Just Energy Transition in SA �Politics, Economics and Regional Perspective

Kenneth Creamer

NSG 27 June 2022

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Current context

• Load shedding is directly costing the economy billions of Rands per year
• The direct cost of Stage Two Load shedding has been estimated, by Nova Economics, to be R500m a day (R970m a day for Stage 4).
• The indirect cost of South Africa’s electricity shortage, in the form of investments that are not being made and jobs that are not created, is so huge that it is difficult to comprehend. It is one of the reasons that South Africa has been trapped on a low growth path for the past decade and more.
• The programme to restore electricity security in South Africa together with the ongoing energy transition has the potential to stimulate growth and employment over the next 10 to 20 years – or it can lead to economic disaster
• A key objective of the energy transition should be to restore economic growth and employment creation through
• the restoration of reliable and widespread access to competitively priced, low-carbon electricity,
• taking advantage of all potential backward and forward linkages that such an investment programme will entail.
• A failed energy transition will result in ongoing electricity shortages and deepening poverty and inequality as scare electricity is accessible mainly to the well-off and the economy continue to shrink and decay

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4 Major interventions for energy security

1. Government’s Integrated Resources Plan (IRP 2019) puts forward a plan to invest in over 30 000 MW of new capacity over the next 10 years – it recognises that wind and solar power are the least cost options for new generation, but also include nuclear, gas and coal in SA’s future energy mix
2. Government has announced policy is to allow private entities – factories, farms, mines shopping centres, etc – to invest in up to 100MW of new electricity capacity without needing to follow cumbersome licensing procedures
3. Government’s emergency procurement programme knowns as the Risk Mitigation Independent Power Procurement Programme (RMIPPP) although questions have been raised about the costs and design of this programme, and there have been delays due to allegation of corruption
4. Eskom will be restructured into a generation entity, a transmission entity and a distribution entity, so as to recalibrate the public utility’s strategic role (to make this vision practical mechanisms must be found to deal with its crippling debt of around R400bn)

Recent additional proposals for ending load shedding

• Expanding REIPPP Bid Window 6 and launch it in time with stronger incentives for early energy.
• Fix RMIPPP design by allowing PV, wind and storage projects to proceed with their entire project energy and capacity to be made available to Eskom (the current design curtails this)
• Reducing local content requirements on PV modules.
• Implement Eskom’s Just Energy Transition (JET) renewable energy PPP projects.
• Unlock opportunities for municipalities to rapidly procure new capacity.
• Bolster the Eskom grid connection process.
• Improving the operation and effectiveness of key institutions like Nersa and the IPP Office.
• Establishing a dedicated well-resourced power crisis implementation unit, possibly as part of Operation Vulindlela, to drive and monitor the implementation of these measures.

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Changing technology costs and low carbon objective are key drivers of the energy transition

• The reason that wind and solar electricity is coming up so fast in the IRP 2019 is due to the fact that these technologies (along with gas) are the lowest cost and have the shortest lead times
• Low-cost electricity is important for economic competitiveness and to assist in electrification of homes and villages
• Low carbon electricity is important for international competitiveness as there is talk of trade barriers against target intensive production
• New industries can be created from this both upstream (building wind towers and solar panels) and downstream (green hydrogen, green steel and electric vehicles) (but industrial policy must be well-designed and based on business logic rather than imposed in an ill-informed manner)

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Much of SA’s Just Energy Transition centers around Mpumalanga

• Account must be taken of the fact that Mpumalanga is SA’s most important province for the just energy transition
• Mpumalanga’s main advantage is that is at the heart of SA’s electricity grid - this will make it cheaper to connect new solar and wind electricity generation plants to the national grid
• Eskom already has announced plans to:
• Release land in Mpumalanga for wind and solar plants
• To repurpose old coal power stations to include gas, wind and solar
• To build industrial hubs for the manufacture of smart grids (inside movable containers) for electrification of villages
• The coal mining companies will continue to supply coal to Eskom and for export for decades ahead and are intimately linked into the Mpumalanga economy e.g. supplying water to Emalahleni
• All of this new potential and legacy issues will have to be carefully managed by Mpumalanga – perhaps in a Social Compact for growth, jobs and a just energy transition
• Financing is potentially available for Eskom and Mpumalanga through the various mechanisms including the R131bn offer made to SA for its just energy transition at the COP26 meeting late last year

Does technological change lead to job gain or job losses?

• Theoretically – it can be shown that technological changes can result in more employment and higher wages, just as it can be shown that technological change can result in job losses and lower wages. (Move from A to D)
• In practice - the actual outcome is conditional and depends the policy environment and how the supply-side of the economy actually responds to the technological change.

