Climate deal ‘could solve Eskom crisis’

Deal with international funders could save Treasury billions and tackle debt pile, says Meridian

The Treasury could save billions on the country’s interest bill and create the fiscal space to solve Eskom’s debt problem if it brokers a climate finance deal with international funders in exchange for an accelerated retirement of coal-powered power stations, says a new briefing note by think-tank Meridian Economics.

The savings would be used to finance a just transition fund, which would pay for the social impact of decarbonising.

The financing proposal is the first of its kind in the world and has not yet been presented to the government. The Treasury has been reluctant to engage with earlier iterations of climate finance transactions and is lukewarm on a proposal put on the table by Eskom.

The release of the Meridian paper comes as climate envoys from the UK, US, France, Germany and the EU arrive in SA to meet the government and stakeholders to explore the potential for a climate finance transaction that would assist in the world’s ambition to achieve net-zero emissions by 2050. The envoys will meet Eskom to discuss its proposed climate finance transaction, which would see nine power stations shut down by 2035, in exchange for R1.8bn of concessional finance for grid and renewable generation investment. This is a mild acceleration of Eskom’s existing plans for decommissioning.

Meridian MD Grové Steyn, who sits on President Cyril Ramaphosa’s presidential economic advisory committee, said that while their paper supported the Eskom proposal, a transaction that did not involve government at a sovereign level and was done between funders and a utility had its limitations.

In particular, it would not resolve Eskom’s debt crisis, which was a burden on the country and the taxpayer and would leave the entity unable to make the investments that are required for SA to meaningfully transition to cleaner energy.

Eskom has R400bn of debt on its balance sheet but generates enough revenue to service only R200bn. To remain solvent, it has relied on annual cash bailouts from the Treasury for the past two years, which need to continue well into the future. But Eskom debt, which is raised at a cost of at least 250 basis points higher than that raised by

the Treasury, is expensive and is costing the country, says Steyn.

The Meridian just transition transaction is wider in scope than the Eskom one and proposes a much faster acceleration of the retirement of coal, to the point where SA is able to meet the International Energy Association goal of no coal plants by 2040.

Meridian estimates that in order to reach this goal, investments of R500bn would need to be made in the power sector, building between 5GW and 6GW of capacity per annum over the next 10 years. Eskom, which owns the transmission grid, will also need to make at least R200bn of investment. This will have to be raised from capital markets. Without addressing the Eskom debt problem, the energy transition will be unable to happen as the Eskom entities will be unable to raise funding.

Meridian proposes that SA broker a government-to-government deal to create a financial mechanism whereby overseas development finance institutions, which are willing to provide concessional climate finance, lend to the SA Treasury as part of its annual borrowing programme. The finance would be provided at the usual lending rate, say 5.5%, which would be dropped to a highly concessional rate, say 1.5%, in return for carbon savings realised by SA’s decommissioning programme.

In the Meridian example, based on an assumed value of the carbon saving of $7/tonne, Treasury could save R100bn on its interest bill over 10 years. A portion of that could go towards the just transition fund.

While the government has committed in principle to a just transition, in which communities are shielded from the social impact of the transition, it has not yet established a mechanism to pay for it.