By Msizi Khoza – Head of Environmental, Social and Governance (ESG) and Absa Corporate and Investment Banking

Eskom’s efforts to repurpose the Komati coal-fired power plant, which was recently decommissioned after reaching the end of its life, will either build or weaken confidence in South Africa’s ability to implement a truly just transition.

To ensure widespread buy-in from coal-reliant communities for the shift to clean energy, it is crucial that this project succeeds.

The re-purposing of Komati has had some teething issues. At a recent community engagement session, Eskom executives conceded that the project has not gone according to plan.

Indeed the World Bank’s SA Country Climate Development Report estimated that the country’s just transition could cost around R8.5 trillion (about $500 billion in net present value) between 2022 and 2050, of which R2.4 trillion ($140 billion) would be needed before 2030.

Further, the report estimates that for each job eliminated in the shift to a low-carbon economy, two to three jobs could be created between 2022 and 2050. The challenge is that these new jobs will not necessarily emerge in the same timeframe, nor in the same sectors and locations, requiring joint public-private interventions to develop new skills within the workforce and facilitate movements across the labor market.

Eskom has also launched an environmental impact assessment for a solar-plus-batteries facility at Komati. Other identified interventions included the establishment of the Komati Training Facility – in partnership with the Cape Peninsula University of Technology – to train, re-skill and upskill Eskom employees and members of the community. The overall aim is to demonstrate that there is indeed life after coal – and a better one at that.  

This is of monumental significance, considering that seven of Eskom’s 15 coal-fired power plants will reach their end of life this decade. There are, understandably, widespread concerns about what the energy transition will mean for workers and communities in the coal belt. Indeed, the Komati’s socio-economic impact assessment conducted by the Presidential Climate Change Commission estimated that 4,166 jobs were at stake – as well as a R1.7bn reduction to SA’s gross domestic product.

The Komati project, if successful, will be replicated across the region the country. If it works, and proves to commercially viable, there could also be substantial interest from the private sector to allocate funding towards these programmes. Whilst the R9bn World Bank concessional loan – backed by a National Treasury guarantee – has come under some criticism from some quarters because of a lack of grant funding component; it is an important catalyst, and will provide a useful test-case for the efficacy of using “private sector” capital in just transition projects.

Considering the large investment requirements for the transition, all stakeholders will need to play a part. South Africa needs R1.5 trillion in the five years to end-2027 to kickstart the shift to a cleaner economy, according to the country’s official just energy transition investment plan. So large is the requirement, that the Just Energy Transition Investment Plan (JETIP) assumes a R500mn funding gap in its analysis.  

Of the R1.5 trillion, nearly half will go towards the electricity sector – things like power lines, batteries and renewable energy facilities. The rest will go towards the electric vehicle industry, kickstarting a green hydrogen sector, skills development programmes, and support for municipalities in Mpumalanga.

This could reignite South Africa’s economy and make it far more competitive on the global stage, particularly as other nations start imposing carbon border taxes.

Thus, it is little wonder why recent reported pronouncements from the new Minister of Electricity on plans to extend the life of Eskom’s coal fleet – have provoked alarm. At the face it, not only do the comments point to policy incoherence at a strategic macro-economic level, but also potentially significant risk at a fiscal policy framework level.

It will likely be very difficult to attract private sector finance to fund the wholesale refurbishment and life extension of Eskom’s fleet of coal-fired power stations. This is primarily because of two reasons. First, commercial and developmental banks as well as asset managers, are taking a harder stance on fossil fuel financing. And second, at an average age of 45, an Eskom power plant uses old technology which is costly to replace and expensive to maintain. Added to that historical mismanagement, under maintenance and vulnerability to sabotage and criminal conduct, financing these plants becomes unfeasible.    

At Absa, our position on coal financing is guided by our coal financing standards which sets clear red-lines on what we can and cannot finance. Whilst, we have taken a conscious decision to no longer finance new coal-fired generation plants – in light of the imperative to advance positive climate action as well as our net zero ambition – we can finance the refurbishment of coal-fired generation plants for specific purpose of efficiency and reducing carbon emissions using carbon capture, usage and storage technology as part of a defined decarbonisation plan.

It is clear that South Africa’s energy crisis is a binding constraint to economic growth, and that urgent and coordinated action is required. As policy makers weigh their options, understanding and properly assessing the long-term financing risks of any action is crucial. Especially in light of the investment required to finance the just energy transition.