Africa’s first integrated green hydrogen plant

Egypt Green, which is owned, built, and operated by Fertiglobe, Scatec ASA, Orascom Construction and The Sovereign Fund of Egypt, marks an important milestone in the development of a green hydrogen ecosystem in Egypt and the broader African region.

Sharm El Sheikh, Egypt, 8 November 2022

  • Today marks the start of the commissioning of the first phase of the green hydrogen plant in Ain Sokhna, Egypt, during an event at COP27 attended by Egyptian President, Abdel Fattah El-Sisi and Norwegian Prime Minister, Jonas Gahr Støre.
  • The facility is the first integrated green hydrogen plant in Africa, and when fully developed will consist of 100 MW of electrolysers, powered by 260 MW of solar and wind.
  • The facility will deliver up to approximately 15,000 tons of green hydrogen as feedstock for the production of up to 90 000 tons of green ammonia per year in Fertiglobe’s existing ammonia plants.
  • The consortium is in the process of finalising engineering and technology choices for the full-scale plant and the partners aim to reach a Final Investment Decision (FID) on the facility in 2023.
  • Currently testing the first and largest PEM electrolyser in Africa for the first phase of the project.

The launch of the hydrogen facility comes as world leaders gather for the United Nations COP 27 Climate Change Conference in Sharm El Sheikh, Egypt, where they seek to accelerate global climate action through emissions reduction. Unless we make sharp reductions in greenhouse gas emissions in the coming decades, global warming will exceed the Paris agreement’s goal of limiting temperature rise to 1.5 degrees Celsius.

In order to secure affordable, accessible and sustainable energy security for future generations an accelerated shift to renewable energy and lower carbon-intensity fuels is required. Green hydrogen, which is produced from water using renewable energy sources, has the potential to play a significant role in decarbonizing hard to abate sectors, such as heavy industries and global shipping.

Ain Sokhna has a strategic position close to the Suez Canal Economic Zone with the possibility of using renewable electricity to develop an industrial hub near global shipping lanes.

Fertiglobe has a strong global network through its shareholders OCI N.V. and ADNOC and is an early mover in hydrogen and low-carbon ammonia. The hydrogen tie-ins for up to 100 MW of electrolysis have already been installed at Fertiglobe’s two existing ammonia plants in Ain Sokhna.

The project is being built by Orascom Construction using Egyptian engineers and state of the art technology.

Terje Pilskog, CEO of co-owner and leading renewable power producer Scatec said: “Today marks a key milestone for Scatec, but more importantly, it represents a breakthrough for green hydrogen production in a strategically situated region. It is an honour to work together with Egyptian authorities and our industrial partners on this project and commence the commissioning of the green hydrogen project in Egypt during the UN world leader’s climate summit. We see a massive green hydrogen demand driven by strong policy support globally, and Africa is perfectly positioned to take advantage of its low-cost renewables and strategic position.”

His Excellency Dr Sultan Al Jaber, Minister of Industry and Advanced Technology, UAE Special Envoy for Climate Change and chairman of co-owner Fertiglobe, said: “The commissioning of ‘Egypt Green’ marks another important step in the journey to unlock the potential of hydrogen and its carrier fuels.  As the world meets in Sharm el Sheikh for COP 27, this project represents a practical response to the need to meet rising energy demand with minimum emissions. The first integrated green hydrogen plant in Africa, delivered in record time, shows what can be achieved when we collaborate around a shared ambition. Fertiglobe will continue to leverage its knowledge and experience in hydrogen and ammonia, to make low and zero carbon fuels more available, as the world seeks a realistic pathway to a decarbonised energy system.”

Nassef Sawiris, Executive Chair of OCI N.V. and Executive Vice Chair of co-owner Fertiglobe said: We are pleased with the launch of the first tangible project of its kind and the first integrated green hydrogen plant in Africa. It is a true milestone that puts Egypt and Africa firmly on the map as one of the best places in the world to develop a green hydrogen hub, thanks to available land, abundant renewable energy sources, the significant pool of skilled labour, and our location on global crossroads. We are pleased to have been able to show leadership in developing a green ammonia production platform in such a short time frame, something that has not been achieved elsewhere. We could not have done this without the support of in particular the Egyptian government or without the collaboration with our industrial partners. We look forward to seeing the positive impact this project can have for the world.”

Ahmed El-Hoshy, CEO of OCI N.V. and co-owner Fertiglobe said: “This project is a significant further step towards our global decarbonisation strategy and an exciting milestone for Fertiglobe, as it marks the first of many stages in the execution on our hydrogen roadmap. Adding the electrolyzer to our state-of-the-art ammonia facilities and infrastructure in Egypt, we are fully leveraging our existing ammonia production and global distribution infrastructure, including OCI’s Port of Rotterdam ammonia import terminal. We aim to meet the increasing demand for large-scale low-carbon hydrogen and ammonia, as the need for more sustainable energy sources becomes more urgent. Together with our partners in the project we are acting on this need and bringing the hydrogen future to life.”

Osama Bishai, CEO of co-owner Orascom Construction said: “The project brings together world class partners that collectively set an ambitious goal to form a new hydrogen hub out of Egypt, thus creating a new sustainable industry. So many variables went into making this phase come to life. This project would not have been possible without the support of the Egyptian government and several ministries, who by working closely with the consortium, was able to provide immense support that was integral to the swift delivery of the first phase of ‘Egypt Green’. I am also proud of our teams on the ground who worked tirelessly to commission the first phase of this project, consequently, making this launch possible. This state-of-the-art project, which implements the latest hydrogen technology, is built by Egyptian engineers on Egyptian soil. We are delighted to embark on a journey that plays an important role in the sustainable industrial development of Egypt.”

Ayman Soliman, CEO of The Sovereign Fund of Egypt said: “This project is a showcase of transitioning from pledges to implementation, delivering on Egypt’s promise to the world to create a regional hub for green energy and transforming the Suez Canal into a green corridor. We are setting a precedent with our foreign and local partners from the private sector by establishing the first integrated green hydrogen plant in Africa and Emerging Markets that caters to the growing demand for clean energy. It is a moment of pride that we will build on for future generations. Our pipeline of projects in the green energy field capitalises on Egypt’s ideal location with its unique renewables profile and proximity to markets with renewables deficits to realize our shared goal of emissions reduction.”

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ACWA Power and IDC set to explore green hydrogen projects in SA

ACWA Power, a leading Saudi developer, investor, and operator of power generation, water desalination and green hydrogen plants worldwide, and the Industrial Development Corporation of South Africa (IDC), a government-owned Development Finance Institution, have signed an extensive memorandum of understanding (MoU) exploring a partnership in the development of green hydrogen and its derivatives in the Republic of South Africa.

This partnership coincides with the state visit of the South African president Cyril Ramaphosa to the Kingdom of Saudi Arabia. The agreement was digitally signed by Paddy Padmanathan, Vice Chairman and Chief Executive Officer of ACWA Power; Clive Turton, Chief Investment Officer of ACWA Power; Rian Coetzee, Head of Industry Planning and Project Development at IDC; and Russell Wallace, Manager of Legal Services at IDC, with agreement copies exchanged at a gathering attended by executive dignitaries.

This is the first agreement of its kind between ACWA Power and the IDC, but the parties have previously collaborated for equity in a renewable energy plant in South Africa. The potential value of this MoU is estimated at US$10-billion. ACWA Power will function as the developer for green hydrogen and its derivatives in South Africa, with the IDC acting as co-developer and equity partner in the proposed projects.

Paddy Padmanathan, Chief Executive Officer and Vice Chairman of ACWA Power
Paddy Padmanathan, Chief Executive Officer and Vice Chairman of ACWA

With tangible renewable energy development commitments in South Africa already contributing to the country’s clean energy goals, the signing of the MOU with the IDC for the development of green hydrogen is a significant step towards further investing in diversifying the country’s energy mix and accelerating its green economy. “

 Paddy Padmanathan, Chief Executive Officer and Vice Chairman of ACWA

As a company that is driving energy transition, ACWA Power is proud to work closely with the IDC with whom we share a robust working history, and today we are delighted to take our collaboration further. I am confident that our expertise in developing mega-scale green hydrogen projects in other geographies will enable us to successfully create a new avenue of sustainable energy generation, one that will pave the path to further progress,” he added.

South Africa has a net-zero target for 2050 and plans to become a significant producer and exporter of green hydrogen and its derivatives. Accordingly, the government has mandated the IDC to lead the development and commercialisation of the green hydrogen economy. The IDC, in partnership with the Green Hydrogen Panel, is in the process of finalising the South African Green Hydrogen Commercialisation Strategy (GHCS). 

The IDC recognises the substantial value and benefits that the green hydrogen economy will bring to South Africa. The green hydrogen economy presents new economic, skills, employment and community opportunities for the country. We are pleased to explore potential partnership opportunities with ACWA Power, given its pedigree and expertise in this industry.”

Joanne Bate, Chief Operating Officer

The IDC is currently supporting the development of several catalytic projects in the green hydrogen value chain including green hydrogen and ammonia production, mobility projects and decarbonisation of hard-to-abate sectors using green hydrogen.  IDC is also exploring bespoke funding solutions with co-funders for green hydrogen projects and supporting the required regulatory and policy changes to foster a conducive environment for the development of this new green hydrogen industry for South Africa.

