South Africa: The endless coal conundrum and the $8.5bn plan to remove it

For South Africa, 2022 has been an annus horribilis, at least in terms of energy. The country has never experienced such major load shedding (up to eight hours of blackouts a day), due to a fleet of antiquated coal-fired power plants. Eskom, the state-owned electricity company, has been plagued by non-payment, poor governance, predatory behaviour and is burdened with a debt of R392.1bn (€22.1bn).

The national grid, which is 70% dependent on coal, has reached its limits and is no longer able to provide continuous and stable electricity to 60 million South Africans. On 1 October, even with an installed capacity of 50,000 MW, Eskom had only 25,300 MW available – despite using its emergency diesel turbines – not enough to meet the estimated 30,000 MW needed that day. Next year does not bode well, with 49 weeks of blackouts planned, according to South Africa’s Council for Scientific and Industrial Research.

Shifting the paradigm

As the continent’s most industrialised but also most polluting economy (12th largest emitter of greenhouse gases globally), South Africa, which holds the world’s tenth largest coal reserves, must renew its energy infrastructure and, above all, change its paradigm. Even as Natural Resources and Energy Minister Gwede Mantashe explained back in May, that the mineral would continue to supply the country’s electricity production, the South African government’s priority is now to secure the financing of the energy transition.

In 2021 at COP26 in Glasgow, Scotland, a partnership was concluded between South Africa, France, Germany, the UK, the US and the EU. The agreement included $8.5bn over five years to help the country eliminate 1 to 1.5 gigatonnes of CO2 emissions by 2040. However, the money – promised in the form of grants or concessional loans – has struggled to materialise. This is partly the fault of the South African administration, which has been slow to submit a detailed investment plan to donors.

There is no simple, one-size-fits-all formula for achieving the energy transition

In late September, Rudi Dicks, head of the Just Energy Transition Partnership, which could become a model for climate financing in Africa, said: “We are in the process of finalising the plan in question, […] we will unveil it at the next COP. Until then, it has to be approved by the council of ministers once the numerous consultations with the different stakeholders in the energy transition have been concluded.”

That has now happened. Wealthy nations endorsed South Africa’s plan to transition away from coal on Monday 7 November, paving the way for an $8.5bn deal that could serve as a template for other developing countries.

Coal workers

It must be said that the task is not easy. It faces a huge challenge: re-training tens of thousands of coal workers at a time when the unemployment rate reached 33.9% in the second quarter of 2022.

During Mining Indaba, an annual meeting of the African mining sector that was held in Cape Town in May, Michelle Manook, director general of the World Coal Association, said: “In South Africa, thermal power plants employ 113,000 people directly, and indirectly support 340,000 jobs. It is imperative that we consider the impact of the energy transition, especially as over 90% of jobs in renewables are temporary. It is, therefore, necessary to question our certainties regarding fossil fuels and the importance they play in emerging markets.”

She said: “The coal industry needs to do more, 99% of emissions can be reduced with clean technologies, but there is no simple, one-size-fits-all formula for achieving the energy transition.”

On the coal industry side, the urgency of the situation seems to have been well understood for several years now: Anglo American and South32 (formed from the BHP Billiton spin-off in 2015), once major coal producers, have completely cleared their portfolios of all coal assets in the country. For South Africa’s other two coal operators, Exxaro Resources and Seriti, the focus is on diversifying into renewables.

Both companies are now taking a holistic approach and no longer see themselves as just coal producers

As Sandra du Toit, head of energy and natural resources for the African region at consultancy EY, says: “Both companies are now taking a holistic approach and no longer see themselves as just coal producers: they are actively investing in green energy.”

Carbon neutrality 2050

Seriti created ‘Seriti Green’ and signed an agreement last August to take control of Windlab Africa, which has several renewable energy projects at various stages of development, with a capacity of 3.5 GW. For its part, Exxaro already manages two wind farms and is interested in the BTE Renewable platform proposed for sale by the British fund Actis, for $800m. Exxaro and Seriti claim to be aiming for carbon neutrality by 2050.

As for Eskom, described as the world’s most polluting electricity company, it also wants to become ‘green’ and has set itself a ‘zero emission’ target for 2050. To achieve this, it needs $30bn, mainly to close or upgrade its 15 or so power stations, according to its CEO André de Ruyter. Last year, it signed a memorandum of understanding with Exxaro and Seriti, its main coal suppliers, to decarbonise their respective supply chains by installing photovoltaic units and battery energy storage systems at the three companies’ sites, and to re-train their employees.

While waiting for the initial results of the state-owned company’s recovery plan, which includes raising its electricity prices and spinning off its three businesses – generation, transmission (already in place) and distribution – and then recapitalising them, President Cyril Ramaphosa is stepping up initiatives to accelerate renewable energy production. For example, the Renewable Energy Independent Power Producer Procurement Programme (REIPPPP) recently doubled the target capacity of its latest tender, which is currently being evaluated, from 2,600 to 5,200 MW.

The scheme allows independent renewable energy producers, who will be selling electricity to Eskom, to generate beyond the 100MW threshold that was previously set for them. “The REIPPPP is playing a key role in the diversification of South Africa’s energy mix,” says consultant du Toit, “as it has opened the door to financing renewable energy programmes outside of Eskom’s balance sheet. The projects underway nationally represent about 8 GW, of which 6 GW is being driven by the extractive industries”.