SA’S $8.5bn climate funding talks deadlock
Negotiators are concerned that 80% of the money promised by the UK, US, Germany, France and the EU is in the form of high-interest loans
Negotiations about the terms of the $8.5-billion pledged by European nations at the 26th UN Conference of the Parties (COP26) to help South Africa phase out coal-fired power stations are running into stiff headwinds, with sources close to the talks saying South Africa may be forced to withdraw from them.
The sources said a major problem is that 80% of the proposed finance will be in the form of loans at high interest rates, which will place the country in further debt.
They added part of the reasons for the deadlock include debt already owed to the World Bank for the Covid-19 relief funding received last year, and that the $8.5-billion will lead to more money being borrowed for the transition with interest.
“We have been deliberating the issue of the repayment plan and how rising interest rates will affect the plan in the long run. The issue is that more of the money will come in the form of loan finance, which will be a problem in the future because we are already in debt,” the sources said.
The funding is in the form of 80% loans and 20% grants. South Africa’s climate task team is negotiating for 65% loans and 35% grants.
There is also concern that the $8.5-billion is inadequate, because South Africa’s negotiators estimate that the transition from coal to renewable energy will cost closer to $250-billion.
They said South Africa needs about $6.6-billion a year to shift away from a predominantly coal-fired energy system to renewable energy and to achieve net-zero carbon emissions by 2050.
Daniel Mminele, the head of the Presidential Climate Change Financial Task Team, confirmed that the $8.5-billion will primarily take the form of concessional loans, in addition to grant funding and other instruments such as guarantees.
He added that South Africa’s approach to loans provided through the partnership is that these should not be taxed and must be at rates significantly lower than what could be obtained in the market by the treasury with terms and conditions that are affordable and cognisant of the country’s fiscal context.
Mminele said the flow of the funding will either go directly to parties such as Eskom or be disbursed by the treasury.
Mineral Resources and Energy Minister Gwede Mantashe confirmed that the pledges would be in the form of loans, which he believed would be detrimental to the country.
He again warned: “I still say that we must not be ambivalent about the just energy transition debate. The assumed pendulum swing, or what others call ‘accelerated transition’, intent on replacing one system with another in a flash, is both irrational and dangerous.”
Topping the agenda at the November United Nations climate summit in Egypt, COP27, will be demands from developing nations for more funding from rich countries to adapt to global warming and a financing mechanism to help them cope with natural disasters and extreme weather events.
Mantashe said: “Going into COP27, we need to engage with this reality in a pragmatic manner, and refocus the debate away from the narrow techno-determinist view to one that focuses holistically on what this means for developing African societies.”
The governments of the United Kingdom, United States, Germany, France and the wider European Union formed the Just Energy Transition Partnership last November, which, together with the World Bank-linked Climate Change Investment Fund, pledged the $8.5-billion for projects that lower carbon emissions.
Andreas Peschke, Germany’s ambassador to South Africa, said Germany was negotiating a promotional loan of $800-million at reduced interest rates and an option to extend the interest period that is “part of a wider engagement worth more than R14-billion”.
“Germany’s contribution to the initial $8.5-billion of approximately $800-million is based on the longstanding
cooperation with the South African government, research institutions, provinces, municipalities and the private sector to introduce a renewable energy mix and pave the way for a socially just energy transition,” he said.
Aurélien Lechevallier, France’s ambassador to South Africa, said: “France is working through l’agence Francaise de Developpement, the state development bank, together with its German peer, KFW Bank, to supply a similar loan,” but did not expand on its plans.
He said France will make a public announcement at COP27 in Egypt in November.
The UK said it would offer debt guarantees in the form of concessional loans or grants, after South Africa produced a detailed plan of how it will spend the money.
A member of the UK’S negotiations team said there are major concerns about whether the UK will come to the table, given the collapse in the value of the pound.
Mminele said several additional funders, including other partner countries and global philanthropists, have expressed interest in funding South Africa’s just transition and are in discussions with the negotiations team. He said he could not name the new partners before the COP27.
Uncertainty about the future of the negotiations crept in after a report by the Climate Policy Initiative, an independent nonprofit research group, said that only 14% of total $100-billion in pledges of climate finance had been made to African countries.
Valli Moosa, deputy chairperson and effective head of South Africa’s Presidential Climate Commission, said: “A report such as this allows us to measure whether the commitments of developed countries to provide finance to developing countries, is indeed being delivered.”
The report added that developed nations were not honouring their pledges because of economic pressures caused by Russia’s war in Ukraine and the Covid-19 pandemic.
“Countries in Central and East Africa face the largest climate investment gaps as a percentage of GDP: 26% and 23% on average, respectively. North African countries face the lowest climate investment gaps (3% of GDP)”, the report noted.
In 2009, developed countries committed to $100-billion of climate financing for poorer nations every year. They have fallen significantly short of that target.
Energy economics expert David Fig warned that more debt would be detrimental for South Africa because it already owes more than $10-billion to the World Bank.
“Our economy is not very robust and as a result we will feel the pinch when we have to pay back the money. More loans means future generations are going to have to pay them back,” he said.
Eskom’s chief executive, André de Ruyter, announced at the oil and gas conference held in early September in the Western Cape that the utility has been negotiating with the World Bank to lend it $476-million to enable it to phase down its coal-fired plant at Komati in Mpumalanga.
“The money will be used for decommissioning certain parts of the 1000-megawatt Komati power plant that is currently despatches 125MW of power when needed, as Eskom battles its worst period of power cuts,” he said.
Reuters reported on 28 September that the World Bank will provide Eskom with concessional loans from a climate facility and grant programme.
‘The ... money will come in the form of loan finance, which will be a problem in the future because we are already in debt’