South Africa aims to meet with other governments and multilateral finance institutions on the sidelines of the upcoming COP26 gathering to progress talks on raising concessional funding, in phases, for a Cabinet-endorsed ‘Just Transition Financing Facility’ to fund green projects in the electricity, automotive and hydrogen sectors.
As part of the first phase, South Africa is proposing a multitranche, multiyear facility, funded by a multilender syndicate, to fund decarbonisation and green projects.
Cabinet has decided that the facility will support the transition from coal to renewable energy in the electricity sector, expand and strengthen the country’s transmission and distribution grids, as well as Eskom’s repowering and repurposing plans for decommissioned coal stations.
In addition, it will be used to stimulate a shift in the domestic automotive sector’s manufacturing profile from internal combustion engine vehicles to electric vehicles (EVs), as well as to initiate the development of a large green hydrogen industry.
Forestry, Fisheries and the Environment Minister Barbara Creecy says the facility does not feature as part of South Africa’s formal COP26 negotiating mandate, which will focus on seeking a breakthrough for the financing of both mitigation and adaptation projects in developing countries, as well as resolving a series of outstanding issues arising from the 2015 Paris Agreement.
However, the Just Transition Financing Facility will be a key feature of South Africa’s informal engagements during the event, which will take place in Glasgow, Scotland.
“The informal agenda relates to what we are able to achieve for our own just transition and our own country through the wide variety of governments, multilateral finance institutions and other institutions that will be present at COP,” Creecy explained during a meeting of the Presidential Climate Commission (PCC) on Thursday.
She said South Africa’s revised Nationally Determined Contribution (NDC) had already indicated the country’s willingness to play its part in addressing the global threat of climate change.
“But in that context, we have a specific national interest and the specific national interest we have in this instance is to try and secure access to multilateral financing to assist us to achieve the ambitious target that we have set as a country.”
South Africa has made a progressive revision to its NDC ahead of COP26, with a new 2030 range of 420- to 350-million tons of carbon dioxide equivalent (Mt CO2-eq) for 2030, which represents a marked improvement on its 2015 pledge of 614 Mt CO2-eq to 398 Mt CO2-eq.
Creecy stressed that South Africa’s ability to reach the lower figure outlined would depend largely on the level of concessional funding, both grants and loans, it was able to secure from developed countries.
Eskom had already published a just energy transition project pipeline that included generation, transmission and distribution projects with a combined value of R400-billion and The Presidency’s Rudi Dicks indicated that the cost of a transition to the manufacture of EVs could involve an initial investment of R150-billion in the automotive sector.
Another $119-billion to $145-billion would have to be invested over the coming 15 to 25 years to develop a large-scale green-hydrogen sector.
For the electricity component, which is the most advanced, South Africa is proposing staggered disbursements under the facility, through three tranches, spread over a 15-year period from 2022 to 2039.
Disbursements would also be performance based and governed by a use-it-or-lose-it principle so as to prevent funds being sterilised when projects failed to materialise.
The lender group could also choose to opt in or out so as to ensure that no project is declined should there be a conflict with a lender mandate, including possible restrictions on investing in gas projects, which feature in Eskom’s pipeline.
Creecy reported that a finance workstream, guided by Cabinet Ministers, had been established in a bid to secure the best possible deal for South Africa in the context of its fiscal constraints and the need to urgently build new electricity capacity.
National Treasury director-general Dondo Mogajane underlined this point, telling the PCC that government would consider the concessional finance becoming available within a context of both the conditions attached to such finance and the country’s current debt burden, which currently stood at higher than 80% of gross domestic product.
He said it had become clear from the recent meetings of the International Monetary Fund and the World Bank that South Africa had an opportunity to access new sources of green financing.
Decisions still had to be made, however, regarding the scale and terms of such funding, including the appropriateness of the “conditionalities”.
On the impact of concessional finance on Eskom and its unsustainable debt position, Mogajane said it would be crucial to balance the utility’s current debt position with the prospect of it taking on new debt and the nature of that new debt.
The National Treasury was also in support of the financing facility, which would fall under government’s rather than Eskom’s control, being broadened beyond the State-owned utility to ensure greater impact.
“We are working together so as to approach this in a way that safeguards the interest of Eskom and safeguards the interest of the country,” Mogajane said.