Given ACWA Power’s experience in the South African renewable energy industry and in green hydrogen projects abroad, the company can play a meaningful role in supporting the objectives of the GHCS. Both parties will carry out a feasibility study, potentially cooperate, jointly develop and co-invest in projects in the green hydrogen value chain in South Africa. This MOU with ACWA Power will support the implementation of the GHCS and will contribute towards the country’s green hydrogen production targets.

ACWA Power has had a footprint in South Africa since 2016, and currently has two solar energy plants—Bokpoort and Redstone—in the country. Both projects utilise concentrated solar power technology.

With key projects in Saudi Arabia and Oman, the company is ramping up green hydrogen projects at scale in different locations globally.

The NEOM Green Hydrogen Company, a joint venture with ACWA Power, NEOM and Air Products, is developing the world’s largest green hydrogen project in Saudi Arabia. When commissioned in 2026, it will produce up to 650 tonnes per day of green hydrogen. By that date, the project will mitigate the impact of 3 million tonnes of carbon dioxide per year.

In addition, ACWA Power, as part of a joint venture, also recently signed a Joint Development Agreement towards a multi-billion-dollar investment in a world-scale green hydrogen-based ammonia production facility powered by renewable energy in Oman; as well as two Memoranda of Understanding in South Korea with different industrial partners.  

Read more on hydrogen in Green Economy Journal

Turn to Could hydrogen be the future of SA’s economic success? on page 14

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Banking on climate change: the rise of climate finance related disputes

Following ESG trends, South Africa’s banking sector is gearing up to provide sustainable financing. This shift into a new era of clean energy will give rise to complex ESG related disputes, and stakeholders should consider including an arbitration clause in underlying contracts to mitigate their risks.

By Kirsten Wolmarans, Partner & Brittany Leroni, Associate at Webber Wentzel

South Africa’s economy and energy system is one of the most coal-dependent in the world.  South Africa’s ratification of the Paris Agreement has, however, set in motion a rapid energy transformation, with the goal of decarbonising the South African economy by 2050.  In the energy sector, South Africa estimates that the process of shifting to low-carbon technologies and the implementation of adaptation requirements to reduce greenhouse emissions will require roughly USD300 billion.

Sustainability-linked financing offers a significant opportunity for banks. Corporate clients, also looking to comply with environmental, social and governance (ESG) objectives, would rather partner with banks that have implemented ESG initiatives in their own processes and systems.  South Africa’s top banks are opting to use the United Nations’ Sustainable Development Goals as a guide to inform their approach to business and are setting targets to link to the Paris Agreement, the local regulatory framework, the South African Financial Sector Code, and the King Code on Corporate Governance for South Africa.  

However, doing the right thing, and becoming green, is not easy. In the absence of clear direction and regulation on how to best operate to achieve these goals, disputes will become increasingly common. This is especially the case where there is a gap between voluntary company commitments and practice. History has shown that this creates fertile ground for disputes.

Tracking global patterns, ESG-related disputes are arising in the context of multiple fields of law, across jurisdictions, and involving issues such as investment in renewable energy initiatives, asset divestment, breaches of representations or warranties relating to climate-change commitments, or where the receiving country is unable to meet environmental covenants which may be put in place under agreements. These disputes will be complex, and often the subject matter will constitute largely unexplored terrain. The South African banking sector will not be immune.

While the spotlight is on ESG, the reputational fall-out and financial repercussions of ESG-related disputes are likely to be significant for the party on the receiving end. Despite this reality, a risk that is often overlooked by parties to a contract is the dispute resolution mechanism. When the implementation of contracts goes awry, disputes arise, and how such disputes are resolved gives rise to a new set of risks.

An important risk mitigation factor that all banks should insist upon when entering to contracts is an agreement to arbitrate. By resorting to arbitration to resolve disputes, not only will the parties benefit from confidentiality, and the inherent flexibility to choose arbitrators with adequate knowledge of the relevant issues, but they will also be able to tailor the procedure to accommodate the dispute. This is especially the case when banks are implicated in disputes with an ‘international’ element, such as a dispute between banks (as investors) and host-states; or where the parties have their places of business in different states; or where the subject matter of the dispute is outside the state where the parties have their places of business. In these instances, the banks will be best equipped to resolve their disputes through international arbitration. Not only does this forum offer a neutral playing field in which to resolve the dispute, but the result is global recognition and enforcement of awards through the New York Convention. 

To illustrate the advantages of electing arbitration, a local population may be directly impacted by an investment in a new gas pipeline to be constructed through a forest, impacting natural resources for the residents in the area. Entering a submission to arbitrate agreement will avoid court proceedings involving numerous parties, spanning several jurisdictions, with the potential of conflicting court orders.  Instead, the arbitration proceedings will provide certainty, finality, and an enforceable award across states.

In summary, the legal and commercial pressures on banks and their corporate clients in moving towards a net zero target by 2050 will create additional risks and challenges. Not only will contractual relationships need to be overhauled, but so will internal practices and policies. To mitigate the risks of when a dispute arises stemming from ESG obligations, serious consideration should always be given to including an arbitration clause in the underlying contract.

READ MORE ON ESG AND CLIMATE CHANGE IN GREEN ECONOMY JOURNAL 53

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Africa resilient: life sciences innovation for achieving health and food security

Remarks by the Minister of Higher Education, Science And Innovation, Dr Blade Nzimande, on the occasion of the 5th Bio Africa Convention 2022 held at the Durban International Convention Centre (ICC)- South Africa

As some of you may be aware, both the 2020 and 2021 Bio Africa Conventions were virtual as a result of the Covid-19 Pandemic. Despite this, the 2021 Convention attracted a staggering one thousand three hundred and eight (1308) attendees from at least thirty-nine (39) countries. There is therefore in a way underscores the importance of this 5th Convention held under the theme: “Africa Resilient, Life Sciences innovation for achieving Health and food security”

The organisers of this year’s Convention could not have chosen a more apt theme, intended to inspire Africa’s policy makers, scientists and social actors to steer our continent away from being only a knowledge consuming region and turning it into a self-reliant, knowledge generating and innovating one. 

As a country, the objectives of this Convention perfectly align with our 2019 White Paper on Science, Technology and Innovation and our Science, Technology and Innovation Decadal Plan 2021-2031, whose key objectives include accelerating the implementation of the pan-African STI agenda and focusing on inclusivity, transformation, SMME support and job creation amongst others.

The Decadal Plan is premised on advancing a whole- of-government approach and ultimately a whole-of- society approach to innovation in South Africa. We have begun with our work to establish a standing ministerial-level Science Technology and Innovation (STI) committee, involving key ministries, chaired by myself, and our President, Cyril Ramaphosa will be hosting an annual STI Plenary which will include business, government, academia and civil society.

I must indicate that our goal is to ensure a ‘just transition’ in both our traditional economic sectors, as well as to lay the foundation for the emergence of new economic sectors, including in the spheres of bio-diversity and the digital economy.

To come close to achieving the overarching objective of this Convention, as articulated in this conference theme, there are several things that I believe we must focus on. 

As we collectively responded to the COVID-19 pandemic, Africa also must deal with the wider set of crises, which are global in nature, but have a specific manifestation and impact in our continent; that of social inequality, of climate change, of technological disruption, and linked to all the above: a crisis of the global capitalist system. 

In fact, we cannot speak of a sustainable, let alone equal society, unless and until we fundamentally change the nature of the global economic and social order.

Importance of Bio-economy

Firstly, this is amongst the reason for African policy makers, scientists and other social actors need to urgently understand and embrace the importance of the bio-economy for Africa’s socio-economic development and sustainability.

Across the world, the concept of a bio-economy is being embraced as a sustainable model that brings together all commercial activity surrounding the use of renewable biological resources such as crops, forests, animals and micro-organisms, agricultural waste and residual materials.

This is being done with the view to address challenges related to food security, health, biodiversity and environmental protection, energy and industrial processes. It is therefore no exaggeration to state that the very survival of humanity is dependent on how we manage the earth’s resources.

The second important challenge relates to inequality on our continent. According to OXFAM: “Africa is the second most unequal continent in the world, and home to seven of the most unequal countries. The richest 0.0001% own 40% of the wealth of the entire continent. Africa’s three richest billionaire men have more wealth than the bottom 50% of the population of Africa, approximately 650 million people.”

As policy makers, scientists and social actors, we must take well-thought, collaborative and decisive action on how to turn Africa into an innovative and self-reliant continent, as enjoined by the theme of this Convention.

To our advantage, we have an incredibly rich biodiversity, and a relatively large proportion of arable land. All this puts us in a favourable position to translate our biodiversity into a viable, competitive and sustainable bio economy.  

We are therefore duty bound to use our biodiversity and arable land to take Africa and her people out of the trap of grinding and debilitating poverty. An important matter that I would urge that you reflect upon is that of the absolute necessity to identify and mobilise sources to fund research development and innovation in Africa in line with the priorities and challenges facing our continent. We cannot be able to advance most of our research, science, technology and innovation goals unless we have our own resources to fund research and be less dependent on donor-driven funding.

