Debt for Climate Opportunities in South Africa

Background Paper #5

The Role of Concessional Finance in Unlocking the Country’s Energy Transition

By Emily Tyler, Celeste Renaud, and Adam Roff

South Africa’s economy, which was already in a precarious state before Covid-2019, has been tipped into full blown crisis by the pandemic. Gross national government debt – at 63.5% of gross domestic product (GDP) in FY2019/20 – is expected to be upwards of 86% within two years. Eskom, which is the country’s state-owned monopolistic and vertically integrated electricity utility, is a key driver of this escalating debt profile and lies at the heart of the economy’s structural challenges.

Eskom is facing unprecedented financial, operational, and technological challenges, including: a failing coal fleet (which generates 85% of its electricity); a carbon and local pollutant profile that is rapidly becoming intolerable to society; an outdated sector model; constraining policy and regulatory environments; revenue shortfalls and the early stages of a utility death spiral; together with a ballooning debt burden of R480 billion (US$27.9bn). In total, 77.2% of this debt is government-guaranteed, and a significant portion is stranded and cannot be serviced.

Over the next three years, Eskom’s projected debt maturity profile will total R224 billion (US$13bn), but accessing funding to refinance maturing debt is increasingly difficult. South Africa’s National Treasury has committed to a 10-year bailout programme totalling R230 billion (US$13.4bn) to assist. If this is removed due to fiscal affordability, Eskom’s debt will be immediately unserviceable. As shareholder and guarantor, Eskom’s risk profile is automatically transferred to the sovereign, impacting the sovereign credit rating and increasing South Africa’s borrowing costs.

Simultaneously, South Africa has a significant and immediate opportunity to pivot its carbon-intensive power sector towards low-carbon energy. Work by Meridian Economics and the Centre for Scientific and Industrial Research finds that cost is no longer a barrier to decreasing the carbon emissions of South Africa’s electricity system by up to 1.5 gigatons (Gt) through an ambitious renewables rollout. A strategically managed, ambitious renewables rollout will trigger large-scale green industrialisation, providing a sustainable economic stimulus for South Africa’s ailing economy.

Although such a build programme is commercially financeable, given the country’s superior renewables resources and mature financing sector, the lack of a credible and clear vision and policy commitment for the electricity sector – together with a stable market and system operator (product of an unbundled Eskom) – are constraining the realisation of this opportunity.

An important political aspect of the South African electricity crisis is the need for a just transition away from coal. Most of South Africa’s coal mining and power-related activities are concentrated in Mpumalanga province, which hosts 12 of Eskom’s 15 power stations and a large share of the country’s coal mines. This has a severe impact on air quality and the health of local populations, but a transition from coal will result in significant disruption in Mpumalanga, putting livelihoods at stake.

There is a need to support the retraining and retiring of the coal workforce, together with the creation of alternative employment
opportunities in the Mpumalanga area. An ambitious rollout of renewables creates the foundation for this just transition. The targeted localisation of renewable energy industrial activities and a portion of renewable energy build can feasibly be managed for Mpumalanga, supporting the absorption of workers from the declining coal industry and stimulating opportunities in value-chain activities related to a new, greener local economy. In addition, a just transition enhances the local environmental and health benefits of phasing out coal-fired power.

Published by Heinrich Böll Foundation, Center for Sustainable Finance (SOAS, University of London), and Boston University Global Development Policy Center as Background Paper to the Debt Relief for Green and Inclusive Recovery Project.