Published on 27 Dec 2021

South Africa is trying to get rid of its coal addiction

Coal has a hold on the power sector, but for not much longer

By Otavio Veras


South Africa finds itself in a fix over its favourite fuel. Burning huge quantities of coal while also committing to eliminate this toxic energy source, Africa’s largest polluter seems to be struggling to forge a clear economic and environmental path. The country appears to take seriously its role in the urgent efforts to contain global warming, but its mostly coal-based power sector and the lack of sufficient funding for a transformation to clean, renewable energy presents a challenge to not just itself and Africa but also the world. There is opportunity, too, in this comprehensive transformation. It could open up new avenues of growth and make South Africa a leading example, but the resources and policy-making resilience needed to quit coal and adopt renewables casts a shadow over that spring.

Deep into the pit

Coal has been a cheap and plentiful energy source in South Africa since the beginning of the gold rush in the late nineteenth century. It was used as fuel in the gold and diamond mines. Demand for coal did not grow much until World War II, when South Africa entered a period of rapid industrialisation. Readily available electricity generated by the newly constructed coal-fired power plants drove major economic development.[1]

Coal’s hold on country’s power sector has proven to be stubborn. Despite the growing global movement to phase out coal in thermal plants, South Africa still heavily relies on this pollutant. In fact, the country ranks first in using coal for energy (Figure 1): 86% of all electricity generated here in 2020 was by coal-fueled plants, significantly ahead of the second ranked G20 member, India, at 71 %.[2] The global average for coal use in power last year was 34%.

In 2020, South Africa produced 203 million tonnes (Mt) of coal, worth 133bn rand (US$8.7bn). The sector employs more than 90,000 people directly, and 450,000 indirectly. Globally, it ranks as the seventh largest coal producer and the fourth largest exporter behind Australia, Indonesia, and Russia.[4]

A large share of South Africa’s coal is mined from the Mpumalanga state, in the eastern region. About 60% of the coal production stays home, while the remainder is exported. Coal exports dropped from 7% of the country’s total foreign earnings in 2011 to 4.6% in 2020, whereas the contribution of coal mining to the GDP fell from 2.3% to 1.9%. Still, coal continued to rank around ninth in South Africa’s top 10 export commodities.[5] South Africa had about 150 coal mines in 2020. [6]

Europe used to be the major buyer of South African coal. However, the implementation of policies limiting CO2 emissions in many European countries changed this scenario. Now, nearly half of South Africa’s coal exports go to India, with the remainder split between China and Pakistan.[7] Coal thus represents an essential pillar of the economy, holding the all-important power generation sector.

Green commitments

South Africa losing its European coal buyers was a direct result of a series of regional and country-wise policies implemented in the European Union (EU) since the early 2010s. Due to a series of laws curbing the use of coal and making the financing of coal-fueled power plants more difficult, coal consumption in the EU almost halved between 2015 and 2020 — one of the fastest falls in coal use of any G20 member. Over five years, the EU managed to reduce its total greenhouse gas emissions by about 7% and almost half of Europe’s coal power plants operational in 2010 have either closed or are due to close.[8] [9]

In July 2021, the European Commission announced the European Green Deal, bringing the EU to the forefront of a broad international climate policy. The Deal outlines a plan to cut carbon emissions in the EU by at least 55 % by 2030 and achieve net zero carbon emissions by 2050.[10] As the world commits to the reduction of fossil fuel energy sources, South Africa’s coal dependency poses doubts about how the country will tackle climate change and achieve emissions levels associated with the ideal ceiling of 1.5°C above pre-industrial average global temperature.