African countries embrace of bio-economy

The third issue we must focus on is to encourage and support more African countries to not just embrace the importance of the bio-economy, but for them to proactively build the necessary policy, institutional and scientific capacity to build a viable bio economy in Africa. And this is linked to the fundamental task of a research funding regime that is based on advancing the African agenda.

This task is particularly urgent if we consider the observations by the United Nations on the impact of the Covid-19 pandemic on food security. 

The United Nations (UN) states that “In the aftermath of the COVID-19 pandemic, world hunger increased substantially – estimates from the State of Food Security and Nutrition around the World (SOFI) reveal that as many as 161 million people fell into hunger between 2019 and 2020, bringing the world´s total to 811 million people facing food insufficiency. In other words, about one in 10 people in the world went to bed without enough nutrition in the first year of the COVID-19 pandemic.”

The UN further observes that “Africa has been particularly vulnerable: about 21% of people on the continent suffered from hunger in 2020, a total of 282 million people. Between 2019 and 2020, in the aftermath of the pandemic, 46 million people became hungry in Africa. No other region on the world presents a higher share of its population suffering from food insecurity.”

In this respect, whilst we recognize the work that is done by South Africa, as a continent must commend the work that is being done by other African countries such as Namibia, Uganda, Ghana and Kenya that have implemented several policy and institutional measures to promote the sustainable management and use of their biodiversity. 

Those African countries that are yet to implement these measures, can learn from the experiences of these countries. Some of the things to learn include the following-

  • The importance of identifying gateway sectors through which to initiate the development of transition to a bio-economy;
  • Strengthening links to R&D and markets for new bio-products and bio-solutions;
  • Developing demand for bio-products and bio-solutions; 
  • Regulating sustainability incentives and managing trade-offs; and 
  • Setting up independent national advisory boards to inform and guide the development of bio-economies.
     

Impact of COVID-19 on livelihoods

The fourth issue relates to the impact of the Covid-19 pandemic on livelihoods. 

A 2021 study by Kenya’s Daystar University reveals that “The negative effect of Covid-19 to the world economy is estimated to be $12 trillion by 2021. During the same period, over 400 million full-time jobs were lost globally by the second quarter of 2020. In Africa, the pandemic led to a negative growth of-5.1% by 2020 thereby plunging the continent into the worst recession in 25 years.”

The study further states that “For small and medium enterprises (SMEs) which employs between 70% and 90% of the population the effect of the COVID-19 Pandemic has been even more severe with 87% of business owners uncertain the future of their businesses. The biggest challenges to business survival were associated inadequate financing support, uncertainty, lack of government support and numerous measures meant to curb COVID-19 such as lockdowns”.

In terms of lessons learnt from Covid-19, my Department of Science and Innovation (DSI) coordinated a package of responses across the NSI to address South Africa’s readiness for the impact of COVID-19.  The response has been centred on four pillars namely; 1. analytics and modelling, 2. research and innovation, 3. manufacturing and 4. international cooperation initiatives in support of the global response to the pandemic.

We reallocated substantial financial resources to fund COVID-19 projects, including epidemiological studies and genomic surveillance that placed South African scientists on the international map, working with other countries to find solutions to the pandemic. 

The KwaZulu-Natal Research Innovation and Sequencing Platform (KRISP) identified the coronavirus beta variant. 

The KRISP team’s genome sequencing demonstrated South Africa’s leadership in this area on a world stage and contributed to the understanding of emerging variants and their effect on the efficacy of COVID-19 vaccines. 

This work informed government decision-making on which vaccines to procure, with genomic surveillance becoming a critical component of a targeted response to the epidemic throughout the country. KRISP’s research has been used to inform the planning and responses of other countries as well. 

As South Africa we also developed our own diagnostics and reagents needed to diagnose COVID-19 cases.  The awarding of the Global mRNA technology transfer hub to South Africa is also acknowledgement of the abilities of the South African scientists.

My Department of Science and Innovation’s (DSI) African Natural Medicines Platform worked closely with the WHO-Regional Office for Africa, through its Advisory and Expect Committee on African Medicines visited South Africa to monitor the country’s capability in terms of research, innovation, manufacturing and clinical utilisation of African Natural Medicines.  

Supported by the Africa Centres for Disease Control and Prevention (CDC), the African Union Commission and the European and Developing Countries Clinical Trials Partnership’s, the WHO-AFRO affirmed that South Africa is best placed to provide continental leadership in research and manufacturing of these health products, including the role of traditional health practitioner. 

Food security

With regards to food security resilience, some of the lessons we learnt in relation to agriculture were in nutrition security, supply chains and digital agriculture system.  

Collaborative work among government departments, the business sector and active involvement of communities and SMMEs demonstrated the importance of inclusivity for a resilient food and nutrition sector.  

South Africa is promoting the inclusion of all forms of food products, especially under-utilised indigenous crops which are readily available across the continent.  

It must be remembered that the AU declared this 2022 the “Year of Nutrition” 

There has been increased efforts and commitment to prioritise and invest in nutrition at the continental level. Therefore, upholding the cultural heritage and practices of Africans includes the consumption of staple and indigenous African foods given their nutritional value and potential to contribute towards food security and health of the African population. 

Through its Indigenous Knowledge-Based Nutraceutical Platform and the Agricultural Biotechnology Innovation Programme, the DSI supported various communities and SMMEs with technologies that added value to their crops and products across provinces.  

Some of our flagship programmes are in soya, maize, moringa, Bambara nuts, amadumbe, cowpea, numerous green leafy vegetables and health infusions.  

In order for Africa to be resilient, especially in cases of disasters and pandemics, it is absolutely essential to deliberately foster an interface of indigenous knowledge and modernisation through digitization.  

Working with the Department of Agriculture, Land Reform and Rural Development (DALRRD), we co-launched a National Biosecurity Research Hub later this year.  

This hub will prioritize both the generation of digital scientific information hubs coupled with development of digitization platforms, to support disease management, surveillance and monitoring for both domestic and international trade.  

These models are being shared with other African countries and will contribute a great deal to continental resilience against natural, pandemics and wars.

Informed by all this, it is extremely important that this Convention comes up with concrete policy actions that must be undertaken by African governments to enable small businesses, especially in the Indigenous Knowledge System sector (IKS), to recover from the devastating impact of the Covid 19 pandemic. 

This will give them an opportunity to increase their output and gain easy access to local and international markets.

AU Agenda 2063

In conclusion, South Africa views this 5th Convention also as part of the response to the African Union’s (AU) AGENDA 2063, which is the continent’s strategic framework that aims to deliver on its goal for inclusive and sustainable development. 

It is therefore my sincere hope that this Convention, will make a significant contribution to the development of sustainable solutions that African governments can adopt, with the view to addressing some of the main problems facing our continent such as food insecurity, climate change and health innovation, and continue to promote the importance of co-operation between African governments and other sectors of society.

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Western Cape Government commits to resolving the country’s electricity crisis

23 Aug 2022

Joint media release Cabinet Meets Business: A focus on Energy

To once again demonstrate that the Western Cape Government (WCG) is solidly committed to resolving the country’s electricity crisis, we called a Cabinet Meets Business gathering with the sole purpose of focusing on energy.

It comes at a critical time as we all must double down with our combined efforts to end load shedding once and for all and bring stability to power production to grow the economy. To achieve this, we need to build strong partnerships; and that is where business leaders and role players in the energy sector are crucial. “The Provincial Government cannot do this alone. Eskom too cannot by itself address this challenge,” said Western Cape Premier Alan Winde.

The Western Cape has a well-established business environment, complete with the required skills ecosystem and the steadfast intent to address energy production challenges, not just for the province but the entire country. Through strong public-private partnerships, large-scale energy generation is possible to build our energy resilience.

This gathering was an opportunity for the Western Cape Provincial Cabinet to meet face-to-face with various stakeholders, to further cement collaboration and create more partnerships.

When load shedding escalated several weeks ago, the WCG, under the stewardship of Finance and Economic Opportunities Minister Mireille Wenger, held an energy summit and invited a wide array of experts, including Eskom, to further map our way out of the darkness. Bold solutions were put on the table. Various proposals from bringing more Independent Power Producers into the fold to looking at other exciting interventions like green hydrogen were robustly and thoroughly discussed. Today’s gathering adds even more voices to the ongoing discussion around fixing our power system.

Innovation is one of the WCG’s core values. The Premier said: “We already have a fertile innovation culture in our Government and province. We must use occasions such as this to build on this.”

The Premier added: “It is the responsibility of not just those who attended Cabinet Meets Business to come up with solutions, but every single citizen should also do what they can to help, even if it means contributing through the reduction of energy usage.”

He added this crisis requires a whole-of-society approach as it impacts the economy and all our lives.

Eskom Group Executive Andre de Ruyter agreed. He was candid in his presentation in saying: “It will not be an easy journey to end load shedding. It is not easy to solve due to decisions made in the past,” but he added: “In the crisis we currently find ourselves in lie the seeds of opportunity.”

Taking questions from attendees, some of whom enquired about the move to renewable energy, de Ruyter assured the gathering: “Energy transition is inevitable, but it must be a just transition.” He added: “Eskom is investing in reskilling the utility’s employees working in the coal management chain with accredited training to find meaningful jobs beyond coal.”

He offered another message of hope: “From this crisis, we can create massive opportunities. Imagine the jobs we can save and create if we invest in solving the crisis now?” he asked.