The outcome is contingent

• It is South Africa’s legal and public policy frameworks and the practices of trade union and employer organisations that will all determine outcomes
• Risks to incumbent workers and affected communities will be reduced:
• if public resources are mobilised to re-skill workers,
• if public utilities are able to repurpose ageing plants and provide new employment opportunities, and
• if policy frameworks operate efficiently and new firms are able to rapidly begin deploying the new technologies.
• If such contingencies do not occur, then there is a real risk that losers will outnumber winners and that the net effect of the technology shift will be negative.  

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Progress requires that we be forward looking, not backward looking

• Many workers and firms in the coal sector will continue to have employment as coal production will continue for decades to come, but over time it will be phasing down and some workers and firms will need find new employment pathways as there will certainly be some closures
• To manage this process will require political leadership and a clear forward-looking vision
• The process which will be made easier if new jobs and new firms are opening-up linked to the energy transition and upstream and downstream of the energy transition

Macroeconomic Dimension of Climate Policy

• “Decades of procrastination have turned the expected smooth transition into what it likely to be an abrupt one.”
• The European Systemic Risk Board pointed out in 2016 that due to delays in dealing with the problem, the transition to net zero will be “too late and too sudden”.
• A key instrument will be the pricing of carbon.
• The pricing may be explicit (through taxation) or
• Implicit (through policy or regulation).

Possibility of stranded assets

• In some cases, this pricing shock / negative shock will lead to stranded assets – and an accelerated obsolescence of existing capital stock.
• In other cases, like in SA, many of the coal fired power stations are very old and beyond their economic life, so this is a sweet spot where capital will be replaced using new technologies.
• But in the SA case, some assets may still be stranded – Medupi and Kusile have just been built, and fuel refineries and even automotive technology.

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Consumption v Investment

• A carbon price will trigger new research spending, new infrastructure spending, accelerated renewal of equipment
• The rate of economic growth may not decline, but the composition of growth will be affected – higher investment and lower consumption
• In the short–run, this will impact negatively on consumers (particularly poorer households) – this means that “Just Transition” issues arise in all countries not just SA e.g. in Europe it has been proposed that 25% of resources from emissions/carbon trading be channeled to a “Social Fund”
• In the longer run, consumers will benefit from a better preserved climate

Impact on Public Finances

• In many cases the impact of the energy transition will be negative assistance will require government to allocate fiscal resources to support vulnerable households due to the regressive impact of the carbon tax, as well as those negatively affected by the transition
• In SA, such fiscal support measure will be required, but if the energy transition is able to restore energy security and end load shedding the net effect on the fiscus may be positive (as the energy shortage is impacting negatively on growth and tax revenue)
• In all cases, an argument can be made for using some debt financing to fund the energy transition as the usual intergenerational argument, that future generations will be required to pay off today’s debt, has to be modified, as future generations will benefit directly from interventions to reverse climate change.
• “Future generations may well be better off inheriting a preserved climate and financial debt rather than preserved finances and permanent damage to the environment.”

Public Finances

• Decarbonisation will have distributional consequences – impacting on the consumption of poorer households and most negatively in certain regions e.g. in SA Mpumalanga
• Therefore, the revenue form carbon taxes or carbon permits should be redistributed to those negatively affected – cannot be viewed as a new source of tax to be used for other purposes
• In addition to the paying for the cost of mitigation, via promoting the energy transition, taxes should be used to contribute to the costs of adaption to climate change, which are also likely to be substantial e.g. costs of storm, flood and drought resilience, changing sea levels

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Technological changes

• A tightening of emissions standards and a change in relative prices e.g. new wind and solar being cheaper than new coal or nuclear will unleash a new wave of technological progress
• In SA Industrial policy needs to be alive to the technological changes underway e.g.
• should state support failing oil refineries or lead a shift to electric vehicles?
• What about building excess to renewable energy capacity to build a hydrogen export sector?

Reading Resources

• Shaping a new economic growth model for South Africa - the role of a well-managed energy transition, Published in “A Just Transition to a Low Carbon Future in South Africa” – published by Mapungubwe Institute for Strategic Reflection (Mistra), By Kenneth Creamer (April 2022)
• Policy Brief Climate Policy is Macroeconomic Policy, Published by Peterson Institute for International Economics By Jean Pisani-Ferry (August 2021)
• Resolving The Power Crisis Part A: Insights from 2021 – SA’s Worst Load Shedding Year So Far – Meridian Economics (June 2022)