Key Takeaways
Rich nations want poorer nations to stop using coal, the world’s largest source of electricity generation and are paying poor nations billions of dollars to switch to renewable energy.
South Africa was one of the countries agreeing to the plan, but now it seeks to use its coal plants a bit longer to ensure electricity for its people. South Africa has large coal reserves domestically.
Indonesia also has an agreement under the plan, but as the largest exporter of coal in the world, it is also struggling with the huge investments needed in developing renewable energy being pressed upon it by the rich countries in the G20.
South Africa is planning to delay the shutdown of its coal-fired power plants and adjust the terms of the $9.3 billion “Just Energy Transition Partnership” agreement. This landmark pact involves some of the world’s wealthiest nations providing loans and grants to South Africa on the condition that it reduces its reliance on coal. In July, South Africa revealed its intention to extend the operational life of three coal plants until 2030, while committing to earlier closures of other facilities to enhance energy security. To meet emission-reduction goals, it also announced plans to operate some plants below capacity.
This change could impact approximately $2.6 billion in funding from multilateral development banks and other sources. This includes an initial $500 million from the Climate Investment Funds’ Accelerating Coal Transition program, which is expected to decide on the disbursement in October.
If the Group of 20 (G20) nations fail to uphold their coal power commitments, it would undermine the program, which has pledged over $40 billion to South Africa, Indonesia, Vietnam, and Senegal. The Just Energy Transition Partnership, which involves South Africa, France, Germany, the United States, the UK, the European Union, Denmark, and the Netherlands, is considered a model for similar agreements with Indonesia, Vietnam, and Senegal. South Africa’s deviation from the agreement’s original terms could also challenge the program’s credibility.
Germany, through its KfW development bank, has agreed to lend South Africa €500 million ($552 million) at below-market rates to aid in its transition from coal-fired electricity. This loan is part of the $8.8 billion in climate financing pledged to South Africa in 2021 under the Just Energy Transition Partnership. It supplements the €600 million ($662 million) already provided by Germany and France at interest rates of 3.0 and 3.6 percent, respectively. The interest rate for the latest loan has not been disclosed.
The loan “is intended to support the South African government in implementing reform measures that contribute to resolving the acute energy crisis in South Africa,” KfW said. It will also contribute to “a socially acceptable and ecologically sustainable restructuring of the South African energy sector and to combating climate change.”
The troubled agreement has faced numerous delays and political disputes within South Africa. Ministers and officials from the ruling party have voiced concerns that the country is being pressured to close its coal-fired power plants, which could threaten energy security and jeopardize jobs. South Africa possesses substantial domestic coal reserves, and state-owned utility Eskom Holdings SOC Ltd. has already decommissioned one coal plant under a separate agreement, citing its unviability.
To replace these coal plants, South Africa might need to invest up to $136 billion in new renewable energy infrastructure over the next twenty years. While delaying the closure of coal plants would not eliminate the need for the new renewable capacity stipulated by the partnership, some South African politicians and labor unions argue that transitioning to renewable energy could lead to job losses and further threaten energy security. Currently, South Africa has 43 gigawatts of coal-fired power, which has suffered from inadequate maintenance and insufficient investment in new capacity. The country is struggling to meet energy demand, with frequent power outages that are impeding economic growth.
Researchers considered three scenarios on how the country’s energy sector may develop until 2040.
- The Economic Transition Scenario: The lowest cost route would see a massive expansion of solar power capacity to 65 gigawatts by 2040, with wind adding 21 gigawatts and battery storage 31 gigawatts. Five gigawatts of gas-fired power would be built and by 2040, 65 percent of energy would come from renewables compared to 8 percent in 2021.
- Coal Extension Scenario: Coal would account for 58 percent of generation in 2030, from more than 80 percent today, and 29 percent in 2040. By that date there would be 79 gigawatts of wind and solar.
- Clean Power Scenario: This scenario would take South Africa closest to its target of reaching net zero carbon emissions by 2050. There would be 13 gigawatts of gas or hydrogen-fired power and 105 gigawatts of wind, solar and batteries by that date.
Indonesia’s Just Energy Transition Partnership
In 2022, a Just Energy Transition Partnership was made with Indonesia—the world’s largest exporter of coal. Through the agreement, Indonesia plans to achieve early peaking of its carbon dioxide emissions by 2030 and climate neutrality of its power sector by 2050, 10 years ahead of its original target, by ramping up its renewable electricity generation to a share of 34 percent by 2030 from 23 percent today. The plan calls for retiring its relatively young coal fleet (with average age of 12 years) prematurely while overcoming overcapacity in its main grid.
Indonesia’s partnership includes a commitment by private-sector financial institutions to deliver 50 percent of the funding pledge. It plans to refinance coal plants with a blended finance package with a lower cost of capital that allows for an early retirement of coal assets. That will be challenging in the current high-interest-rate environment compared to low interest rates that prevailed during the time the majority of the plants were established and the amount of grants required to retire a substantial share of coal assets might not be forthcoming.
As part of the partnership, Indonesia plans to accelerate the deployment of renewables through renewable energy independent power plants. But the business ecosystems for private investments in renewables are still emerging and investors face significant risks. It will be a challenge to attract the scale of private sector investments required, and if it is able to do so, it is likely only at high premiums commensurate with the investment risk. To date, tariffs for renewable energy independent power plants in Indonesia are the highest compared to its Southeast Asian and South Asian peers.
Conclusion
Many Western nations are forming partnerships with countries such as South Africa and Indonesia to expedite their transition to “clean energy,” by first removing their coal plants in favor of politically correct solar and wind technologies. In the case of South Africa, its coal plants are aging and blackouts are frequent with only one coal plant closure so far. But rather than close the next 3 coal plants, it wants to extend their lives to 2030. In contrast, Indonesia’s coal plants are relatively new. Challenges exist in both countries from heated debates on coal closures vs. renewable construction in South Africa to renewable independent power plants and private funding in Indonesia. Whether funding will be forthcoming and at what rates is an open question. Regardless, these two countries will serve as the basis for the success or failure of the program.
