By: Rhian Capostagno - African Head of Energy Transformation at Partners in Performance

SA faces a tough spot as it balances diminishing demand for coal with local need to keep producing and the situation jeopardises jobs and security of supply, warns global firm Partners in Performance

South Africa faces a particularly precarious energy security juncture, as external pressures to reduce fossil fuel demand clash with the critical role of coal exports in the nation's GDP. To get through this energy supply, and potential job security and environmental management crisis, both the public and private sectors will need to manage the energy transition much more carefully, transparently and urgently than initially anticipated, global experts warn.

While coal is still critical for providing stable base load energy to South Africa, its profitability is diminishing owing to the downturn in global coal prices and rising unit costs, says Rhian Capostagno, African Head of Energy Transformation at global business optimisation firm Partners in Performance (PIP).

”Coal has long been a major export product to countries such as Taiwan, Japan, Vietnam and India, contributing billions to the GDP. This trend is expected to diminish in the medium term as green alternatives become more prevalent and a large portion of the remaining coal demand shifts towards high-calorific coal, essential for powering the construction of HELE (High Efficiency, Low Emission) plants. These plants require coal with elevated calorific values to operate efficiently. Encouragingly, as Capostagno notes, our country is well-positioned to meet this demand due to our capacity to supply high-calorific coal.”

As the world decarbonises, coal will move towards a buyers’ market and they will seek high Quality in both Calorific value and ESG. Mounting Environmental, Social and Governance (ESG) pressures are also making it harder for coal mines to remain competitive, but coal also faces even more urgent challenges in terms of meeting the demands of shareholders who remained invested despite of ESG pressures, she says. Many ESG-focused fund managers have pledged to cease investing in coal by 2030. Consequently, there is no investment in coal prospecting or the development of new coal mines, and existing mines are being mothballed or prematurely closed. Shareholders who remained invested in this increasingly marginalised commodity, drawn by its previously high profitability and demand, are no longer seeing the returns they anticipated.

“The coal value chain in South Africa faces a multitude of significant challenges, including depressed coal prices, escalating unit costs driven by exchange rates, the impact of foreign exchange on import expenses and rising logistics costs. The most pressing issue, however, is the state of the rail network. Coal must be transported by road or rail to local power plants, industrial sites, or ports for export. Currently, South Africa's dysfunctional rail system, coupled with geopolitical influences on fuel costs and a declining global demand for coal, is severely undermining the profitability and appeal of the coal industry.”

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“While the recently proposed privatisation of certain elements of the South African rail network is a positive step, challenges remain. The railway system is still unreliable, inadequate, and plagued by organised crime. The alternative – costly transportation via smaller trucks on long, hazardous roads using increasingly expensive fossil fuels – makes profitability challenging and negatively impacts our national carbon footprint.”

“Another pivotal issue of great concern is that, due to these challenges, coal mines are moving towards unprofitability, potentially leading to their closure much earlier than planned. This could have a devastating impact on the S of ESG – thousands of workers jobs could be at risk, as the renewable energy sector and other industries can’t reskill and absorb them fast enough. It is crucial to leverage the current educational expertise to facilitate the transition of workers from the coal industry into other adjacent sectors. Additionally, mines might close before they are adequately prepared to rehabilitate the land and its water sources or convert them into biomass cultivation sites (such as moringa, napier grass, sugarcane). Many people don’t realise what a vital role South Africa’s mines play in cleaning the country’s water and supplying it affordably to local communities. In many regions the mines play a critical role in water purification and supply, and when they close, the municipalities won’t necessarily be in the financial or technical position to take back this responsibility.”

It is for these reasons that Capostagno is advising PIP’s mining clients to accelerate their ESG efforts and innovate more rapidly to minimise negative impacts on vulnerable mining communities and environmental areas. We are privileged to work with some of the industry's top innovators and an extensive portfolio of clients within the coal value chain, including all local coal mining majors. Our services encompass a wide range of areas, including diversification and marketing strategies, risk mitigation planning and development of executable decarbonisation roadmaps.

A non-sustainable coal industry with unplanned shutdowns due to poor profitability also poses significant risks to South Africa’s energy supply. While the renewable energy sector is growing steadily, it requires a significant ramp up in investments in generation capacity, storage and network stabilisation control infrastructure  to be able to manage a high renewable penetration grid and replace the supply traditionally provided by coal.

It is therefore critical for both the private and public sectors in South Africa to critically analyse their energy transition roadmaps leading up to key dates such as 2030, 2040 and 2050, and to consider pulling both strategic decarbonisation and operational levers sooner than initially anticipated. “You have to look at the art of the possible. For instance, how do we accelerate investments in storage and network stabilisation, where can we start introducing bioenergy alternatives or green hydrogen to decarbonise the economy more securely, where can we expedite the reskilling of coal workers, where can we offset carbon emissions, where can we mitigate opex and capex impacts, and what are the best uses of investment capital within certain budgets and timelines? It’s all about narrowing down the problems and solutions and ensuring that we arrive at sustainable strategies through ruthless prioritisation.”

South Africa’s coal industry is projected to have a remaining runway of about eight to twelve years before it undergoes an inevitable decline due to global pressures favouring green energy and the resultant impact on demand. “The bottom line is that those still mining and selling coal need to act now to ensure they tick both the high-quality coal and responsible business boxes. Imperative is the integration of thinking of full value chain thinking between, for example, downstream logistics emissions and the carbon footprint of our coal in our customers operations. Even if they cannot fully control downstream activities in the value chain, partnering with business and government entities is crucial to address the challenges facing the country. We are seeing early shoots in the formation of multifaceted partnerships, and the development of a strategic roadmaps so all buyers of South African coal can be clear on our decarbonisation imperative.”