Minister Wenger said: “Cabinet Meets Business is borne out of a belief in the power of partnerships. Therefore, we brought together local and provincial government, the private sector and Eskom to share our plans to address this urgent issue, which is a major impediment to our country’s success.”

Cape Town Mayor Geordin Hill-Lewis said: “This year is already the worst year of load shedding on record, and we are only eight months in. The constant threat of more blackouts hangs over the heads of all South Africans. I am grateful here in Cape Town we are often able to spare residents and businesses up to two levels of load shedding.” He added: “Putting an end to our economic malaise requires urgent action on energy and the City has embarked on an ambitious plan to end load shedding over time by making Cape Town less reliant on Eskom.

“I am encouraged that we as the City of Cape Town have capable partners in the Provincial Government and other Western Cape municipalities who not only share our vision of an energy secure future for the province but who are also committed to working within their own spheres of competence to ensure the key ingredients for energy security are put in place as soon as possible.”

“It must be emphasised,” the Premier stressed, “We stand with Eskom in solving this crisis. Under the Group Chief Executive and his team, I believe the power utility is doing everything it can to resolve the country’s energy woes, and as the WCG and City, we will help wherever we can.

“There is always opportunity in crisis, and the call was put out today for businesses to invest in innovative energy generation solutions, and to look at innovation as a whole in this space – and to do so with haste. Energy generation has become an economic opportunity that businesses should look to embrace.”

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Lessons learned from advising on the world’s largest industrial green hydrogen facility

Global law firm Baker McKenzie recently advised Advanced Clean Energy Storage along with Mitsubishi Power Americas and Magnum Development in the United States Department of Energy’s USD504.4-million loan guaranty to develop the world’s largest industrial green hydrogen facility in central Utah in the United States.

Closed on June 3, 2022, the loan highlights the Biden Administration and the Department of Energy’s (DOE) commitment toward supporting the clean hydrogen sector. It also helps create a viable market for hydrogen and will make it scalable in the western United States and electrical grid, creating the fundamental infrastructure necessary to deploy this zero-carbon energy storage source.

“Supporting ACES Delta to reach financial closing on the DOE loan is part of the unique opportunity to be involved in such a transformational energy transition project in the United States and globally,” said James P. O’Brien, chair of Baker McKenzie’s Global Projects Practice. “To see ACES Delta transform its vision of hydrogen energy storage to the launch of this project is really exciting.”

Christopher Jones, head of Baker McKenzie’s Hydrogen Group, added: “With a growing number of hydrogen projects taking place across the globe, being a part of such a flagship project enhances our legal insights and industry expertise for our team to continue to excel in this space. It demonstrates our continued global leadership in the clean energy technology sector for the past 20 plus years.”

Key issues and lessons learned

Referencing Baker McKenzie’s report – Shaping Tomorrow’s Global Hydrogen Market, James P. O’Brien and Christopher Jones list some of the lessons learned and key issues to consider when considering an investment in hydrogen.

Hydrogen is now playing a crucial role in making an essential and fundamental change to our energy systems. It constitutes a key part of the solution to climate change.

Despite regulatory challenges and legal complexity, there are numerous, important opportunities for businesses.

Closing the gap between cost and revenue in hydrogen projects is possible by making smart use of government support in the form of public funding and public-private partnerships.

Many governments are already supporting the growth of hydrogen using innovation funds, mandatory targets and public-private partnerships, and this support is already showing results. ­

Many countries have adopted (or have committed to do so) hydrogen-specific strategies.

One of the key challenges is decarbonizing hydrogen production. This will entail using (i) renewable (and nuclear) electricity to produce green hydrogen and (ii) natural gas combined with CO₂ storage or conversion into solid carbon to produce blue hydrogen.

Both of these production methods for decarbonized hydrogen are expected to play a major role in meeting the world’s future energy needs. Nonetheless, blue hydrogen could have the advantage in the near term.

Without government intervention through emission trading schemes, energy taxes or similar obligations on grey hydrogen users today, and on those that will use hydrogen when obliged to decarbonize, there will be no significant market for green and blue hydrogen in the short to medium term. 

Since using carbon capture, utilisation and storage (CCUS) is already the cheapest low-carbon hydrogen production method, government support could quickly make this into reality. In this way, the rise in demand for hydrogen could very soon be met using CCUS-based hydrogen production.

Since hydrogen markets will grow exponentially in the mid- and long-term, companies that invest today in hydrogen will be able to capture this growth, become technology leaders and shape the future of the business.

However, there are still multiple barriers to the widespread development of decarbonized hydrogen and each investment will face challenges in the form of policy, regulatory, economic and financial barriers.

The speed of deployment of hydrogen in coming years is expected to vary between sectors and countries. These variations come partly from the different level of maturity or adoption of the technology required for decarbonized hydrogen development, either globally or in specific regions. 

Investors should assess (i) the effect of existing regulatory barriers on any new investment or project, (ii) the likelihood of such barrier disappearing for a particular market and within a particular timeframe, and of course (iii) the availability of public support to de-risk the investment when needed.

To best use available government support, companies should therefore understand (i) which countries provide the most and best focused funding or investment support and (ii) what types of projects governments are likely to support.

Companies contemplating a specific investment in their own region and field of expertise should carry out a thorough analysis of funding and financing opportunities. However, understanding regional and sectoral funding trends as well as expert recommendations can already provide some insight as to government-funding and financing patterns.

Africa developments

Kieran Whyte, Partner and Head of Projects at Baker McKenzie in Johannesburg, and Lamyaa Gadelhak, Partner and Co-Head of the Banking & Projects Practice Group, Helmy, Hamza & Partners, Baker McKenzie Cairo, outline some recent developments in the hydrogen sector in Africa.

In February 2022, the South African Hydrogen Society Roadmap (HSRM) was published by the South African Department of Science and Innovation, marking an important milestone in the launch of South Africa’s hydrogen economy.  The HSRM was developed by the Department of Science and Innovation, Hydrogen South Africa (HySA), and government and industry stakeholders. It focuses on national ambitions, sector prioritization, the overarching policy framework and the macro-economic impact of the hydrogen economy throughout South Africa. 

The Roadmap is aligned with the country’s Integrated Resource Plan, the Integrated Energy Plan and the Renewable Energy Policy, all of which acknowledge the important role of hydrogen in South Africa’s just energy transition, which aims for net zero emissions by 2050.

The HSRM outlines a number of targets, including the creation of an export market for green hydrogen and ammonia, the implementation of a Centre of Excellence in manufacturing for hydrogen products, the development of domestic hydrogen supply chains, the production of 500 kilotons of green hydrogen by 2030, and a long term target of 15 GW power generation based on hydrogen by 2040. Further targets include a one megawatt small-scale electrolysis facility piloted by 2025, and the deployment of 10 GW electrolysers in the Northern Cape and 1.7 GW electrolysers in the Hydrogen Valley by 2030.

The government of Egypt has expressly recognized the production, storage and export of green hydrogen and green ammonia among the areas falling within the state’s economic development strategy.

It has also passed a decree that would allow green hydrogen and green ammonia projects to benefit from a wide range of state support under the country’s existing Investment Law No. 72 of 2017, including tax incentives.

This is a key development for Egypt’s hydrogen economy. We expect that it will stimulate private investment and the development of new green hydrogen and ammonia projects in the country.

In May 2022 Egypt, Kenya, Morocco, Mauritania, Namibia and South Africa launched the Africa Green Hydrogen Alliance, with the intention to foster collaboration and ensure the continent is able to lead in the development of green hydrogen for energy transition.

Empowering African countries to participate fully in the green hydrogen market has tremendous potential to improve access to cost-effective power for all African citizens. African economies will also reap the benefits of the rapidly increasing global demand for sustainable, decarbonised power. However, infrastructure gaps, and policy, regulatory and funding barriers must be urgently addressed through government support and incentives.

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Is Africa being left behind in the push for a net zero world?

The UK shooting past its record high daytime temperature in July was a powerful reminder that the effects of climate change aren’t something that will be felt in the distant future, but which are with us here and now. It also happens that there have been a lot of those powerful reminders in 2022.

By Brondwyn Douglas, Senior ESG Officer at Spear Capital

Whether it’s the wildfires raging across Europe, the floods that ravaged parts of Australia and South Africa earlier this year, or the megadrought that’s enveloped southwestern North America, the signs are now too glaring to ignore. 

Acknowledging the problem and addressing it, however, are two different things. Much has been made of the net-zero commitments made by some of the world’s biggest governments, as well as the fact that the combined assets companies committed to achieving net-zero emissions had risen to US$130 trillion by the end of 2021. 

But in the quest for a net-zero world, is Africa being left behind? Is it getting the support it needs to not only develop sustainably but also live with the effects of the climate catastrophe? 

Addressing significant vulnerabilities 

Africa is, after all, disproportionately affected by climate change, with rising global temperatures already triggering food insecurity, poverty, and displacement across the continent. There will be other impacts too, including the destruction of heritage sites and a rise in conflict.

In many ways, the continent is suffering from the actions of others, particularly in the developed world. Africa itself is only responsible for less than three percent of global CO2 emissions. Despite that and despite the fact that large parts of the continent still have a lot of ground to make up when it comes to growth and development, it is under massive pressure to reduce its own emissions. 

