A Just Transition Transaction (JTT) that enables South Africa to secure highly concessional finance from rich countries in return for accelerated decarbonisation would help create the fiscal space required to take such a programme forward, a new Meridian Economics study asserts.
Released to coincide with the visit to South Africa of climate envoys from Europe, the UK and the US ahead of the upcoming COP26 gathering in Glasgow, Scotland, the study argues that such a transaction could yield interest savings of R100-billion over 25 years and unlock the R750-billion in investment needed to support the country’s transition from coal to renewables.
The finance could be deployed by the National Treasury to recapitalise the three unbundled Eskom entities of generation, transmission and distribution, enabling them to access capital markets, as well as to help government absorb the loss of the asset value that would arise as a result of the early retirement of the country’s coal plants.
Part of the finance would be dedicated to a ‘South African Just Transition Fund’, which would be used to support affected workers and communities and create new jobs through stimulating a green economic revitalisation of Mpumalanga.
Meridian Economics MD Dr Grové Steyn says the JTT could also act as an overarching complement to Eskom’s own proposed Just Energy Transition Transaction, which focuses primarily on securing green infrastructure finance, but does not address the utility’s unsustainable debt burden.
Eskom is currently unable to service its debt, which stands at more than R400-billion, without ongoing support from the National Treasury, which last year injected R56-billion into the utility.
To address the problem, Meridian proposes that the National Treasury includes concessional JTT debt finance as part of its existing plans for foreign exchange debt issuances – the National Treasury intends raising long-term dollar debt for between 9% and 15% of its requirements.
Using the JTT loan framework outlined in the study, South Africa could take out loan finance (structured as a series of 25-year debt financing tranches) at the market rate, which is currently around 5.5%.
Instead of fixed yearly interest payments, however, the payment profile could be “shaped” to match South Africa’s ability to deliver agreed carbon dioxide savings against a baseline provided by the Integrated Resource Plan of 2019 (IRP2019).
South Africa would then have the right to credit the yearly dollar-denominated value of its carbon savings against its interest payment obligation in each year at a pre-determined dollar-per-ton carbon dioxide price.
Using the $7/t price assumed in the study, Meridian calculates that the savings for South Africa on a $16-billion loan would be R100-billion in net present value terms.
“Structured in this way, the JTT will enable South Africa to, in effect, reduce the interest rate on such a loan from around 5.5% to a highly concessional rate of about 1.5% by adhering to the agreed carbon-mitigation pathway,” Steyn explained, adding that, in some configurations, the transaction could be done partially or entirely in rand.
"Either configuration will not increase the sovereign debt burden, it will actually reduce it."
Such a pathway would enable the country to achieve the highest level of ambition expressed in its Nationally Determined Contribution and put the net zero by 2050 aspiration of the country’s Low Emissions Development Strategy within reach.
Such a pathway would require significantly more ambitious decarbonisation in the electricity supply industry than is currently outlined in the IRP2019 and would require a material scale-up in renewable energy, peaking, storage and grid infrastructure investment.
Steyn estimates that R750-billion would need to be invested in the electricity sector over the coming ten years, which, given Eskom's financial constraints, would materialise only if there were to be a fundamental reorganisation of the market structure, starting with the unbundling of Eskom.
“We are also going to have to recapitalise the balance sheets of the Independent Transmission, System and Market Operator and the distribution entity for this to be financeable.
“The JTT speaks to this process by supporting the sovereign with highly concessional finance to create the fiscal space to enable the National Treasury to commit to the recapitalisation of these entities and by establishing a just transition fund that will essentially help us obtain the buy-in needed from affected communities to implement an accelerated transition.”
Steyn says the JTT would not be enough to fully compensate the National Treasury for the recapitalisation of the unbundled Eskom entities and it would have to "co-invest" to enable this.
The proposal is at an early stage but has already been canvassed at a high level within the South African government and with potential international partners.
Nevertheless, Steyn was convinced that South Africa had a window of opportunity to take advantage of the fact that developed countries were currently open to considering innovative climate-finance proposals from developing countries.
“We have heard independently that the South Africa option is currently at the top of the list of what they are looking at . . . so, it may be hard to believe, but we currently have the world’s attention.
“However, if the process does not show progress from our side, then ultimately they are going to move on.”