South Africa signed the Paris Agreement in April 2016 and subsequently set the goal to reduce its greenhouse gas emissions to reach net zero by 2050.[11] In September 2021, the government published the last revision of the South Africa’s Nationally Determined Contribution, which defines the nation’s future trajectory on climate action. In the document, South Africa set its emission reduction target in a range of 350 - 420 million tonnes of carbon dioxide equivalent (Mt CO2e) by 2030.[12] However, the reduction targets seem insufficient to meet the Paris Agreement’s 1.5°C temperature limit, according to the Climate Action Tracker, a research group which scrutinises climate and energy policies countries have enacted worldwide. If all countries were to follow South Africa’s current approach, warming would likely be between 2.0°C and 3.0°C above pre-industrial average global temperature. [13]

South Africa’s CO2 emissions in 2019 reached 434Mt CO2e. This makes it the fourteenth largest CO2 emitter in the world, and on a similar level as larger countries such as Mexico and Brazil.[14] [15]

Besides CO2 emissions, South Africa also emits record levels of sulphur dioxide (SO2), a harmful gas produced by burning coal in power plants. The country is the second-largest hotspot of SO2 in the world. Within Africa, SO2 emissions from Mpumalanga reach a concentration that overshadows all other SO2 hotspots in the continent. It is the largest hotspot associated with coal power worldwide.[16]

The energy sector is the largest contributor to South Africa’s emissions. In 2019, electricity generated by coal-fueled power plants discharged 231Mt CO2e into the atmosphere, more than half of South Africa’s total emissions in 2019.[17]

Pressure from environmental groups, from the international market and from the population have pushed the government to elaborate the Integrated Resource Plan (IRP, 2010-2030). Published in October 2020, the IRP encompasses South Africa’s long-term plan for electricity generation and infrastructure.

The IRP envisages decommissioning of approximately 10,500MW of coal power plants until 2030, cutting coal’s share in power generation by half to 43%. However, the document states that South Africa should not fully abolish coal use for electricity but, instead, all new coal power projects must be based on high-efficiency, low-emission technologies and other cleaner coal technologies. The plan also aims to increase the contribution of renewables in South Africa’s energy matrix from 7% (2020) to 39%. [18] [19] [20]

Another contentious point in the IRP is the plan to extend operations of South Africa’s nuclear power plant Koeberg Power Station past the end of its design life, which would be in 2024. It also makes a request for additional nuclear power to be installed. Nuclear power is not the ideal solution if the goal is to be completely environmentally friendly. However, it emits considerably less CO2 per kWh generated than coal — 12g compared to 820g.[21] Nuclear power’s problem lies in the nuclear waste generated. Its only disposal option is to be stored for decades until radiation drops to non-hazardous levels.[22]

South Africa implemented a carbon tax in 2019 but allowed tax exemptions of up to 95% until 2022.[23] While the lowest carbon price in the EU in October 2021 was $63 per tonne of CO2, South Africa’s carbon tax is nearly one-eighth lower at $8.[24] [25]

South Africa’s current strategy to abide to the Paris Agreement seems to fall short. The country would likely need to do more to wean itself off coal and this would create a thorny situation for the one single most polluting company in South Africa – the state-owned power utility, Eskom.

A giant concern

Eskom produces about 95% of South Africa’s electricity. This comfortable and powerful position has led to a culture of inefficiency. After years of poor maintenance and lack of investment in new plants, older power stations started to malfunction causing concerns on future reliability and sustainability of South Africa’s electricity supply.

Since 1999, South Africa’s net reserve margin has been steadily declining because of increasing electricity demand and lack of additional generation capacity being commissioned.[26] Reserve margin is the excess capacity over the power capacity needed to meet peak electricity demand. By 2007, the under-invested power sector was not robust enough to support electricity demand and blackouts started occurring.

To avoid total power system failure, Eskom started implementing power shutdowns in selected areas. The operation involved planned rolling blackouts on a rotating schedule throughout the country – a practice commonly referred to as ‘load shedding’. Besides insufficient electricity supply to meet demand, the crisis was worsened by a skill shortage at Eskom and problems with the supply of coal to its coal-fired power plants at the time.

By 2015, load shedding was costing the South African economy an estimated US$130m per day.[27] This type of concentrated power interruption continues to be used until the present day. Eskom calculates that South Africa currently needs between 4,000MW and 6,000MW of additional power generation capacity to eliminate the risk of load-shedding.[28]

In June 2021, in a bid to address the nation’s failing electricity supply, South Africa’s government changed the rules regulating how much electricity can be generated by independent power producers (IPP). Now, private companies can build their own power plants with up to 100MW of generating capacity without requiring a license.[29] Previously, the limit for private plants was 1MW. This change opens the market for competition in the energy sector as companies can plan and achieve their energy needs independently of Eskom’s actions.