In fact, as an article in Foreign Policy points out, some rich-world nations have gone so far as to leverage development aid and threaten to cut off finance to push African countries into adopting climate change mitigation strategies. At a surface level, it’s possible to see why the rich world is putting this kind of pressure on the continent. Having seen the rapid economic rise of China, India, and other large emerging markets result in matching increases in carbon emissions, it fears that the same will happen in Africa. That too makes a modicum of sense. While population growth in other parts of the world is plateauing or even shrinking, it’s still accelerating across the continent. In fact, 2020 research showed that the world’s 15 fastest growing cities were all in Africa.   

Ignoring Africa’s realities    

The trouble is both of those views ignore a couple of realities. The first is that the continent is starting from such a low energy usage base (with the notable exception of South Africa, which has the world’s most polluting power company in the shape of Eskom) that, even on the continent’s accelerated growth path, its contribution to global emissions is likely to remain lower than that of the developed world for some time to come. 

The second is that Africa has a long history of adopting new innovations without needing all the preceding stages other countries experienced. The story of how the continent “leapfrogged” fixed line telephony with mobile phones is well-trodden, as is its embrace of mobile money. Less well-known is how it’s used those innovations to embrace things like off-grid solar power.

As countries across the developed world try to figure out how to change their power systems from one-way, centralised grids to smart, two-way ones, many parts of Africa have a chance to take such an approach from the beginning. 

Investing on the ground  

Africa, in other words, needs different ways of thinking to guarantee a greener future. To our mind, that looks like investment in the companies that are already making a difference on the ground, fostering development, and advancing sustainability. 

These companies understand the realities of the markets they operate in and are in a much better position to push Africa towards sustainable development and even net-zero than paternalistic handouts and punitive threats.

While limiting the effects of the climate catastrophe is and should be a global effort, it should not be informed by misconceptions that Africa represents some kind of existential climate threat. In fact, with the right investments in the right places, it might just offer models that the rest of the world can follow. 

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Creecy firm in rejecting Karpowership plan

Environment minister Barbara Creecy has stood firm on her legal mandate to defend the country’s environment, declaring that support from Gwede Mantashe’s energy department for Turkish powerships cannot override the Constitution and environmental laws.

By Tony Carnie Follow

Forestry, Fisheries and Environment Minister Barbara Creecy has noted that, “The alleviation of the current energy crisis may be vital, but this does not mean that it must be achieved by this specific (Karpowership) project. Nor does it follow that there is now a licence to ignore all relevant environmental considerations.”

And yet, Creecy has given the controversial Turkish Karpowership group a third bite at a multibillion-rand, 20-year energy contract cherry — by granting the company another chance to “rectify” the manifest failures in its flawed and incomplete environmental impact assessment (EIA) process. 

Significantly, the EIA was preceded by a cynical and possibly fraudulent attempt to circumvent the EIA process entirely by exploiting “emergency approval” loopholes under Section 30A of the National Environment Management Act at the height of the Covid-19 crisis.

In emphatic written decisions dated 1 August, Creecy dismissed all three appeals by the Istanbul-based Karpowership group against the rejection by her department of their EIA proposals.

The company hopes to generate 1 220MW of electricity by docking several gas-burning power and allied supply ships in the Richards Bay, Ngqura and Saldanha harbours.

‘Special weighting’

Creecy said Karpowership’s consultants, economic allies and legal representatives had tried to brush aside significant environmental concerns and persuade her that energy and socioeconomic considerations should be given a special weighting in the EIA approval process — and that there should also have been a special intergovernmental consultation process for this Strategic Integrated Project.

Creecy was not impressed by these arguments, declaring that in terms of Section 24 of the Constitution, she had the imperative to protect the environment for current and future generations and to ensure that all development was ecologically sustainable.

In response to criticism from several business lobbies, including the National African Federated Chamber of Commerce, Black Entrepreneurs Stand Together and the Eastern Cape Maritime Business Chamber, Creecy acknowledged that the government’s 2019 energy path did not exclude gas-fired power plants.

However, she said: “Karpowership is not the only entity that can deliver this result, and refusing their application for authorisation simply means that from the perspective of environmental governance, the proposed activities cannot be supported.

“Therefore, I do not agree with the argument that because this specific application for environmental authorisation was refused, therefore a general national policy was contradicted.”

Her rulings, running to roughly 100 pages each for the three harbour proposals, make it clear that both she and her department remain concerned about several aspects of the Karpowership plan.

These included the climate change impacts of emitting millions of tonnes of greenhouse gases and significant risks to fisheries, birds and marine organisms from underwater noise or hot water expulsions from the powerships’ turbochargers, exhaust stacks and cooling water circuits.

Why the lifeline?

While many will applaud Creecy and her officials for seemingly holding the line against actual or perceived political pressure by those with vested interests in the gas project, questions now arise about why has she thrown another last-minute lifeline to Karpowership to correct its failures and attempted shortcuts.

According to the appeal ruling, Creecy has the legal discretion to fashion a “just and equitable remedy” to address any shortfalls or irregularities in the EIA process.

“In my consideration of all the relevant information before me, I find that there are various gaps in information and procedural defects in relation to the public participation process that led to the rejections of the EA application. The gaps in information and procedural defects are material and fatal and cannot be cured during the current appeal process.”   

In exercising her discretion on the matter, she said various interests that might be affected by her proposed remedy should be weighed.

“This should at least be guided by the objective to address the wrong occasioned by the infringement; deter future violations; make an order which can be complied with; and which is fair to all those who might be affected by the relief.”

Therefore, she had decided to remit the matter to her department so that “various gaps and defects” in the public procedure process could be addressed during the “reconsideration and re-adjudication” of the environmental approval process.

Time limits

The proviso is that this reconsideration process should comply with the time frames stipulated in the 2014 EIA Regulations.

Neither her department nor Karpowership has responded to our questions on the duration of these new time limits. But according to senior Durban environmental attorney Jeremy Ridl, the Turks may now get another 106 days, or 156 days, to submit a revised EIA report, depending on the processes followed. Thereafter, Creecy’s department would have another 107 days to make a final decision.

Ridl said that while these time frames provided for a minimum of 30 days for public participation, the public would be at a considerable disadvantage while preparing or evaluating expert opinions.

The fact that Creecy had granted Karpowership another bite at the EIA cherry suggested to him that she was inclined to grant final authorisation at a later stage if the company could address the identified defects.

It was also possible, however, that Creecy was simply being cautious in following due legal process and giving Karpowership one final opportunity to repair defects.


Yet, because the ANC government and energy minister Mantashe appeared to have “bent over backwards” to support the Karpowership proposal, Ridl questioned whether the voice of a lone environment minister could sway opinions at Cabinet level.

Nevertheless, Creecy’s appeal ruling gave short shrift to Karpowership’s assertions that she could overlook “micro” environmental impacts in degraded “brownfields harbours”.

“The gaps, limitations and inconsistencies provided in the socioeconomic assessment report had the effect of excluding critical environmental concerns from the EIA, that Karpowership attempts to rationalise based on its own notion of development and improvement of the South African economy.”

Breeding and nursery areas

Far from being heavily degraded industrial harbours, Creecy noted that the 57km2 Saldanha Bay/Langebaan Lagoon was the largest body of wave-sheltered water on the South African coast and provided a critical nursery area for both seabirds and fish such as harders, silverside, stumpnose, goby and blacktail.

Algoa Bay and its islands also provided food, shelter and breeding areas for several sea birds — including the largest breeding ground of the endangered African penguin (about 35% of the global and 42% of the South African population) and the world’s largest population of Cape gannets.

Similarly, Richards Bay harbour and its adjoining mud flats and nature reserve provided a critical nursery area for numerous fish species — not just for the benefit of anglers in the harbour, but the KZN region as a whole.

Underwater noise

Whereas Karpowership had proposed that further studies about underwater noise be deferred until after the powerships had been given the go-ahead, Creecy said this would defeat the purpose of an EIA — namely to identify potential negative impacts before they occurred.

This was especially critical for a power technology that had never been used in South Africa, she said, emphasising the need for a more rigorous, detailed and cautious assessment of underwater noise impacts.

According to submissions made to Creecy by several environmental NGOs, the final EIA report did not contain an adequate assessment of underwater noise impacts generated by powerships in the three harbours for up to 24 hours a day for two decades.

Creecy appears to acknowledge these concerns in her ruling, noting that noise impacts had not been assessed adequately. One of the technical studies noted that marine animals could suffer extensive damage to their hearing systems, haemorrhaging, damage to internal organs and disruption to communication and feeding.

These specialist reports indicated that concerns around human-induced noise in the sea were valid. She also concurred with senior officials in her department’s Oceans and Coasts branch, who voiced concern that there was still “considerable uncertainty” around the potential noise impacts from powerships. 

One of the specialist reports also suggested that additional noise “could be disastrous for the ecology” if it exceeded ecological thresholds or could not be mitigated (by silencing equipment and other methods).

Sea heating

Another issue of concern was the additional heat in the sea around powerships due to cooling water emissions that could potentially affect the food chain, from tiny plankton to small fish and much larger marine animals.

She remarked that specialist studies and the final EIA report were “not always entirely convincing” in dismissing concerns around heated seawater discharges, which could result in temperature increases of up to 15°C in the vicinity of the powerships.

