
Market adaptation in the wake of accelerated action
Steven Nicholls, Head of Mitigation for the Presidential Climate Commission (PCC) and adviser to the National Business Institute (NBI) says there are likely to be three phases to market adaptation, which he sets out as follows:
1. Recognising that climate risk requires massive shifts in the economy and therefore massive shifts in how we allocate capital. We are in this phase now.
2. Innovating how the financial sector does business. In this phase, the financial sector starts getting involved in pipeline generation and innovating new instruments as well as new ways of working.
3. Adapting to the needs of a just transition. This will require a greater degree of distribution of the benefits of projects, and likely lower returns for private capital as well as deep consideration of alternative ownership models. Without this final fundamental shift in how we see transitions and the role of finance, inequality will be a pervasive stumbling block.
We are seeing a rise in using existing instruments, concessional finance and bonds mostly to fund climate friendly investments but more diverse partnerships across players in the public and private sector will be key.
There are also new regulatory reforms and voluntary guidance such as green taxonomies, TCFD (the Task Force on Climate-Related Financial Disclosures) and updated listing requirements. But if we’re honest there isn’t much innovation happening yet.
A focus on making the transition to renewables just and equitable
The PCC is launching its Just Transition Framework Implementation plan and consultations with organised labour and other stakeholders are ongoing. The framework seeks to ensure that the transition away from coal is just, equitable and leaves no-one behind.
On the international front, the coal price windfall as a direct result of the ongoing war in Ukraine may see some investors hold on to these assets. However, looming trade restrictions on carbon-intensive products such as the European Union’s Carbon Border Adjustment Mechanism (CBAM) means that South Africa faces significant international trade risks. CBAM would initially apply to imports of cement, iron and steel, aluminium, fertilisers and electricity.
‘Countries across the world are trying to win the race to dominate the clean-energy economy, through tax incentives, regulatory regimes and cut-throat competition. We can expect competition to be supercharged once the Inflation Reduction Act has been passed in the US. The aim of this act is to ensure that clean energy is made in America,’ explained Alex Lenferna, co-founder of the Climate Justice Coalition.
Old Mutual’s green investments and initiatives
Financial institutions like Old Mutual have shown ambitious commitment to falling in line with the global community’s effort to keep global warming below 1.5 degrees Celsius by mainstreaming its ESG portfolio to drive access to cleaner, affordable energy thus increasing the share of renewable energy in the country’s energy mix.
To that end, Old Mutual joined both the Net-Zero Asset Owner Alliance and the Net Zero Asset Managers Initiative at the beginning of 2022.
This is in line with the UN’s Sustainable Development Goals (SDG 7) – a blueprint for the institution's ESG commitments. Through Old Mutual Alternative Investments’ African Infrastructure Investment Managers (AIIM), 3 521 gigawatt hours (GWh) of renewable energy was produced in 2020. This is equivalent to powering just over a million middle-income homes with clean energy. At the same time, the 32 projects under the AIIM facility are offsetting thousands of carbon-dioxide emissions.
In addition, investments into off-grid portfolio companies have provided reliable solar or hybrid solar/diesel power to small and medium-sized businesses. Orionis and Starsight Energy have to date installed 20 733 active solar-home systems and 64 MW of capacity, offsetting 10 759 tCO equivalent.
Among the domestic trends, there will be a rush to domestic solar-power use.
‘With crippling loadshedding and presidential promises of tax incentives and feed-in-tariffs, those who can afford it will rush to solar and storage solutions. Those who can't afford solar and are stuck with Eskom will face devastating loadshedding. That's why the Climate Justice Coalition is calling for a Green New Eskom to ensure we are leaving no-one behind in the transition,’ said Lenferna.
Integrating climate risk into investment decisions will be key to achieving both South Africa and the global community’s goals of limiting warming and ensuring a safer, habitable world for all.
By Tunicia Phillips
Tunicia is an award-winning freelance journalist who specialises in climate change, environmental and energy reporting.