Although the new policy provides opportunity for a more competitive energy market, there is the risk that power capacity built by private companies will use coal as fuel, going against climate change goals. According to the Minerals Council South Africa, a lobby group for the industry, mining companies have a pipeline of energy projects totalling about 1,500MW that could be brought on stream in less than three years. It is not certain how much of this amount will be fuelled by coal.

A few months ahead of the 2021 United Nations Climate Change Conference (COP26), Eskom started pitching a US$10bn plan to eliminate most of coal from its portfolio. The strategy sees the company shutting down most of the its coal-fired power plants by 2050 and, at the same time, embracing renewable energy. This self-imposed goal is stricter than what was envisaged in the Integrated Resource Plan (IRP), which proposed decommissioning of about 35,000MW of coal-fired power capacity by 2050.

As of March 2020, Eskom had around 41,000MW of installed coal-fired capacity distributed over 99 coal-fired plants.[30] [31] Currently, Eskom alone produces 213Mt CO2e emissions per year, or about half of South Africa’s CO2e emissions. Eskom also accounts for the most SO2 emissions in the world, according to the Centre for Research on Energy and Clean Air. The company emits more SO2 than the entire power sector of the EU and US, or the US and China, combined.[32]

Eskom indeed needs a plan to drastically reduce emissions starting as soon as possible. However, the costs of a full coal phase-out of 99 power plants and subsequent installation of renewable capacity of equivalent size are likely to be several times the US$10bn Eskom is asking for. In the US, where the renewables industry is already well established, the average cost of construction of an onshore wind farm is US$1,400 per kW of capacity, while construction costs for a solar photovoltaic power plant are at $1,800 per kW.[33] Building 41,000MW of new renewable power generation in the US would cost something between $57b to $74b today. South Africa would have similar costs plus the costs of decommissioning the existing coal-fired plants.

Two steps back

While Eskom unveils ambitious plans to end South Africa’s coal dependency, the two projects at Kusile and Medupi stand as examples of how not to do it.  The two large-scale coal-fired power plants were planned to be built within four years. Thirteen years after construction started, both are still incomplete.  By 2021, only half of the 4,800MW design capacity has been installed, with full operation now planned for 2025.[34] [35]

Kusile is located on top of a coal mine, but a disagreement between the mine owner and Eskom resulted in the cancellation of the coal supply contract.[36] Medupi’s story is more tragic. Commissioned in 2007 with the same design capacity as Kusile’s, the Medupi plant began operations only in August this year. Two weeks after inauguration, a hydrogen leak caused an explosion that shut down the plant.

The South African Parliament estimates that the costs to get both Kusile and Medupi plants running at full capacity will overrun the budget by $20bn. Each power plant will release an estimated 25Mt CO2e per year once full operational.[37] [38] [39]

The stories of Kusile and Medupi are typical cases of sunk-cost fallacy when a bad project is kept alive because too much money was already invested in it. It would certainly have been cheaper to mothball the projects a decade ago and focus on renewable energy. Now, South Africa finds itself locked into two highly polluting new assets at a time when it is also committing to join most of the world in the effort to eliminate coal.

Kicking the can

The drive to decarbonise has also affected the mining companies extracting coal. In this case, getting rid of coal means cutting off a part of the business. The large mining companies with coal assets have been adopting one of the following strategies: create a spin-off company where all coal assets are nested, stop investing in new coal ventures and run down the existing mines until the last coal rock; or sell the coal assets to a smaller company, divesting from the dirty mineral but essentially just pushing the problem forward.

One of the first global energy major to withdraw from coal in South Africa was TotalEnergies of France.[40] In 2015, TotalEnergies exited the coal business by selling its last coal mine to Exxaro, now South Africa’s largest coal miner.