In her ruling, Creecy was at pains to emphasise her belief that the fundamental environmental rights in Section 24 of the Constitution were “distinctly anthropocentric in nature”.

“The ultimate aim of these fundamental rights is not the conservation or protection of the environment for the sake of the environment itself, but the aim therof is the responsible utilisation of natural resources for satisfying the needs of humans.

“In this context, I also have the constitutional and legal obligation not to allow a preventable state of affairs in an environment that may potentially or actually harm the health or well-being, in a wide sense, of another person or persons. The ‘need and desirability’ of a proposed project should also be considered in this context.”

Karpowership response

We asked Karpowership whether it was considering taking Creecy’s ruling on judicial review, and if not, what time window was left for the “remittal and reconsideration process” by the Department of Fisheries, Forestry and Environment.

The company did not respond to our questions, but issued this response:

Karpowership operates in 25 countries across the globe. We take great pride in our track record of environmental stewardship, and we have always placed top priority in our ability to comply with international environmental legislation. Our desire to serve as a good corporate citizen to the people of South Africa and comply with South Africa’s environmental laws is a driving force of this project.

“We respect Minister Creecy’s exercise of her powers, but we are very disappointed with the outlook, especially given the time it took to make a decision. While we disagree with the findings on Friday’s report, we agree with the independent arbiter that there are no fatal flaws in the Karpowership SA EIA. 

“We appreciate the DFFE’s remission of our EIA to the competent authority, which allows us the opportunity to address perceived gaps, and we hope that the process will be much timelier than it has been to date. 

“We all have the same mission — to rapidly provide power to the South African people and to implement solutions that ensure environmental protections and ecologically sustainable development. In order meet these goals, we need a collaborative partner in the government who follows timetables laid out in South African law.

“Floating Gas to Power is embraced in Europe, the United States and Asia because the projects take less than one year to build and deliver clean, affordable and reliable power without the destruction of ecosystems on thousands of hectares of land. 

“South Africa needs dispatchable power now and, with the support and collaboration of the government, we are confident that we can address all EIA concerns and deploy projects that will power 800,000 homes and end one full stage of load shedding.

“We remain committed to being part of South Africa’s energy security solution and are ready to deploy our Powerships immediately.” 

Article courtesy of The Daily Maverick

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What a new world order might mean for the global economy

Russia’s invasion of Ukraine has opened fault lines between nations which will affect trade relations and investment for years to come.

Keith Wade – Chief Economist & Strategist at Schroders

The war in Ukraine is already having a significant effect on inflation and activity in the world economy as commodity prices have soared and supply chains have been disrupted. Inflation in the G7 was running at more than 7% in April, its highest for 40 years, and will reach double digits in some countries such as the UK later this year. The conflict also marks a watershed moment as it challenges established assumptions about the balance of geopolitical power in the world economy. This has implications for future alliances, trade and investment.

In our view, the consequences of Russia’s invasion of Ukraine will reverberate for many years and will act as a further disruptive force on the world economy. In this note, we look at how the war could lead to a realignment of global powers, and a more regionalised world economy with implications for global supply chains and inflation.

Beyond Russia’s invasion of Ukraine: a new world order?

We start by looking at how the war may alter geo-politics and then ask how future trade and investment flows will be affected through changes to supply chains.

Although clearly important in energy markets Russia accounts for only a small part (2%) of global trade. It plays a relatively minor role in international investment and global supply chains or value chains (GVCs). At face value the impact of the war and sanctions would not seem to be a threat to overall globalisation.

However, the invasion of Ukraine has demonstrated the power of sanctions. It’s also opened up a divide between those nations who oppose the war and support Ukraine, and others who are with Russia. There is also a large group of countries which are taking a more neutral position and may at some point be pressurised into choosing sides.

In effect, the war has opened up a fault line between nations and will influence behaviour and investment going forward. Companies are now more aware of the political risks and costs associated with trade and foreign direct investment (FDI).

One of the first lessons from the Ukraine conflict has been the power of sanctions to isolate an economy from the global financial system. Russia thought it was well prepared, but found its war chest of $600-billion foreign exchange reserves ineffective. Access to them has been stymied in the face of sanctions such as exclusion from the SWIFT system, which is integral to making international payments.

Alongside the outcry from public opinion, such sanctions have meant Western companies have had to write off significant investment in Russia since the war began. Estimates from the United Nations Conference on Trade and Development suggest that two-thirds of the Russian FDI stock is held by companies domiciled in developed market (DM) countries opposed to the war. The top 10 holdings by multi-national companies amount to $105-billion, much of which has been written off.

Ignoring political risks can be expensive, but identifying them in advance is never straightforward. One approach is to look at how countries vote in international forums. For example, the recent United Nations (UN) vote to expel Russia from the Human Rights Council provides some clues as to where future alignments may lie.

The necessary two-thirds majority to expel Russia was achieved, with strong backing from the West, particularly the 30 NATO countries. However, there were some notable abstentions such as India, Brazil, South Africa, Indonesia, Mexico, Saudi Arabia and other nations from the Middle East. Meanwhile, Russia, China, Cuba, North Korea, Iran, Syria and Vietnam were among the 24 countries who voted against.

China and the risks of broader sanctions

Clearly, China stands out amongst the dissenters. The world’s second largest economy, it accounted for 18% of global merchandise exports [1] in 2021, the highest for a single country according to the World Trade Organization (WTO).  China has also attracted considerable FDI as companies seek direct exposure to the Chinese market. In 2021 it was the second largest recipient and the fourth largest source of FDI.

United by a mistrust of Western institutions and particularly NATO, Russia and China have formed an alliance which has “no limits”, indicating scope for broad-based co-operation. From an economic perspective, the two are complementary as Russia seeks more sophisticated technology and China is very commodity-dependent. It may also be possible to trade the Chinese yuan against the Russian ruble outside of SWIFT and free of Western sanctions.

So far China has been careful in what it says about the Ukraine crisis and at this stage there has been no acceleration in trade with Russia. As the friendship develops, however, there is a risk that support for, or even a lack of opposition to Russia will be interpreted in a hostile way and ultimately attract sanctions from the West.

One potential flash-point is in energy markets, where sales of gas and oil have been critical in funding the Russian military. As a consequence of sanctions there is a significant discount on Russian oil, currently $25/barrel (see chart 1, below) which offers a substantial saving on energy costs and a competitive advantage for those economies who are prepared to buy it.

Some of that discount is eroded by refining and insurance costs, but with the EU and US set to embargo Russian oil, the saving on Urals crude is expected to persist. The discount has certainly already proved sufficiently attractive for India. It has become a significant importer of Russian oil, increasing its share of the country’s exports to 18% from 1% before the conflict in Ukraine. India and China now account for about half of Russia’s marine bound oil exports.

Consequently, we can expect tensions to build and it will not be long before we hear a call for tariffs or other measures on those supporting Russia through trade. Such action could be seen as being in the same vein as the EU plan to impose carbon tariffs on imported goods which are heavily reliant on burning fossil fuels. Russian aggression rather than climate change would be the target, but the measures would be the same.

China’s relations with the West: a balancing act

Before we go too far along this path though, we should remember that China will try to strike a balance. China’s prosperity is based on international trade, mostly with the West. The US-China trade route is still the busiest in the world and increased trade with Russia cannot compensate for the potential loss of US or EU business.

Meanwhile, the West is well aware that the growth in China trade has been one of the major drivers of globalisation. The increased supply of low cost Chinese goods has played a key part in suppressing inflation (see chart 2, below, for the link with US retail sales) and, by raising global labour supply, putting downward pressure on wage costs in the developed markets.

Should the West extend sanctions to those nations seen as supporting Russia and prolonging the conflict in Ukraine, global growth would be weaker as international trade slows. China would be badly affected and would struggle to counter the loss of US and European trade. However, the impact would also be felt in the West through faster global inflation and an even greater cost of living crisis.

Such a stagflationary outcome means that mutual interests in the global trade system are likely to prevail and both sides will tread carefully to avoid an escalation in tensions over Russia.

Another blow to globalisation  

Nonetheless, the conflict in Ukraine clearly sets the stage for an increase in geopolitical tension as a new world order emerges. In this respect the risks have risen and hence deal another blow to the globalised model of extended supply chains. When making decisions over where to locate production, multi-national companies will be weighing the risk of adverse political outcomes against the benefits of more efficient operations.

That model has, of course, already come under strain from Brexit, US trade wars with China and the Covid-19 pandemic. 

The latter exposed the weakness of far-flung supply chains and remains an issue as China’s zero-Covid policy continues to delay deliveries. The trade war between the US and China has also injected a degree of caution. Tariffs and restrictions on technology have increased such that FDI into China has slowed.

For the UK, Brexit has caused major disruption in supply chains as international firms grapple with the complexities of producing goods across different trade jurisdictions.

Meanwhile, climate change acts as a continuing threat in the background with the potential to disrupt supply routes and production facilities.

Not surprisingly, “just in case”, is replacing “just in time” as the guiding principle for firms seeking to make their supply chains more resilient.

Options for future trade

This presents several options. We may see increasing capital flows into other “friendly” lower risk countries as alternative locations for FDI. Companies may hold more inventory, there may be more onshoring of overseas production, or simply less output as the extra risks deter expansion.  

