The Just Transition Transaction (JTT) proposal released by Meridian Economics last month to coincide with a visit of climate envoys from Europe, the US and the UK may be both massively ambitious and highly complex, yet it would be wrong to dismiss it.
Unlike Eskom’s simpler plan – which focuses primarily on securing green infrastructure finance as it moves to repower and repurpose decommissioned coal sites and accelerate transition-facilitating grid investment – the JTT is a more all-encompassing sovereign-to- sovereign proposal.
It is premised on creating the fiscal space required to support South Africa’s shift from coal to renewables, while also cushioning affected workers and communities by positioning the country to secure highly concessional finance from rich countries in return for accelerated decarbonisation.
The finance could be deployed by the National Treasury to part- recapitalise the three unbundled Eskom entities of generation, transmission and distribution, enabling them to access capital markets at affordable rates – a proposition that is currently not possible, owing to Eskom’s unsustainable debt position.
Proceeds could also be used to capitalise a dedicated ‘South African Just Transition Fund’, to be used to support affected workers and communities in Mpumalanga.
Recognising that the sovereign is also facing constraints, Meridian does not propose additional debt. Rather, it wants the National Treasury to integrate long-term (25-year) concessional JTT loan tranches as part of ongoing foreign exchange issuances – government intends raising long-term dollar debt for between 9% and 15% of its requirements.
To do so, a predetermined dollar-per-ton rate would be agreed for any carbon dioxide reductions delivered by South Africa ahead of the baseline provided by the Integrated Resource Plan of 2019, or IRP 2019.
South Africa could then move to secure loan finance at the market rate, which is currently around 5.5%. Instead of fixed yearly interest payments, however, the repayment profile could be “shaped” to match South Africa’s ability to deliver agreed carbon dioxide savings against the IRP 2019 baseline. In other words, South Africa could credit the yearly dollar-denominated value of this decarbonisation against its interest payments in each year at the predetermined 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.
This is achieved because, if South Africa adheres to an agreed carbon-mitigation pathway, the interest rate will reduce from around 5.5% to a highly concessional rate of about 1.5%.
Meridian argues that this will not increase the sovereign debt burden but reduce it.
The National Treasury is naturally concerned about the ‘moral hazard’ that will arise if it agrees to recapitalise the Eskom entities, as it would lose the leverage associated with yearly fiscal injections.
However, given the scale of the challenge, the growing appetite for decarbonisation globally and the need to position the Eskom entities to support the massive private generation investment that is required over the coming few decades, the JTT is definitely worth exploring.