In April 2021, mining firm Anglo American moved its coal operations in South Africa into a new company called Thungela. Although Anglo American will continue supporting Thungela in sales and marketing for three more years, it plans to let it run independently after that.[41]

Anglo American's decision to separate its coal business follows a similar move made by mining and metals company South32, which sold the South Africa Energy Coal (SAEC) to South African group Seriti Resources, in June 2021.[42]

But selling coal assets to another entity is hardly likely to achieve de-carbonisation of the economy. That is because, whoever buys will need to put those assets to work for profits. This goes against the zero-emissions target that South Africa is trying to achieve. An vivid example of that was the selling of three of Exxaro’s non-core coal mines to a small local mining company called Overlooked Colliery, in April this year. Overlooked says it plans to double coal production by next year.[43]

A more practical approach is one which was adopted by Glencore, another large mining company with coal operations in South Africa. Glencore decided to keep operating its coal mines until full depletion and announced it would stop investing in new coal ventures.[44]

China’s coal financing

Buyers of end-of-life coal assets, new investors in coal mining projects and backers of coal-fired powerplants are finding it increasingly difficult to financing their projects. By October this year, 178 globally significant banks, insurers, and other financial institutions have announced their divestment from projects related to at least one fossil fuels type, such as coal, oil, LNG or gas. Several of these companies also pledged to stop financing crude oil extraction from oil sands and the arctic.[45]

For a long time, China has been an indubitable lender for coal-fired power plant projects. Although Xi Jinping has recently vowed that China would stop building new coal-fired power plants abroad, China currently supports 13 % of the total capacity of coal power developments outside of China.

If actions follow words, a full divestment could affect 44 coal power plants earmarked for Chinese state financing totalling $50bn in lost investment. More specifically in Africa, Chinese companies and banks participate in financing at least 12 coal projects, summing 8,300MW of power capacity, or half of all coal projects approved for construction in the continent. [46][47][48][49][50]

However, China is already the largest carbon emitter worldwide, with an estimate 13,600Mt CO2e emissions in 2019.[51] That amounts to a quarter of the world’s CO2e emissions or equivalent to the total annual emissions of the 180 of the world’s lowest-emitting countries combined.[52] China is currently running 1,058 coal plants — more than half the world's capacity.[53] Given China’s share of global CO2e emissions, the only realistic path to meeting climate goals involves China’s cooperation in drastically cutting down coal use for power generation within its borders and financing of the same abroad.

The Green way forward

Ending finance to coal-related projects and creating incentives to invest in renewables are avenues financial institutions have been pursuing along the road towards a net zero future. Green Finance is an umbrella term for financing of sustainable projects with low carbon footprint and geared towards a net zero emissions future. China has positioned itself on the forefront of Green Finance. It raised $63b in green debt locally and offshore in the first nine months of this year. [54] [55]

South Africa took the first step in creating a business environment conducive to Green Finance practices by developing the first green finance taxonomy for the country. The project will adapt international best practice to South Africa’s context and needs. The first draft was published in June.[56]

There is much to be done to rid South Africa of coal. Power generated by burning coal provides electricity to about 40 million people in the country. Decommissioning the whole of South Africa’s polluting power plants means replacing 41GW of coal power capacity with renewables. The costs are in the tens of billions of dollars and the timeframe for a change is narrow.

The challenge is big, but it also has the potential to reshape South Africa’s economy and make the country a reference in the continent and even a model to show the world that a transition from fossil fuels is possible even for a country so addicted to them. South Africa has an enormous unmet potential for renewables. For example, across land and sea, it could fit over 600GW of wind energy and 38GW of photovoltaic solar potential for power generation.[57][58][59]

The country secured a US$8.5b deal at COP26 to help eliminate fossil fuels from its energy matrix and accelerate the use of renewables. The financing is to come from developed countries.[60] It is a good start.


 References

[5] The coal value chain in South Africa (Trade & Industrial Policy Strategies, Jul 2021)

[6] The coal value chain in South Africa (Trade & Industrial Policy Strategies, Jul 2021)

[15] Mexico and Brazil CO2 emissions 2019 (Knoema)

[59] 1GW = 1,000MW

 

 

 

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