  • Increased FDI to lower risk countries
  • Companies holding more inventory
  • More onshoring of overseas production
  • Less investment, less output

The first of these options would be preferred from an economic perspective as it would sustain global trade, albeit on a more regional basis. Estimates from the McKinsey Global Institute suggest that 15-25% of global goods trade could shift to different countries over the next five years. The result would be that a broader set of countries will participate in GVCs in the years ahead. Our earlier analysis on US-China decoupling also provides some scenarios.

Alongside this we are likely to see a simplification of production processes as has been apparent in the reduction in semi-conductor chips in the auto industry and greater standardisation, such that inputs can be sourced from a wider group of suppliers.

The result may be a departure from the optimal allocation of capital, but efficiency losses would be minimised. In effect, supply chains could become simpler and more diversified, an outcome acceptable to economists and risk managers alike.

Increasing inventory – the second potential option – is probably the most obvious: building buffer stocks into the supply chain. This would be a reversal of the more efficient just in time model which helped drive significant declines in the inventory-sales ratio in the first decade of the century. These declines occurred between China’s ascension to the WTO and the global financial crisis (GFC). 

However judging from recent trends in the US there has already been some increase in inventory-sales ratios in recent years and prior to Covid (see chart 3, below). This may not reflect the broader international picture, but could be attributed to low interest rates after the GFC which reduces the cost of funding inventory.

Going forward, inventory is likely to rise given its low cyclical position and as firms choose to hold greater stocks in the long run to guard against disruption, but higher interest rates may temper this move.

The third option of more on-shoring through bringing supply chains home would boost domestic activity, but clearly represents a retreat from globalisation. The supply chain may become more robust and resilient to global shocks, but security comes at a price. For example, moving production from Asia back to Europe can be expensive. Although the ratio of workers’ wages in the US compared to China has fallen from over 30 in 2000, it was still five times in 2018 (the latest figures available).

The increase in transport costs (shipping and fuel) helps offset this, but higher labour costs mean that increased onshoring will come alongside greater investment in robotics and artificial intelligence (AI). Higher productivity will be needed to stay competitive. One of our longer run themes or Inescapable Truths – accelerated technological change – will be strengthened by the search for more resilient supply chains.

The fourth outcome, less investment, is the worst outcome as it would simply mean less trade, weaker growth and lower income.

In practice we will probably see a mix of all four options: diversification of supply chains to “safer“ countries, more inventory and onshoring and some withdrawal from international trade.

Stagflation as the risk premium on globalisation rises 

What does this mean for investors? The reverberations from Russia’s war with Ukraine point to a new alignment of nations. Tensions over the war are likely to lead to a more fragmented or regionalised world economy.

In macro terms this means less efficiency, higher costs and slower growth i.e. more stagflation. Global supply will be more disrupted and in this respect inflation will be harder to control. The challenge for central banks in keeping inflation to target will be greater, making interest rates higher and more volatile.

There will be bright spots as the search for greater security of supply should encourage greater adoption of technology. Firms will need to counter higher costs through higher productivity. Wages should be stronger as a result, although overall global employment would be lower particularly in the emerging markets.

The war in Ukraine will intensify the focus on the risks of globalisation and raises geopolitics up the agenda for business and investors. Trade and investment help bind countries together, but when they unravel the costs are significant.

[1] China plus HK, China (WTO)

Schroders plc

Issued by Schroder Investment Management Limited. Registration No 1893220 England. Authorised and regulated by the Financial Conduct Authority.  For regular updates by e-mail please register online at www.schroders.com for our alerting service.

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The load shared: Ramaphosa calls for South Africans to be part of solution

25 July 2022

President on actions to address the electricity crisis in SA. He calls for all South Africans to be part of the solution; to contribute in whatever way they can to end energy scarcity.

Fellow South Africans,

Tonight, I want to address you about the energy crisis that is confronting our nation.

During the past three weeks, severe load shedding has disrupted all of our lives and caused immense damage to our economy.

The daily power cuts we have been experiencing have inconvenienced millions of households and have presented huge challenges for businesses.

After more than a decade without a reliable electricity supply, South Africans are justifiably frustrated and angry.

They are fed up.

We have therefore developed a set of actions to respond to the crisis.

The crisis that we are facing requires that we should take bold, courageous and decisive action to close the electricity gap.

This is a call for all South Africans to be part of the solution; to contribute in whatever way they can to ending energy scarcity in South Africa.

As government we are announcing a number of interventions to overcome the immediate crisis.

In the past 10 days, I have held extensive discussions with the Eskom executive management, power station managers and former Eskom personnel.

I have also met with labour federations, Business Unity South Africa, the Black Business Council, community representatives and several experts in the energy sector. This morning, I also met political party leaders.

I am grateful for the valuable proposals made by all those we have met.

These meetings have helped to shape our response and ensure that all sections of South African society are involved in solving this problem, as this is a national crisis.

All the people I have spoken to have said this is the time when the country must unite to address this challenge.

The set of additional actions I am announcing this evening:

Firstly, are aimed at improving the performance Eskom’s existing fleet of power stations;

Secondly, will accelerate the procurement of new generation capacity;

Thirdly, are intended to massively increase private investment in generation capacity;

Fourthly, are designed to enable businesses and households to invest in rooftop solar; and,

Finally, are directed at fundamentally transforming the electricity sector and positioning it for future sustainability.

Fellow South Africans,

For our response to be effective, we need to understand the problem.

South Africa has installed capacity to produce approximately 46,000 MW of electricity, and at peak times we use about 32,000 MW of electricity.

However, only 60% of this installed capacity is available at any given time due to some units going through planned maintenance and others having unplanned outages.

Many of our power stations were built many years ago.

The average age of Eskom’s power stations is 35 years. Generally as power stations get older, their performance deteriorates.

The construction of our newest power stations, Medupi and Kusile, started late and they have experienced several delays and some design flaws.

These challenges are being addressed.

As a result of this, Eskom deferred essential maintenance to keep the lights on, which is causing breakdowns and failures now.

The performance of some of Eskom’s power stations have been further worsened by extensive theft, fraud and sabotage.

After years of state capture and mismanagement, a capable and effective management team is working hard to turn the utility around and reverse years of decay.

However, as things stand, we are still faced with an electricity shortage of up to 6,000 MW.

In recent weeks, a combination of factors resulted in 18,000 MW of generation capacity being lost, and forced Eskom to implement stage 6 load shedding.

Eskom has to implement load shedding to prevent the electricity grid from collapsing, and to ensure that we never experience a complete blackout.

The factors that led to the latest load shedding included a number unit breakdowns at some power stations.

We also experienced damage to the transmission line from Cahora Bassa in Mozambique and there were also instances reported of deliberate damage to equipment.

Teams within Eskom have worked hard to bring generation units back online and stabilise the national grid.

As a result of their efforts, the system outlook has improved over the past week.

The agreement reached between Eskom and workers has allowed critical repairs to the units that had broken down to be undertaken and normal electricity generation operations to resume.

Progress has also been made by law enforcement agencies in tackling sabotage, theft and fraud at Eskom’s power stations and other key installations.

While these actions to stabilise electricity generation have brought relief from the current load shedding, the system remains vulnerable and unreliable.

The shortage of electricity is a huge constraint on economic growth and job creation.

It deters investment and reduces our economy’s competitiveness.

As this administration, we have already taken important steps to increase generation capacity and diversify our energy supply.

One of the first steps we took to address the electricity shortfall was to revive the renewable energy procurement programme in 2018.

Since then, over 2,000 MW of solar and wind power has been connected to the grid through Bid Window 4 of the programme.

A further 2,600 MW of capacity has been procured through Bid Window 5, which will begin to add capacity from early 2024.

We have started to diversify generation by allowing parties other than Eskom to generate electricity.

In June last year, we raised the licensing threshold for new embedded generation projects from 1 MW to 100 MW.

This removed the licensing requirement for generation projects up to 100 MW that are connected to the grid.

This measure enabled these generators to have the ability to sell electricity to one or more customers, such as factories, mines or data centres.

We also changed the regulations to allow municipalities to procure power independently.

A number of municipalities are already in the process of doing so.

Eskom recently made land available next to its power stations in Mpumalanga for renewable energy projects, which will unlock 1,800 MW of new capacity.

Eskom has identified additional land that will be released for this purpose.

These actions are significant and they will make a difference over the coming months and years.

What the most recent load shedding has made clear, however, is that the actions we have taken and continue to take are not enough.

We are therefore implementing additional measures to achieve long-term energy security and end load shedding for good.

First, we are fixing Eskom and improving the performance of our existing fleet of power stations.

Over time, the maintenance programme of Eskom’s electricity generation fleet has declined.

It is now been decided that over the next 12 months, Eskom will increase the budget allocated for critical maintenance to increase the reliability of its generation capacity.

We are cutting red tape that has made it difficult for Eskom to buy maintenance spares and equipment within the required period to effect repairs.

One of the challenges that Eskom has faced has been the shortage of skilled personnel and engineers.

The utility is now recruiting skilled personnel, including former senior Eskom plant managers and engineers from the private sector.

These skilled personnel will support various personnel and help to ensure that world-class operating and maintenance procedures are reinstated.

Over the next three months, Eskom will take additional actions to add new generation capacity to the grid on an urgent basis.

