MAKING CLIMATE CAPITAL WORK

Unlocking $8.5bn for South Africa’s Just Energy Transition

“Making Climate Capital Work” finds that South Africa will need $250 billion over the next three decades to transform its energy system, around 3% of South Africa’s GDP a year. 

Produced by the Blended Finance Taskforce and Stellenbosch University’s Centre for Sustainability Transitions, the report finds around two thirds of the capital required will be needed in new energy infrastructure – and can be financed by the private sector.  

The remaining third will need to be concessional funding. This can be from public sources like multilateral development banks, development finance institutions and international climate funds to accelerate the build-out of enabling infrastructure like transmission, distribution and flexibility.  

Grant capital from donors and philanthropy will also be critical to support a just transition, ensuring that workers and coal-dependent communities are not left behind and tackling issues of energy security and affordability.

Lord Nicholas Stern, Chair of the Grantham Research Institute at London School of Economics said at the report launch at the World Economic Forum in Davos: “We must remember not to view the energy transition too narrowly as simply a cost, but rather as an investment towards a different growth model: one that sets South Africa on a sustainable development path. We have seen that the old model is no longer viable. If we fail on climate, then we fail on poverty, unemployment, and energy access. We need to understand this as a development narrative and we need to use today’s leadership across G20, G7 and COP to move faster”.

The report lays out a framework and principles for the capital requirement and identifies the type of capital to be deployed – including the $8.5 billion which was committed by a handful of rich countries for South Africa in Glasgow at COP26 in November 2021.

The seven core principles in the report are aimed at the donor countries who pledged the $8.5 billion and other providers of climate finance. They include transparency, better coordination, scaling the use of catalytic instruments and ensuring climate finance is demand-driven and responds to a country’s specific transition and development needs.  Applying the principles set out in the report will ensure that capital deployed is ‘fit-for-purpose’ – matching financing with the country’s needs and priorities.  

“Though it is only a fraction of the capital requirements for the transition, the $8.5 billion commitment could be catalytic if the cost of this capital is lower than sovereign borrowing rates, if it includes ‘de-risking’ instruments like guarantees and if it is made up of a substantial grant component to address the climate justice element of the overall challenge” said Professor Mark Swilling, Director of the Centre for Sustainability Transitions at the report launch.

Andrew Johnstone, CEO of Climate Fund Managers added: “Using existing blended finance models, the $8.5 billion could leverage additional capital to meet $40 billion or more of South Africa’s just energy transition investment needs”.

Getting it right in South Africa is of global importance. Donors are already negotiating the next set of climate finance ‘deals’ in Indonesia, India, Vietnam, and Senegal. As the report emphasises, failing to decarbonise these energy systems would kill any chance we have of meeting the climate goals of the Paris Agreement. Catalytic climate capital can help, but only if it is fit-for-purpose.

Achieving rapid decarbonisation in coal-dependent middle-income countries is critical to meeting global climate targets set under the Paris Agreement. Conflict in Ukraine continues to exacerbate energy security and affordability crises. At the same time, natural disasters like the recent floods in South Africa’s Kwazulu Natal Province are increasing in frequency and intensity. International and emerging economies cannot afford for these climate ‘deals’ to fail. 

champions of making Climate capital work

“The partnership for South Africa’s Just Energy Transition should serve as a proof point of COP26 commitments turning into action. With six months to go before the next COP, we have no time to lose.”

Patrick Dlamini, CEO, Development Bank of Southern Africa

“This is a whole of economy transition. It is a multi-decade journey which will rely on greater collaboration between international and domestic development finance. But done right, this can be the blueprint for how we unlock capital for transitioning economies.”

Amar Bhattacharya, Senior Fellow, Center for Sustainable Development at Brookings Institution

“It is difficult to conceive of a path to 2050 that doesn’t account for people – we must not only talk about the energy transition, but about transitioning the whole economy including sectors and jobs currently linked to the coal value chain.”

Catherine Koffman, Group Executive, Project Preparation, Development Bank of Southern Africa

“We need to take a regional approach to decarbonisation.”

H.E. Iipumbu Shimii, Namibia’s Minister of finance

"The $8.5 bn facility must be fit for purpose and match to the needs of the transition. Conventional streams of funding alone including climate finance are inadequate for a just and equitable transition process. A blended approach is key. South Africa has both a plan and a pipeline. This is not a question of finding quality projects but of how fast climate capital can help unlock them using sustainable funding sources and mechanisms. Based on my experience and PHD research, Transition Finance is an important enabler for the transition journey, especially considering the complexities of the energy transition in South Africa and the perspective of the South generally. Business as usual is therefore not an option."

Priscilla Jezi, Senior Advisor for Eskom JET Funding, sustainable finance specialist, CST Stellenbosch PhD Sustainable Development Candidate

"Justice needs to be at the centre of this energy transition and the finance package allocated to it, though it should not be reduced to a financial conversation. It is also important that we clearly define what is meant by climate justice outcomes in the South African context".

Dr Nthabiseng Mohlakoana, Senior Researcher, Centre for Sustainability Transitions, Stellenbosch University

“This is a complex but extraordinary opportunity, and much of realising that opportunity will rely on trust. Trust that all types of capital (concessional, private and philanthropic) will come together in a complementary way to finance a just transition; trust that the already committed capital will surface and go into parts of the system where private capital cannot; and trust that as we progress, this unlocks a much bigger green growth opportunity – both within and beyond South Africa’s borders. Critical to mobilising the private capital to finance the lion’s share of this transition will be the effective deployment of the $8.5bn pledge from governments – not only to support Eskom and finance accelerated coal closure – but to catalyse the virtuous cycle of development that sends the market signal to say ‘we believe that South Africa is investor-ready’ – now let the transition finance flow.”

Annika Brouwer, Sustainability Specialist, Ninety One

"South Africa’s ability to successfully transition from a coal-based economy depends on institutional innovation. This goes beyond the transactional value of the $8.5 billion.”

Nina Callaghan, Centre for Sustainability Transitions, Stellenbosch University

"The commitment made at COP26 created a sense of optimism in the potential for multilateral negotiations to accelerate energy transitions globally. With less than six months to go until COP27, we need to prove that this optimism was not misplaced by shifting to implementation".

Eliza Macmillan-Scott, lead author, Country Transition Director at the Blended Finance Taskforce