Southern Africa’s temperature is likely to increase almost twice as fast as the global average this century. Under scenarios of low global mitigation, its temperature could rise over 4°C and exceed 6°C in parts, which could threaten food security and have serious implications for biodiversity, water scarcity and human health. The WWF forecasts South Africa’s water demand to exceed supply by 17% in 2030. So SA should have a strong interest in reducing its comparatively high emissions. For instance, last month Greenpeace said that SA has the “most polluting coal-fired power stations in the world.”
However, its economy is very energy and coal-intensive. This complicates the shift to low-emission pathways, particularly in a country with significant poverty (19% live on less than US$1.9 a day), income inequality (highest globally) and 28% unemployment. And real GDP growth has disappointed, averaging just 1% the past five years, including a recession in the first half of 2018. The transition must also be carefully managed, to ensure it is ‘just’ for SA’s coal workers and truckers, who are concentrated in one province.
In addition, SA’s state-owned power monopoly, Eskom, is struggling to meet demand. It implemented rolling black outs in January. Moreover, Eskom’s financial position is precarious and it required another bailout from Treasury this month.
So local banks have had to think about their role in funding SA’s power sector. On the one hand, they have done a great job financing SA’s renewable power program, the largest in Africa, with 92 projects and a capacity of 6322MW. Although renewable energy prices have dropped to competitive levels (and construction is considerably faster than power stations), they generally can’t be used for baseload power due to their intermittent supply to the grid. Hence coal is likely to remain an important part of SA’s power longer-term and will still contribute 40% of Eskom’s energy supply after decommissioning older stations.
Banks also have to decide whether or not to fund Eskom itself. The five large banks provided it with R15bn of funding this January, which could be seen as essential to ‘keep SA’s lights on’. In addition, they agreed back in 2015 to fund two approved coal-fired power plants that form part of SA’s long-term energy plan. However, three of SA’s five large banks recently withdrew their support, after adopting policies to no longer fund coal-fired plants.
Recent speculation that government might consider forcing banks to fund various sectors through prescribed lending, irrespective of their policies, is concerning for the sector.