As an immediate measure, surplus capacity will be bought from existing independent power producers.

These are power plants which built more capacity than was required and can now supply this excess power to Eskom.

As part of addressing the shortage of megawatts, Eskom will now also purchase additional energy from existing private generators such as mines, paper mills, shopping centres and other private entities that have surplus power.

A number of our neighbouring countries in Southern Africa, such as Botswana and Zambia, have more electricity capacity than they require.

Eskom will now import power from these countries through the Southern African Power Pool arrangement.

Eskom will also use interim power solutions, such as mobile generators, to supplement current generation capacity for a limited period.

Eskom will implement a programme that encourages efficient energy use by consumers to reduce demand at peak times.

We have spoken in the past about Eskom’s huge debt, which stands at close to R400 billion.

The debt continues to be a huge burden on Eskom’s ability to address its many challenges.

The National Treasury is working to finalise a sustainable solution to Eskom’s debt.

The Minister of Finance will outline how government will deal with this matter in an effective manner when he presents the Medium-Term Budget Policy Statement in October.

We will use climate funding provided through the Just Energy Transition Partnership to invest in the grid and repurpose power stations that have reached the end of their lives.

Eskom will be constructing its first solar and battery storage projects at Komati, Majuba, Lethabo and several other power stations. These will result in over 500 MW being added to the system.

The South African Police Service has set up a special law enforcement team to help Eskom in confronting crime and corruption.

A number people have been arrested in recent days and several others are already being prosecuted for corruption and fraud involving Eskom contracts.

With improvements in the regulatory environment and mobilisation of society, Eskom will be well positioned to carry out its maintenance and investment programmes.

There can be no longer any excuses.

These steps will allow us to limit load shedding to lower stages and reduce the risk of such severe load shedding in future.

To end load shedding, however, we need to urgently add much, much more capacity to the grid.

Our second priority is therefore to accelerate the procurement of new capacity from renewables, gas and battery storage.

The relevant government departments are working together to ensure that all projects from Bid Window 5 of the renewable energy programme can start construction on schedule.

This includes taking a pragmatic approach to the local content requirements for these projects, prioritising the need to build new capacity as quickly as possible.

The Department of Trade, Industry and Competition together with the Independent Power Producers Office will provide further details in this regard within the coming days.

The amount of new generation capacity procured through Bid Window 6 for wind and solar power will be doubled from 2,600 MW to 5,200 MW.

We will release a request for proposals for battery storage by September this year, and a further request for gas power as soon as possible thereafter

The Minister of Mineral Resources and Energy will issue a determination for the remaining allocations in the Integrated Resource Plan 2019, and will open further bid windows on an expedited basis.

To ensure effective planning, the country’s Integrated Resource Plan is being reviewed to reflect the need for additional generation capacity and our climate commitments.

Third, we are accelerating greater private investment in generation capacity.

Last year we announced the raising of the licensing threshold to 100 MW.

This move was widely welcomed. It has unlocked a pipeline of more than 80 confirmed private sector projects with a combined capacity of over 6,000 MW.

We are already working together with industry to accelerate the most advanced projects, several of which are already entering construction.

These changes have fundamentally changed the generation landscape.

Following the success of this reform and the enthusiasm shown by the private sector, we will remove the licensing threshold for embedded generation completely.

This will enable private investment in electricity generation to rise to higher levels.

While they will not require licences, all new generation projects will still have to register with the regulator and comply with the technical requirements for grid connection and our environmental legislation.

One of our greatest challenges in adding capacity to the grid is the time that it takes for any energy project to receive the necessary approvals and commence construction.

The process, from design to commercial operation, has tended to take more than three years due to lengthy regulatory processes and red tape.

While existing legislation may be sufficient in ordinary times, the current crisis requires that we act decisively and more speedily.

We will therefore be tabling special legislation in Parliament on an expedited basis to address the legal and regulatory obstacles to new generation capacity for a limited period.

We raised this matter this morning with leaders of political parties represented in the National Assembly.

There was broad agreement that this process should be hastened once the special legislation is tabled in Parliament.

We will in the meantime waive or streamline certain regulatory requirements where it is possible to do so within existing legislation. 

This includes reducing the regulatory requirements for solar projects in areas of low and medium environmental sensitivity.

It also means Eskom can expand power lines and substations without needing to get environmental authorisation in areas of low and medium sensitivity and within the strategic electricity corridors.

We are also establishing a single point of entry for all energy project applications, to ensure coordination of approval processes across government.

I have instructed departments and entities to review all existing time frames and to ensure we process all applications on an urgent basis.

These measures are preferable to declaring a state of disaster or even emergency, as some have suggested.

These interventions will allow us do what is necessary to accelerate new generation capacity while protecting the rights of all South Africans and upholding the rule of law.

We do not need a state of emergency or national disaster to implement common sense regulations that should help in resolving our energy crisis.

Fourth, we intend to enable businesses and households to invest in rooftop solar.

South Africa has great abundance of sun which we should use to generate electricity.

There is significant potential for households and businesses to install rooftop solar and connect this power to the grid.

To incentivise greater uptake of rooftop solar, Eskom will develop rules and a pricing structure – known as a feed-in tariff – for all commercial and residential installations on its network.

This means that those who can and have installed solar panels in their homes or businesses will be able to sell surplus power they don’t need to Eskom.

We call on all South Africans to use electricity sparingly as we work towards ending load shedding and getting more energy on the grid.

Finally, we are fundamentally transforming the electricity sector and positioning it for future sustainability.

We have spoken in the past about restructuring Eskom, which will result in three entities, namely an electricity generation entity, an electricity transmission entity and an electricity distribution entity.

Eskom has established an independent transmission company and is on track to separate its generation and distribution businesses by the end of 2022.

We will soon be appointing boards for the transmission and generation entities.

Broader reforms to establish a competitive electricity market will be expedited through the finalisation of the Electricity Regulation Amendment Bill to enable private sector investment.

These changes will radically transform the structure of the electricity sector for future generations.

Many other countries have taken this route and have been able to stabilise electricity generation.

They will diversify our energy sources and improve the security of supply.

These changes will allow more generators, both private and state-owned, to compete on an equal footing.

The grid will remain state-owned.

Eskom will continue to be the mainstay of our country’s energy industry as we improve its efficiency, financial sustainability and performance.

To ensure that these measures are implemented in a coordinated manner, I have established a National Energy Crisis Committee.

The committee is chaired by the Director-General in the Presidency, and brings together all the departments and entities involved in the provision of electricity.

The National Energy Crisis Committee will draw on the best available expertise from business, labour, professional engineering entities and community-based organisations. 

The relevant Ministers will report to me directly on a regular basis to ensure that we move quickly to implement these actions.

Fellow South Africans,

The measures I have outlined are not just to address our immediate constraints.

Our ultimate objective is to achieve long-term energy security, so that we never have to experience an electricity shortage again.

We aim to do this by stabilising Eskom and improving plant performance, establishing a competitive electricity market, opening the way for private investment in new generation capacity and increasing our investment in renewables.

These measures are necessary to revive economic growth and create jobs.

In the process, we will position our country as a leading player in the transition to new and sustainable energy sources, turning this crisis into an opportunity for future growth and resilience.

Just as government will play its part, I call on business, labour and all of society to join us in this effort.

This includes urgent implementation of the Eskom Social Compact and reinforcing the commitments and concrete steps to be taken by all social partners.

Just as we rallied behind the national effort to contain the COVID-19 pandemic, so too must we now contribute wherever we can.

As households we can use electricity sparingly.

We must pay for services and prevent illegal connections.

We must join in a massive rollout of rooftop solar and contribute to the solution.

Business needs to reduce its consumption through greater energy efficiency.

Business should seize the opportunities that have been created and invest in generation projects.

Labour should engage in a spirit of partnership, mindful that achieving energy security is the most important thing we can do to protect existing jobs and create new ones.

Last weekend, I visited the Tutuka power station in Mpumalanga, whose performance has been badly affected by criminal activities.

We heard of maintenance spares being stolen and sold back to Tutuka and other power stations.

We were told of ongoing theft of oil in a massive scale and the deliberate damaging of equipment so that Eskom should hire equipment from private contractors.

What is happening at Tutuka and other power stations is deliberate sabotage by well-organised criminal syndicates that are destroying the utility and damaging our economy.

After my visit to Tutuka, I met with all of Eskom’s power station managers.

I was impressed with the diversity of this group of men and women and their commitment to getting in the right skills and ensuring adherence to a maintenance philosophy.

We owe the teams at these power stations a debt of gratitude for their actions.

They set a fine example for the rest of us.

The measures we are announcing this evening, together with the steps we have already taken, will hasten the end of load shedding.

They will put our country on a clear path towards reliable, affordable and sustainable energy supply.

If we work together, if we hold each other to account, if we meet our deadlines and fulfil our commitments, we will end the energy crisis and create the conditions for growth and job creation.

More than that, we will show that we are up to the challenge of rebuilding our beloved country.

Ministers who serve in the Energy Crisis Committee brief the media following President Cyril Ramaphosa’s address to the nation to further outline measures to ensure long-term energy supply in South Africa.



IN ISSUE 53, WE UNCOVER THE FUTURE OF ENERGY IN SA
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